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AMERICAN FARMLAND COMPANY TABLE OF CONTENTS
INDEX TO FINANCIAL STATEMENTS
As filed with the Securities and Exchange Commission on June 26, 2015
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM S-11
FOR REGISTRATION
UNDER
THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
AMERICAN FARMLAND COMPANY
(Exact name of registrant as specified in its governing instruments)
10 East 53
rd
Street
New York, New York 10022
(212) 484-3000
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
D. Dixon Boardman
Chairman of the Board of Directors
American Farmland Company
10 East 53
rd
Street
New York, New York 10022
(212) 484-3000
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to: | ||
John T. Haggerty Goodwin Procter LLP 53 State Street Boston, MA 02109 Tel: (617) 570-1000 Fax: (617) 523-1231 |
|
Paul D. Tropp Freshfields Bruckhaus Deringer US LLP 601 Lexington Avenue New York, New York 10022 Tel: (212) 277-4000 Fax: (212) 277-4001 |
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box: o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer
ý
(Do not check if a smaller reporting company) |
Smaller reporting company o |
CALCULATION OF REGISTRATION FEE
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Title of Securities to be Registered
|
Proposed Maximum Aggregate
Offering Price(1)(2) |
Amount of Registration Fee
|
||
---|---|---|---|---|
Common Stock, $0.01 par value per share |
$100,000,000 | $11,620 | ||
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The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale thereof is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 26, 2015
PROSPECTUS
Shares
American Farmland Company
Common Stock
American Farmland Company is an internally managed real estate company that owns a diversified portfolio of high-quality farmland, consisting of mature permanent, specialty/vegetable row and commodity row crop farms, as well as farmland development, located in select major agricultural regions in the United States. We seek to provide our stockholders with a combination of (i) current income from renting our stable portfolio of mature farms and (ii) capital appreciation, partially driven by our ability to develop properties to maximize their value. We lease our farms to experienced farmer tenants under a variety of lease structures with staggered durations, including fixed and participating leases, which typically consist of fixed base rent and participating revenue components.
This is our initial public offering, and currently no public market exists for our common stock. We are offering shares of our common stock as described in this prospectus. We currently expect the initial public offering price of our common stock to be between $ and $ per share. We are pursuing this offering in order to repay our indebtedness and acquire additional high-quality farmland properties to increase our scale and diversification. We intend to apply to have our common stock listed on the New York Stock Exchange under the symbol "AFCO."
D. Dixon Boardman, the Chairman of our Board of Directors, as well as other executive officers, founders and principal stockholders (or their affiliates), have indicated an interest in purchasing $ million, in the aggregate, of shares of our common stock in this offering at the public offering price. However, because indications of interest are not binding agreements or commitments to purchase, such individuals may elect to purchase more, less or no shares in the offering or the underwriters could determine to sell more, less or no shares to these individuals in this offering. The underwriters will receive the same underwriting discount from any shares of our common stock purchased by such individuals as they will from any other shares of our common stock sold to the public in this offering.
We are a Maryland corporation, and we have elected to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes. Shares of our common stock are subject to ownership limitations that are primarily intended to assist us in maintaining our qualification as a REIT. Our charter contains certain restrictions relating to the ownership and transfer of our common stock, including, subject to certain exceptions, a 9.8% ownership limit of common stock by value or number of shares, whichever is more restrictive. See "Description of Our Capital StockRestrictions on Ownership and Transfer."
Some risks of investing in our common stock include:
We are an "emerging growth company" under the federal securities laws and will be subject to reduced public company reporting requirements. Investing in our common stock involves a high degree of risk. Please refer to the "Risk Factors" beginning on page 25 of this prospectus to read about factors you should consider before investing in our common stock.
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Per Share
|
Total
|
||
---|---|---|---|---|
Public offering price |
$ | $ | ||
Underwriting discount(1)(2) |
$ | $ | ||
Proceeds, before expenses, to us |
$ | $ | ||
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We have granted the underwriters an option to purchase up to additional shares of our common stock from us, at the initial public offering price, less the underwriting discount, within 30 days from the date of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of common stock on or about , 2015 through the book-entry facilities of The Depositary Trust Company.
Deutsche Bank Securities | Raymond James | FBR | ||
Janney Montgomery Scott |
The date of this prospectus is , 2015
You should rely only on the information contained in this prospectus, or in any free writing prospectus prepared by us or information to which we have referred you. No dealer, salesperson or other person is authorized to make any representations other than those contained in this prospectus. If anyone provides you with different information, you should not rely on it. This prospectus and any free writing prospectus prepared by us is not an offer to sell nor is it seeking an offer to buy these securities in any jurisdiction where the offer or sale thereof is not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus or as of another date specified herein, regardless of the time of delivery of this prospectus or any sale of these securities. Our business, financial condition, liquidity, results of operations and prospects may have changed since those dates. We will update this prospectus as required by law.
i
This glossary highlights some of the terms that we use elsewhere in this prospectus and is not a complete list of all the defined terms that may be used therein. Except as otherwise indicated or required by the context, references in this prospectus to:
ii
iii
iv
All NCREIF statistics and property statistics referred to as calculated by NCREIF methodology are on an accrual basis calculated using the following methodology:
As described by NCREIF on its website, the NCREIF Farmland Index is a quarterly time series composite return measure of investment performance of a large pool of individual agricultural properties acquired in the private market for investment purposes only. The NCREIF Farmland Index does not include development properties. Calculations are based on quarterly gross returns of individual properties which are net of asset level expenses but are before the deduction of fund or portfolio-level asset or investment management fees and expenses. Each property's return is weighted by its market value. Income and capital changes are also calculated. The Company's portfolio will differ from the NCREIF indices in the allocation between row and permanent crops and concentration in any particular region. The NCREIF Farmland Index is comprised of both operated and leased properties. The Company leases farms; thus, the directly operated properties in the NCREIF Farmland Index will generally not be comparable to those held by the Company. Returns are reported on an unlevered basis. The NCREIF Farmland Index "quarterly total returns," "annual total returns" and "annualized total returns" are metrics for assessing the performance of an investment asset or portfolio of assets that take into account appreciation or depreciation of the underlying asset value, realized gains or losses and income generated by the asset and are the sum of the following two components:
NOI
Beginning market value + 1 / 2 (capital improvements partial sales + partial purchases NOI) |
(ending market value beginning market value) + partial sales capital improvements partial purchases
Beginning market value + 1 / 2 (capital improvements partial sales + partial purchases NOI) |
Annual and annualized total returns are computed by chain linking quarterly rates of return together to calculate time-weighted rates of return for the relevant periods, with returns assumed to be compounded quarterly. This assumes that returns in earlier quarters are reinvested in the property in subsequent quarters. For periods of over one year, returns are expressed on a return-per-year basis. Additionally, "cumulative return" refers to percentage change in return since inception (or other defined period of time), calculated by subtracting the current value from the original value and dividing that difference by the original value. All returns are unaudited and subject to change.
v
The summary highlights some of the information contained in this prospectus. It does not contain all of the information that you should consider before investing in our common stock. You should read carefully the more detailed information set forth under the heading "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other information included in this prospectus. Unless otherwise indicated, the information contained in this prospectus assumes (i) the Internalization has been completed, (ii) that the common stock to be sold in the offering is sold at $ per share, the midpoint of the pricing range set forth on the cover page of this prospectus and (iii) that the underwriters do not exercise their option to purchase up to additional shares of our common stock. Unless the context suggests otherwise, references to "we, " "us," "our," "American Farmland" or the "Company," and any similar terms, refer to American Farmland Company together with its consolidated subsidiaries. Unless otherwise indicated, all information contained in this prospectus is as of March 31, 2015.
American Farmland Company
We are an internally managed real estate company that owns a diversified portfolio of high-quality farmland, consisting of mature permanent, specialty/vegetable row and commodity row crop farms, as well as farmland development projects, which is located in select major agricultural regions in the United States. We seek to provide our stockholders with a combination of (i) current income from renting our stable portfolio of mature farms and (ii) capital appreciation, partially driven by our ability to develop properties to maximize their value. We lease our farms to professional farmer tenants under a variety of lease structures with staggered durations, including fixed and participating leases, which typically consist of fixed base rent and participating revenue components. Approximately 45.6% of our 2014 contractual rent and 62.5% of our contractual rent for the first quarter of 2015 was comprised of fixed and base rent, some of which has annual escalators. In addition, our participating leases typically require our professional farmer tenants to obtain crop insurance, which seeks to protect the stability of our cash flow. We are a Maryland corporation and aim to be the leading farmland REIT to be traded on a U.S. stock exchange with a highly diversified portfolio, scalable platform and a unique investment focus on permanent, specialty/vegetable, development and commodity row crop farmland throughout the U.S.
Our business strategy is to generate stable and growing cash flow and capital appreciation for our stockholders. To implement our business strategy, we adhere to four core principles: (i) diversification, (ii) high-quality standards, (iii) a value-added approach and (iv) risk management. As of the date of this prospectus, our portfolio is comprised of 17 farms with an appraised value of $171.1 million as of March 31, 2015, and approximately 15,378 gross acres with more than 21 crop varieties, some of which are planted in rotation, in Alabama, Arkansas, California, Florida, Georgia and Illinois. Each farm was appraised by an independent appraisal firm employing a state certified appraiser with local expertise and who is certified as either an A.R.A. (Accredited Rural Appraiser) or M.A.I. (Member of the Appraisal Institute), or state certified as a Certified General Real Estate Appraiser. See "Our Business and PropertiesAppraisals" and "Experts."
1
Summary property information by crop type for farms held as of March 31, 2015 is shown below:
Farm Type
|
No. of
Farms |
Tillable
Acres |
Gross
Acres |
Total
Cost ($) (1) |
Current
Appraised Value (2) |
Allocation
as a % of Current Appraised Value (3) |
Target
Allocation Range |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mature permanent crop |
5 | 3,069 | 3,882 | $ | 62,490,587 | $ | 69,660,637 | 41 | % | 35 - 55% | ||||||||||
Specialty/vegetable row crop |
2 | 1,608 | 1,808 | $ | 13,361,564 | $ | 15,200,000 | 9 | % | 15 - 35% | ||||||||||
Commodity row crop |
4 | 4,446 | 4,726 | $ | 33,019,316 | $ | 46,975,000 | 27 | % | 10 - 30% | ||||||||||
Farmland development (4) |
6 | 3,487 | 4,962 | $ | 38,115,947 | $ | 39,249,000 | 23 | % | 10 - 30% | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
Total: |
17 | 12,610 | 15,378 | $ | 146,987,414 | $ | 171,084,637 | |||||||||||||
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Management
Our management team is responsible for all investment and business strategy decisions, including making formal property decisions prior to each acquisition, disposition or other key property or portfolio related matters, and our Agricultural Sub-Adviser is predominantly responsible for property sourcing, recommendations and ongoing due diligence. Our management and our Agricultural Sub-Adviser work closely together with respect to all phases of an acquisition, including due diligence and ongoing monitoring, and have formal and informal processes of communication in place that ensure a continual flow of information.
Executive Management
We were founded in October 2009 by D. Dixon Boardman, our Chairman, Harrison LeFrak, our Vice Chairman, and Thomas S.T. Gimbel, our Chief Executive Officer, among other significant founders, to execute upon a plan to acquire a diversified portfolio of high-quality farmland that can generate stable and growing cash flow. Our executive management team has expertise in areas critical to acquiring, owning and managing farmland real estate. Mr. Gimbel, as Chief Executive Officer, Robert L. Cowan, as President and Chief Investment Officer, Geoffrey M. Lewis, as Chief Financial Officer and Treasurer, and Lindsey B. Sichel, as Chief Administrative Officer and Chief Marketing Officer, comprise our executive management team. Mr. Cowan has 30 years of experience in farmland investment, acquisition and management having served as the Agriculture and Timber Director for the Utah Retirement System, and prior to that having worked in various roles at Farmland Reserve, Inc., a large private agricultural investment entity. Mr. Cowan obtained a Master of Science, specializing in Agricultural Economics, from Brigham Young University in 1977. Messrs. Gimbel, Lewis, Boardman and LeFrak and Ms. Sichel have worked with us since our founding and on average have more than 20 years' experience in investments and/or real estate. In addition, we intend to hire additional dedicated senior-level financial/accounting personnel to support our internal accounting function following the consummation of this offering.
2
Agricultural Sub-Adviser
Furthermore, we have a contractual relationship with our Agricultural Sub-Adviser, Prudential Mortgage Capital Company, LLC, which includes Prudential Agricultural Investments, a unit of Prudential Mortgage Capital Company, LLC to provide us with various investment, acquisition and property management services. Our Agricultural Sub-Adviser is a business unit of Prudential Investment Management, Inc., the primary asset management business of Prudential Financial, Inc. (NYSE: PRU), which is the ultimate parent of our Agricultural Sub-Adviser. See "Our Business and PropertiesManagementAgricultural Sub-Adviser" and "Our Business and PropertiesInvestment Focus and ProcessUnderwriting Criteria and Due Diligence ProcessAgricultural Sub-Adviser." Our Agricultural Sub-Adviser or its affiliates have been investing in farmland on behalf of institutional clients since 1989 and managed approximately 149,800 acres of farmland with a market value in excess of $959 million as of March 31, 2015. As a mortgage lender, our Agricultural Sub-Adviser and its affiliates have an agricultural debt portfolio that, as of March 31, 2015, exceeded $3.4 billion, with 590 customer relationships and with investments in 34 states. Our Agricultural Sub-Adviser and its affiliate, CAPS, have a staff of 29 professionals in five regional offices located in prime U.S. agricultural regions. CAPS provides property management and brokerage services to both our Agricultural Sub-Adviser and external clients. Since 1986, CAPS has brokered approximately $2.4 billion of transactions representing approximately 1.2 million acres of farmland as of March 31, 2015.
Market Opportunity
We invest in mature permanent crop, specialty/vegetable row crop and commodity row crop farmland, including development farmland, located in select major agricultural regions in the U.S. that, to the extent not in development, generate rental income and have the potential for capital appreciation. The U.S. is a world leader in the agricultural industry and, unlike many other consumer-oriented products, consumer spending on food is largely non-discretionary. Based on USDA data, the aggregate value of the approximately 913 million acres (or 1.4 million square miles) of land operated or owned as part of a farm in the U.S. as of the end of 2014 was more than $2.7 trillion, and the total value of agricultural sector production grown in the U.S. in 2014 was estimated to be $465 billion.
We believe that U.S. farmland property represents an attractive investment opportunity due to a number of factors, including the following:
3
Additionally, we believe that an investment in our company will be appealing to many investors due to a number of factors relating to the market for farmland investments and the nature of farmland as an asset class, including the following:
Competitive Strengths
We believe the following characteristics differentiate us from our competitors:
4
rotation, in Alabama, Arkansas, California, Florida, Georgia and Illinois. We believe our U.S. focus allows for better comparable geographic and crop type diversification and fewer comparable legal, political and infrastructure risks than other global regions. We believe that we have greater cash flow stability and more acquisition opportunities as a result of our diversification: (i) through numerous crop varieties; (ii) across USDA Regions as well as high-quality sub-regions and microclimates; (iii) through negotiated lease structures ( e.g. , fixed or participating) of differing durations; (iv) through varied farm tenants and tenant types ( e.g. , family operation or corporate entity); and (v) by property plans ( e.g. , development, mature or alternate higher and better use including so-called "Path of Progress" farming potential).
5
systems and water availability by drilling water wells, building reservoirs or developing unused acreage. We will often facilitate the adoption of modern farming techniques, such as "precision farming" that utilizes precise mapping and crop measurement, updating irrigation and fertigation systems or laser leveling. Furthermore, if available, and within the limitations of the requirements for qualification as a REIT, we may seek ancillary revenue sources ( e.g. , by selling excess water rights or by potentially leasing small parcels to wind farm operators or developing mineral rights) and alternative uses ( e.g. , residential and commercial), which may provide additional value in the future. Within the constraints of the REIT rules, we may also monetize portions of our farmland by unbundling multiple-parcel farms or the disposition of farms for non-agricultural use such as residential purposes.
6
7
Portfolio
As of the date of this prospectus, we own 17 farms consisting of a total of approximately 15,378 gross acres of cropland as set forth in the table below.
Property Name
|
Crops |
County,
State |
Date
Acquired (1) |
Tillable
Acres |
Gross
Acres |
2014
Contractual Rent (Fixed & Participating) (2) |
2015 Q1
Contractual Rent (Fixed & Participating) (3) |
Total Cost (4) |
Lease
Expiration |
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Permanent Crop: |
|||||||||||||||||||||||
Kimberly Vineyard 1 |
Wine grapes | Monterey, CA | Aug-10 | 81 | 85 | $ | 295,320 | $ | 28,782 | $ | 3,123,614 | Oct-16 | |||||||||||
Kimberly Vineyard 2 |
Wine grapes | Monterey, CA | Dec-14 (5) | 164 | 175 | 20,679 | (6) | 76,393 | (6) | 9,953,943 | (7) | Oct-19 (6) | |||||||||||
Golden Eagle Ranch |
Almonds | Stanislaus, CA | Mar-12 & Aug-12 | 1,056 | 1,112 | 2,562,472 | (8) | 961,203 | (8) | 17,274,256 | Nov-19 | ||||||||||||
Quail Run Vineyard |
Wine grapes | Monterey, CA | Nov-12 | 223 | 240 | 369,491 | (9) | 138,965 | (9) | 9,744,219 | Nov-16 | ||||||||||||
Blue Heron Farms |
Walnuts | Kings, CA | Nov-13 | 380 | 430 | 774,779 | (8) | 120,906 | (8) | 14,237,861 | Nov-17 | ||||||||||||
Falcon Farms |
Pecans |
Dougherty, GA;
Lowndes, AL |
Nov-14 | 1,165 | 1,840 | | (10) | 56,350 | (10) | 8,156,694 | Nov-16 (10) | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
Total Permanent Crop: |
3,069 | 3,882 | $ | 4,022,741 | $ | 1,382,599 | $ | 62,490,587 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Specialty/Vegetable Row: |
|||||||||||||||||||||||
Sweetwater Farm |
Varied | Jackson, FL | Dec-10 | 1,450 | 1,624 | $ | 380,300 | (11) | $ | 95,075 | (11) | $ | 5,404,534 | Dec-16 | |||||||||
Sandpiper Ranch |
Strawberries/ Vegetables | Santa Cruz, CA | Dec-11 & Apr-12 | 158 | 184 | 405,604 | (12) | 97,650 | (12) | 7,957,030 | Dec-15 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
Total Specialty/ Vegetable Row: |
1,608 | 1,808 | $ | 785,904 | $ | 192,725 | $ | 13,361,564 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Commodity Row: |
|||||||||||||||||||||||
Pleasant Plains |
Corn/Soybeans |
Douglas,
McLean, Cass, Morgan & Sangamon, IL |
Jul-10 | 1,159 | 1,196 | $ | 503,730 | (11) | $ | 125,933 | (11) | $ | 8,872,020 | Dec-15 | |||||||||
Macomb Farm |
Corn/Soybeans | McDonough, IL | Dec-10 | 422 | 434 | 180,200 | (12) | 45,050 | (12) | 2,596,385 | Dec-15 | ||||||||||||
Tillar Farm |
Cotton/ Rice/
Corn/Soybeans |
Drew, AR | May-11 | 1,248 | 1,444 | 208,500 | (12) | 52,125 | (12) | 4,172,034 | Dec-15 | ||||||||||||
Kane County Farms |
Corn/Soybeans | Kane, IL | Jun-11 | 1,617 | 1,652 | 701,308 | (12) | 175,587 | (12) | 17,378,877 | Dec-15 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
Total Commodity Row: |
4,446 | 4,726 | $ | 1,593,738 | $ | 398,695 | $ | 33,019,316 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Development (13) : |
|||||||||||||||||||||||
Roadrunner Ranch |
Citrus | Tulare, CA | Apr-11 & Sep-11 | 227 | 244 | $ | | (14) | $ | | (14) | $ | 6,953,275 | N/A | |||||||||
Condor Ranch |
Avocados/
Lemons |
Ventura, CA | Nov-11 & Dec-11 | 261 | 786 | 125,931 | (15) | 23,600 | (15) | 9,361,633 | Nov-15 | ||||||||||||
Grassy Island Groves |
Citrus | Okeechobee, FL | Dec-12 | 451 | 623 | | (16)(17) | | (16)(17) | 4,111,289 | N/A (15) | ||||||||||||
Blue Cypress |
Varied | Brevard, FL | Feb-13 | 2,036 | 2,694 | | (14) | | (14) | 10,442,223 | N/A | ||||||||||||
Hawk Creek Ranch |
Pistachios | Yolo, CA | Oct-13 & Feb-14 | 425 | 524 | 89,833 | (14)(18) | | (14) | 5,922,340 | N/A | ||||||||||||
Pintail Vineyard |
Wine grapes | Yolo, CA | Nov-13 | 87 | 91 | 10,791 | (14)(18) | (1,922 | ) (14) | 1,325,187 | N/A | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
Total Development: |
3,487 | 4,962 | $ | 226,555 | $ | 21,678 | $ | 38,115,947 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
TOTAL: |
12,610 | 15,378 | $ | 6,628,938 | $ | 1,995,697 | $ | 146,987,414 | (19) | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
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8
See "Our Business and PropertiesOur PortfolioDescription of Our Farms" for detailed descriptions of each farm, including leasing, capital expenditure and development information.
As of the date of this prospectus, our portfolio was diversified by crop type and region as shown by the charts below:
Appraised Value Diversification (in millions USD)
by Crop Type |
Appraised Value Diversification (in millions USD)
by State and Region |
|
|
|
|
Total appraised value: $171.1 |
Note: Portfolio diversification based on appraised value as of March 31, 2015 for all farms excluding any farms acquired after the third quarter of 2014, which are based on investment cost as of March 31, 2015. Some crop types contain multiple crop varieties (i.e. Wine grapes consists of Merlot, Chardonnay, etc. and Winter Vegetables refers to melons, peanuts and other mixed vegetables), which collectively aggregate to more than 21 crop varieties, some planted in rotation.
9
Portfolio Performance
Our long-term objective is to own and acquire a diversified portfolio of high-quality cropland that includes farmland development. To date, we have acquired 17 farms through 23 transactions, totaling approximately 15,378 gross acres. As of March 31, 2015, we have received updated appraisals from third parties for 16 of the 17 farms we held as of that date, all of which were acquired prior to the fourth quarter of 2014. Based on these appraisals, the annualized total return, on a gross basis, for the ten mature farms that we have held for 12 months or more was 11.0% through March 31, 2015, and the cumulative gross total return for these farms was approximately 55.2% since their respective inceptions through March 31, 2015, with an average holding period of 3.9 years. These returns currently exclude farms that were held for less than 12 months as of March 31, 2015 and development farmland that is not yet commercially productive.
Our annualized total returns include both income and capital appreciation and are calculated using the appraised values of our farms. The returns we may realize upon the actual sale of a farm may be more or less than the appraised value for a variety of reasons. Therefore, total annualized return should not be considered in place of our net income (loss) and our cash flow from operations calculated in accordance with GAAP. Please find more detailed information on each property, including more detailed charts relating to our annual income returns and annualized appreciation returns, in the section entitled "Our Business and PropertiesOur PortfolioDescription of Our Farms."
The table below summarizes the annualized income, appreciation and total returns for our farms (excluding development farms) calculated as per NCREIF methodology.
10
Business and Growth Strategies
Our key strategies to drive our business and growth include the following:
Farm
|
Tillable Acres
Subject to Development |
Crop Being
Developed |
Total
Capital Expenditures To Date |
Estimated
Remaining Capital Expenditures |
Estimated
Remaining Capital Expenditures Less Revenue Offset |
Expected
Completion Date |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Blue Cypress Farm |
2,036 | Specialty/ Vegetable Row Crops | $ | 3,110,024 | $ | 226,683 | $ | 226,683 | 2016 | |||||||||
Condor Ranch |
202 | Avocados and Lemons | 4,341,144 | 1,001,963 | (290,127 | ) | 2016 | |||||||||||
Roadrunner Ranch |
227 | Seedless organic mandarins | 4,444,660 | 1,392,442 | 20,717 | 2016 | ||||||||||||
Quail Run Vineyard (partial) |
77 | Wine grapes | 1,758,142 | 500,212 | 73,612 | 2017 | ||||||||||||
Grassy Island Groves |
451 | Citrus | 1,689,222 | 2,903,339 | 2,017,019 | 2019 | ||||||||||||
Pintail Vineyards |
87 | Wine grapes | 234,139 | 1,459,138 | 1,098,138 | 2019 | ||||||||||||
Hawk Creek Ranch |
425 | Pistachios | 827,282 | 5,789,947 | 3,652,987 | 2021 | ||||||||||||
| | | | | | | | | | | | | | | | | | |
Total |
3,505 | $ | 16,404,613 | $ | 13,273,724 | $ | 6,799,029 |
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Our ability to effectively implement our business and growth strategies is subject to numerous risks and uncertainties, including those set forth under "Risk FactorsRisks Related to Our Business and Farms."
Cropland Acquisitions under Evaluation
As of the date of this prospectus, we have identified and are in various stages of reviewing prospective farmland acquisitions, which we refer to as our acquisition pipeline, representing various crop types and geographic regions throughout the U.S., though there can be no assurances we will complete any of these potential acquisitions. We believe each of the farms being evaluated by us for potential acquisition meets our investment guidelines. In determining which farmland properties to pursue, we evaluate a number of qualitative and quantitative factors including, but not limited to, the following: (i) overall analysis of the property's quality and its physical attributes such as soil types and quality, water availability and quality, and appropriateness of the location for the crop type produced; (ii) projected income, appreciation and risk performance relative to our objectives; (iii) analysis of historical crop production of the property; (iv) an analysis of the specific crop type and the current local and broader market dynamics; (v) analysis of purchase price compared to current and historical market values; (vi) comprehensive environmental assessment performed by independent, professional consultants; (vii) evaluation of exit strategies; and (viii) assessment of the quality and reputation of prospective professional farmer tenants.
Properties in our acquisition pipeline are sourced in a number of ways, both internally from our management team as well as through our Agricultural Sub-Adviser, and while we solely determine whether to acquire a potential farmland property, we rely on and work closely with our Agricultural Sub-Adviser throughout all stages of property due diligence and negotiation through acquisition. We have engaged in preliminary discussions with some of the owners and commenced the initial due diligence process on certain of the farms in our acquisition pipeline. Other than as noted below, we have not agreed upon price or terms relating to, and, prior to completion of this offering, do not expect to agree upon price and terms or enter into binding commitments with respect to the acquisition of any property, and therefore we do not believe any potential property acquisition, other than as noted below, is probable at this time.
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The process for acquiring farmland varies in certain ways from the process for acquiring other types of commercial real estate such as office buildings, shopping centers and apartments. The due diligence for farmland property acquisitions may include analysis of factors like soil attributes that are less relevant or possibly irrelevant in evaluating other types of real estate. Further, the process also varies depending on the crop type. For example, farmland for commodity row crops, which may be purchased from an auction and close in a very rapid amount of time, typically takes less time to acquire (typically 60-90 days) than permanent crop farmland, which is a more fragmented, less publicized market that may require a longer period of time to negotiate and close (typically 90-120 days). In acquiring the 17 properties in our portfolio, we have reviewed an additional 280 properties through March 31, 2015 that we elected not to pursue based on diligence, an inability to agree on acceptable terms, another bidder or other reasons, yielding an acquisition rate of approximately 6%. The historical duration from preliminary discussions through closed acquisition for our properties has varied from several weeks to almost one year, and we estimate the duration is most often within a range of 60 to 120 days.
We have executed a definitive purchase and sale agreement for $19.4 million with the seller of a California pistachio farm and a definitive purchase and sale agreement for $5.3 million with the seller of a California almond farm. In addition, we have obtained a right of first offer and right of first refusal for certain acreage owned by the seller of our Blue Heron Farm. See "Our Business and PropertiesOur PortfolioCropland Acquisitions under Evaluation." There can be no assurance that we will complete the acquisition of any property that we are currently evaluating, including those detailed above.
Financing Strategy
Through the third quarter of 2014, we were exclusively equity financed. We have obtained two revolving credit facilities arranged by Rutledge Investment Company, the original revolving credit facility of $25 million, which the Operating Partnership entered into on December 5, 2013 and the second revolving credit facility of $25 million, which was entered into on January 14, 2015, collectively referred to as the revolving credit facilities. Both, as drawn upon, are secured by specific farmland assets. In the fourth quarter of 2014, we drew down an aggregate of approximately $20 million under the original revolving credit facility. We will draw on such lines in the future to free up liquidity for various corporate purposes, including acquisitions. We are in the process of obtaining additional revolving credit facilities and expect to expand our credit facilities in the future. No assurances can be given, however, if we will be successful in our efforts. See the section entitled "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesCredit Facilities." Management may incur debt or other financing for other purposes, such as to finance assets, provide "bridge financing" or to fund property development expenditures, property improvements or regular property operations from time to time. We do not expect our debt to exceed 50% of our gross asset value. However, our charter and amended partnership agreement do not prevent us from exceeding this desired level, and accordingly we may exceed our target debt-to-asset level at certain times. We may also issue securities or instruments publicly or privately to finance our activities and assets ( e.g., common stock, preferred stock, convertible debt, senior or subordinated debt). In addition, we may seek other forms of public or private financing.
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Overview of Risk Management
Risk management is one of our founding and core principles that is integral to the implementation of our business strategy. Our Board of Directors oversees our overall risk management process, with certain specific areas overseen by our Audit Committee, Compensation Committee, Ethics, Nominating and Corporate Governance Committee and our executive management. Under the oversight of our Board, our senior management team, particularly, Thomas S.T. Gimbel, our Chief Executive Officer, Geoffrey M. Lewis, our Chief Financial Officer and Treasurer, and Lindsey B. Sichel, in her capacity as our Chief Administrative Officer, are responsible for implementing risk management systems and processes and reporting to the Board. Further, a joint committee of directors and executive management comprises our Acquisition Committee which reviews potential property acquisitions, including associated risks, prior to us executing definitive documentation on any acquisition. In addition, our Agricultural Sub-Adviser provides management with an analysis of the risks of each investment both prior to acquisition and in an annual business review. See "Management."
Summary Risk Factors
Investing in our common stock involves a high degree of risk. Prospective investors are urged to carefully consider the matters discussed under "Risk Factors" prior to making an investment in our common stock. Such risks include, but are not limited to:
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Internalization
Since commencing operations in October 2009, we have been externally managed by AFA, which is an affiliate of Optima. On November 25, 2014, we and our operating partnership entered into a Contribution Agreement with AFTRS and each of the holders of equity ownership interests in AFA pursuant to which, upon the completion of and concurrently with this offering, we will internalize the management functions historically provided by AFA. As consideration in the Internalization, our operating partnership will issue Common Units with an aggregate value of $12 million. On December 15, 2014, we received the requisite consent from a majority of our disinterested stockholders approving the Internalization. We expect that the Internalization will be completed simultaneously with, and conditioned upon, the completion of this offering, and to recognize an expense in connection with the Internalization, representing the excess of the amount paid over the fair value of the net assets acquired in connection therewith. See "Structure of Our CompanyInternalization."
We expect that, after the Internalization, our management team will be comprised of the current employees of our company as well as shared employees with Optima pursuant to an arrangement described below. See "Certain Relationships and Related Party TransactionsTransitional Services Agreement." In addition, we will continue to rely upon our Agricultural Sub-Adviser, pursuant to an amended and restated Sub-Advisory Agreement that is described in more detail under "Our Business and PropertiesInvestment Focus and ProcessUnderwriting Criteria and Due Diligence ProcessAgricultural Sub-Adviser."
Our Operating Entities
Our Company
We were incorporated in Maryland and commenced operations on October 15, 2009. Because we did not have taxable income for the years ended December 31, 2009 through December 31, 2011, we did not elect REIT status for those years and were treated for U.S. federal tax purposes as a regular "C" corporation. We elected to be treated as a REIT for U.S. federal tax purposes, commencing with, and in connection with the filing of our federal tax return for, the taxable year ended December 31, 2012. As a REIT, we generally are not subject to federal income tax on the taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax at regular corporate rates. Even if we qualify for taxation as a REIT, we may be subject to some federal, state and local taxes on our income or property. In addition, the income of any taxable REIT subsidiary that we own will be subject to taxation at regular corporate rates.
We conduct our business and own all of our farms through our operating partnership. As of March 31, 2015, we owned approximately 82.0% of the Common Units in our operating partnership, which includes the Co-General Partner interest, following the Internalization described in "Structure of Our CompanyInternalization," and without giving effect to this offering, we anticipate owning approximately 76.3% of the partnership interests in our operating partnership, and as of March 31, 2015, on a pro forma basis giving effect to this offering and the Internalization, we will own approximately % of the Common Units in our operating partnership.
Our Operating Partnership
Our operating partnership is a Delaware limited partnership formed on August 14, 2009, which commenced operations on October 15, 2009. Our operating partnership holds substantially all of our assets and conducts all of our operations. Following this offering and the Internalization as described above under "Structure of Our CompanyInternalization," we will be the exclusive general partner of our operating partnership.
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Our Structure
The following diagram depicts our anticipated ownership structure as of the completion of this offering and the Internalization. Our operating partnership owns all of the farms in our portfolio directly or indirectly. See "Principal Stockholders" for certain information regarding the beneficial ownership of shares of our common stock.
Restrictions on Ownership and Transfer
Our charter prohibits any person or entity from beneficially owning shares in excess of 9.8% (in value or in number of shares, whichever is more restrictive) of the outstanding shares of our common stock, or 9.8% in value of the aggregate of the outstanding shares of all classes and series of our stock. See "Description of Our Capital StockRestrictions on Ownership and Transfer." In connection with previous private placements of our common stock, we have granted two waivers from the ownership limit contained in our charter to two current stockholders to own up to approximately 12% and 14.8%, respectively, of shares of our outstanding common stock in the aggregate. We anticipate these stockholders will own less than 9.8% upon the completion of this offering, in which case the waivers will terminate. We do not expect that the issuance of these waivers will adversely affect our ability to qualify as a REIT.
Benefits to Related Parties
In connection with the Internalization and this offering, certain of our directors and executive officers will receive material financial and other benefits, including those set forth below.
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Conflicts of Interest
Conflicts of interest may exist or could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and our operating partnership or any partner thereof, on the other. Our directors and officers have duties to our company under applicable Maryland law in connection with their management of our company. At the same time, we, as the general partner of our operating partnership, have duties and obligations to our operating partnership and its limited partners under Delaware law and the amended partnership agreement in connection with the management of our operating partnership. Our duties and obligations, as the general partner of our operating partnership, may conflict with the duties of our directors and officers to our company.
Several of our executive officers and the chairman of our Board of Directors are also partners or officers of Optima, and will continue to be following the completion of this offering. Because several of our named executive officers will be employees of Optima, a substantial amount of their time and attention may be diverted from us. Such executive officers owe a fiduciary duty to Optima, which may conflict with their fiduciary duty that they owe to us. If these executive officers were to act or fail to act in a manner that was detrimental to our business, or favor one entity over another, they could be subject to liability for breach of their fiduciary duty to us and our stockholders. Additionally, any agreements between us and Optima, including the Transitional Services Agreement, may not be as favorable to us as if they were negotiated with an unaffiliated third party, and such agreements are subject to an inherent conflict of interest. In addition, our Board of Directors may encounter conflicts of interest in enforcing our rights against Optima in the event of a default or disagreement under any agreements between us and Optima.
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Our Agricultural Sub-Adviser's services under the Amended and Restated Sub-Advisory Agreement are not exclusive, and we are not required to only use their services. Our Agricultural Sub-Adviser and its directors, officers and employees may earn fees and provide similar investment advisory and asset management services to a variety of other entities, although the Amended and Restated Sub-Advisory Agreement requires our Agricultural Sub-Adviser to comply with certain allocation procedures relating to the method by which our Agricultural Sub-Adviser allocates investment opportunities for us and its other clients. Our Agricultural Sub-Adviser receives compensation for the services it provides to us, and we cannot guarantee its level of performance or that its attention may not be diverted by other external clients. This agreement is cancellable by both parties as of December 31 of any calendar year by providing written notice to the other party on or before June 30 of such calendar year. In certain circumstances, a termination fee may apply.
Upon completion of the Internalization, we will enter into a Transitional Services Agreement with Optima under which Optima will provide us with office space, information technology support services and general administrative services at cost as well as access to certain of its personnel or employees. Additionally, each of Messrs. Boardman, Gimbel and Lewis are members of our Board of Directors and Messrs. Gimbel and Lewis are also members of our executive management team, and each is a partner or officer of Optima. As a result, the terms of this agreement may not be as favorable to us as if they were negotiated with an unaffiliated party. We may choose not to enforce, or to enforce less vigorously, our rights under this agreement because of our desire to maintain an ongoing relationship with Optima.
We intend to adopt policies that are designed to reduce certain potential conflicts of interests. See "Policies with Respect to Certain ActivitiesConflicts of Interest and Related Policies."
Our REIT Status
We have elected to be taxed as a REIT under Sections 856 through 860 of the Code. We believe that we have been organized, owned and operated in conformity with the requirements for qualification and taxation as a REIT under the Code beginning with our taxable year ended December 31, 2012, and that our intended manner of ownership and operation will enable us to continue to meet the requirements for qualification and taxation as a REIT for federal income tax purposes. To maintain our qualification as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute at least 90% of our REIT taxable income to our stockholders, determined without regard to the deduction for dividends paid and excluding net capital gains. As a REIT, we generally are not subject to U.S. federal income tax on the taxable income we currently distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax at regular corporate rates. Even if we have qualified and continue to qualify for taxation as a REIT, we have been, and may be, subject to some U.S. federal, state and local taxes on our income or property, and the taxable income of our taxable REIT subsidiaries, or TRSs, will be subject to taxation at regular corporate rates.
Emerging Growth Company Status
We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies," including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We have not yet made a decision as to whether we will take advantage of any or all of these exemptions. If we do take advantage of any of these exemptions,
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we do not know if some investors will find our common stock less attractive as a result. The result may be a less active trading market for our common stock and our stock price may be more volatile.
We may take advantage of these provisions until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenue equals or exceeds $1.0 billion (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of this offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt or (iv) the date on which we are deemed to be a "large accelerated filer" under the Securities Exchange Act of 1934, as amended, or the Exchange Act.
In addition, the JOBS Act also provides that an "emerging growth company" can take advantage of the extended transition period provided in the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to take advantage of this extended transition period to comply with new or revised financial accounting standards.
Corporate Information
Our executive offices are located at 10 East 53 rd Street, New York, NY 10022. Our telephone number at our executive offices is (212) 484-3000 and our corporate website is www.americanfarmlandcompany.com. The information contained on, or accessible through, our website is not incorporated by reference into this prospectus.
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Common stock offered by us |
shares (or shares if the underwriters' option to purchase additional shares is exercised in full) | |
Common stock and Common Units to be outstanding after this offering |
shares and Common Units (1)(2) |
|
Use of proceeds |
We estimate that the net proceeds from this offering, after deducting the underwriting discount and commissions, estimated offering expenses and advisory fees payable by us, will be approximately $ million (or approximately $ million if the underwriters exercise in full their option to purchase additional shares of our common stock). We will contribute the net proceeds from this offering to our operating partnership. Our operating partnership intends to use the net proceeds from this offering (i) to pay down $20.4 million of our revolving credit facilities and (ii) for working capital purposes, including to fund a combination of (a) new acquisitions, including $24.7 million for the two acquisitions described herein, and (b) development costs for our existing properties currently expected to total approximately $8.0 million for 2015. |
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Distribution Policy |
Historically, we have paid regular semi-annual distributions to holders of our common stock. Following the completion of this offering, we intend to pay regular quarterly distributions to holders of our common stock. We intend to pay a pro rata distribution with respect to the period commencing on the completion of this offering and ending on the last day of the then current fiscal quarter, based on $ per share for a full quarter, which corresponds to $ per share annually. We intend to make aggregate distributions roughly comparable to our current aggregate distributions, which are supported by our earnings, subject to potential increases in line with increases in earnings from our growing portfolio. As a result of the shares issued in the offering, per share dividend amounts will be lower than our historic dividends, as disclosed in "Distribution Policy." |
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|
Our ability to make distributions in the future will depend upon our actual results of operations and earnings, economic conditions and other factors that could differ materially from our current expectations and from the assumptions used in our estimate. We do not intend to reduce the expected distributions per share if the underwriters' option to purchase additional shares of our common stock is exercised. Any future distributions will be at the discretion of our board of directors and will be dependent upon a number of factors. See "Distribution Policy." |
|
Proposed listing symbol |
AFCO |
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Risk factors |
Investing in our common stock involves a high degree of risk. You should carefully read and consider the information set forth under the heading "Risk Factors" of this prospectus and other information included in this prospectus before investing in our common stock. |
D. Dixon Boardman, the Chairman of our Board of Directors, as well as other executive officers, founders and principal stockholders (or their affiliates), have indicated an interest in purchasing $ million, in the aggregate, of shares of our common stock in this offering at the public offering price. However, because indications of interest are not binding agreements or commitments to purchase, such individuals may elect to purchase more, less or no shares in the offering or the underwriters could determine to sell more, less or no shares to these individuals in this offering. The underwriters will receive the same underwriting discount from any shares of our common stock purchased by such individuals as they will from any other shares of our common stock sold to the public in this offering.
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Summary Consolidated Financial Data
The following table sets forth summary selected financial and operating data on (i) a historical basis for our company and (ii) a pro forma basis for our company after giving effect to this offering, the related Internalization and the redemption of our 8% Series A Cumulative Non-Voting Preferred Stock, or our Series A Preferred Stock, for $31,900 plus accrued and unpaid dividends through the date of redemption. You should read the following summary consolidated financial data in conjunction with our "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements, notes thereto and other financial information included elsewhere in this prospectus.
The summary historical consolidated financial data set forth below as of and for the years ended December 31, 2014 and 2013 have been derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. The summary historical consolidated financial data set forth below as of and for the year ended December 31, 2012 has been derived from our audited consolidated financial statements not included in this prospectus.
The summary historical consolidated financial data set forth below as of March 31, 2015 and 2014 and for the three months ended March 31, 2015 and 2014 have been derived from our unaudited consolidated financial statements and related notes included elsewhere in this prospectus. These consolidated financial statements have been prepared on a basis consistent with our audited financial statements. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of this data. The results of any interim period are not necessarily indicative of the results that may be expected for a full fiscal year or for any future period or our financial condition at any future date.
Our summary unaudited pro forma consolidated financial and operating data as of and for the three months ended March 31, 2015 and the year ended December 31, 2014 reflect the completion of this offering, the completion of the Internalization and the redemption of our Series A Preferred Stock as if these transactions had occurred on January 1, 2014 for the operating data and as of the stated date for the balance sheet data. Our pro forma financial information is not necessarily indicative of what our actual financial position and results of operations would have been as of the date and for the periods indicated, nor does it purport to represent our future financial position or results of operations.
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Pro Forma
Consolidated for the three months ended March 31, 2015 |
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|
Pro Forma
Consolidated for the year ended December 31, 2014 |
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|
|
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Historical Consolidated as
of and for the three months ended March 31, |
Historical Consolidated as of and
for the year ended December 31, |
||||||||||||||||||||
(all amounts in dollars except for number of
shares) |
2015 | 2014 | 2014 | 2013 | 2012 | |||||||||||||||||
Operating Data: |
||||||||||||||||||||||
Total operating revenues (1) |
$ | $ | 2,327,396 | $ | 1,488,255 | $ | $ | 7,261,063 | $ | 5,715,934 | $ | 3,150,707 | ||||||||||
Total operating expenses |
1,737,563 | 1,393,801 | 6,134,862 | 5,358,836 | 3,997,379 | |||||||||||||||||
Total other expense (income) |
95,314 | 16,273 | 117,114 | (13,101 | ) | (41,261 | ) | |||||||||||||||
Income (loss) before gain on sale of land (2) |
494,519 | 78,181 | 1,009,087 | 370,199 | (805,411 | ) | ||||||||||||||||
Net income (loss) (3) |
414,687 | 133,843 | 1,056,788 | 833,677 | (805,411 | ) | ||||||||||||||||
Less net income (loss) attributable to non-controlling interests |
128,757 | 53,746 | 346,071 | 280,226 | (94,475 | ) | ||||||||||||||||
Net income (loss) attributable to the Company |
285,930 | 80,097 | 710,717 | 553,451 | (710,936 | ) | ||||||||||||||||
Core FFO attributable to the Company (4) |
894,109 | 525,991 | 3,038,965 | 2,300,625 | 797,461 | |||||||||||||||||
Share and Per Share Data: |
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Earnings per weighted average common share: |
||||||||||||||||||||||
Basic and diluted |
$ | $ | 0.03 | $ | 0.01 | $ | $ | 0.07 | $ | 0.06 | $ | (0.08 | ) | |||||||||
Weighted average shares of common stock outstanding: |
||||||||||||||||||||||
Basic and diluted |
10,890,847 | 10,369,475 | 10,404,087 | 10,039,722 | 8,984,136 |
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|
Pro Forma
Consolidated for the three months ended March 31, 2015 |
|
|
Pro Forma
Consolidated for the year ended December 31, 2014 |
|
|
|
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|
Historical Consolidated as
of and for the three months ended March 31, |
Historical Consolidated as of and
for the year ended December 31, |
||||||||||||||||||||
(all amounts in dollars except for number of
shares) |
2015 | 2014 | 2014 | 2013 | 2012 | |||||||||||||||||
Balance Sheet Data |
||||||||||||||||||||||
Net asset value per share (unaudited) (5) |
$ | $ | 11.6934 | $ | 11.1450 | $ | $ | 11.5653 | $ | 11.0681 | $ | 10.6581 | ||||||||||
Total assets |
151,875,929 | 124,456,248 | 151,096,812 | 120,252,460 | 123,360,910 | |||||||||||||||||
Total liabilities |
26,922,206 | 3,570,615 | 31,657,097 | 3,416,201 | 2,491,980 | |||||||||||||||||
Non-controlling interests |
20,540,482 | 20,369,678 | 20,561,963 | 20,466,922 | 20,448,075 | |||||||||||||||||
Total stockholders' equity |
$ | $ | 104,413,241 | $ | 100,515,955 | $ | $ | 98,877,752 | $ | 96,369,337 | $ | 100,420,855 |
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Before you invest in our securities, you should be aware that your investment is subject to various risks, including those described below. You should carefully consider these risk factors together with all of the other information included in this prospectus before you decide to purchase our securities.
Risks Related to Our Business and Farms
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our farms and harm our financial condition.
Investments in real estate, including our investments in farmland, are relatively illiquid compared to other types of financial assets. As a result, our ability to promptly sell one or more farms in our portfolio in response to changing economic, financial and investment conditions may be limited. Return of capital and realization of gains, if any, from an investment generally will occur upon disposition or refinancing of the underlying property. We may be unable to realize our investment objectives by sale, other disposition or refinancing at attractive prices within any given period of time or may otherwise be unable to complete any exit strategy. In particular, weakness in or even the lack of an established market for a property, changes in the financial condition or prospects of prospective purchasers, changes in national or international economic conditions and changes in laws or regulations or fiscal policies of jurisdictions in which the property is located in each case may limit our ability to dispose of a property. Accordingly, we may encounter difficulties to the extent we needed to address liquidity needs through the sale or other disposition of our farms.
In addition, the Code imposes restrictions on a REIT's ability to dispose of farms that are not applicable to other types of real estate companies. In particular, the tax laws applicable to REITs effectively require that we hold our farms for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forego or defer sales of farms that otherwise would be in our best interests. Moreover, if we acquire farms from C corporations ( e.g. , corporations generally subject to full corporate-level tax) in certain non-taxable transactions, built-in gain recognized on the non-taxable disposition of such farms within 10 years of our acquisition will be subject to tax at the highest applicable U.S. federal corporate income tax rate. Therefore, we may not be able to vary our portfolio in response to economic or other conditions promptly, on favorable terms or at all, which could harm our financial condition.
The geographic concentration of our portfolio could cause us to be more susceptible to adverse weather, economic or regulatory changes or developments in the markets in which our farms are located than if we owned a more geographically diverse portfolio, which could materially adversely affect the value of our farms and our ability to lease our farms on favorable terms or at all.
As of March 31, 2015, 79% of the gross acres in our portfolio were located in California, Florida and Illinois, which exposes us to greater economic risks than if we owned a more geographically diverse portfolio. As of the date of this prospectus, our farms in California, Florida and Illinois represent approximately 70%, 6% and 21%, respectively, of the total 2014 contractual rent of our portfolio and approximately 72%, 5% and 17%, respectively, of the total first quarter 2015 contractual rent of our portfolio. As a result, we are particularly susceptible to developments or conditions in these states and/or the specific counties in which our farms are located, including adverse weather conditions (such as drought, windstorms, tornados, floods, hail and temperature extremes), transportation conditions (including conditions relating to truck and rail transportation and the navigation of the Mississippi River), crop disease, pests and other adverse growing conditions, and unfavorable or uncertain political, economic, business or regulatory conditions (such as changes in price supports, subsidies and environmental regulations). Any such developments or conditions could materially adversely affect the value of our farms and our ability to lease our farms on favorable terms or at all, which could
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materially adversely affect our financial condition, results of operations, cash flow and ability to make distributions to our stockholders.
Our portfolio is concentrated in a limited number of farms, which subjects us to an increased risk of significant loss if any farm declines in value or if we are unable to lease a farm.
We currently own 17 farms located in six states across the U.S., with those that are not under development leased to a number of tenants. One consequence of a limited number of investments is that the aggregate returns we realize may be substantially adversely affected by the unfavorable performance of a small number of leases or a significant decline in the value of any single property. In addition, while we do not intend to invest 35% or more of our total assets in a particular property at the time of investment, it is possible that, as the values of our farms change, one property may comprise in excess of 35% of the value of our total assets. Lack of diversification will increase the potential that a single underperforming investment could have a material adverse effect on our cash flows and the price we could realize from the sale of our farms. Since our current real estate portfolio is concentrated across only six states, we are also currently vulnerable to any adverse change in the political or regulatory climate in those states or specific counties where our farms are located, which could materially adversely affect our portfolio and our ability to lease farms.
We currently rely significantly on rent from our Golden Eagle Ranch farm, which is comprised of both fixed and participating rent, to generate a substantial portion of our rental income and, therefore, are more susceptible to adverse events with respect to that property, which if such events occur could materially adversely affect our financial condition, results of operations and ability to make distributions to our stockholders.
As of March 31, 2015, one property in our portfolio, Golden Eagle Ranch, represented 38.7% of our 2014 contractual rent received to date, which does not include certain rent to be paid under participating leases that has not yet been recognized and 48.2% of our first quarter 2015 contractual rent, which represents rent received for the three months ended March 31, 2015 and includes certain rent from participating leases for 2014 that was not recognized in 2014 but does not include certain rent to be paid under participating leases for 2015 that has not yet been paid or recognized. Therefore, the financial failure of that property or of a tenant that leases portions of that property is likely to have a material adverse effect on our financial condition, results of operations and ability to make distributions to our stockholders.
Our investments in mature permanent crop farms with trees or vines that have a finite multi-year lifespan have a higher risk profile than our commodity and specialty/vegetable row crop farms because if mature permanent crops are damaged or diseased, or if the variety falls out of market favor, it requires multiple years and substantial capital to redevelop the farm, which could materially adversely affect our results of operations and ability to make distributions to our stockholders.
As of March 31, 2015, 5 of our 17 farms owned at that time, or approximately 24% of our tillable acres, are planted with a majority of mature permanent crops, and, in the future, we expect to add to our investments in farmland used for mature permanent crops. In addition, this number will increase as our development farms focused on permanent crops become productive. Permanent crops have plant structures (such as trees, vines or bushes) that produce yearly crops without being replanted. Permanent crops involve more risk than specialty/vegetable and commodity row crops because permanent crops require more time and capital to plant. As a result, permanent crops are more expensive to replace and more susceptible to disease and poor weather. If a farmer loses a permanent crop to drought, flooding, fire or disease, there would generally be significant time and capital needed to return the land to production because a tree or vine may take years to grow before bearing fruit.
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The trees or vines on permanent crop farmland have finite productive lifespans and, as such, require replanting either in scheduled portions over time or in full towards the end of the lifespan as productivity declines and the property is no longer commercially viable. Additionally, permanent crop farmland prevents the farmer from being able to rotate crop types to keep up with changing market conditions or changes to the weather or soil. If demand for one type of permanent crop decreases, the permanent crop farmer cannot easily convert the farmland to another type of crop because permanent crop farmland is dedicated to one crop during the lifespan of the trees or vines and therefore cannot easily be rotated to adapt to changing environmental or market conditions.
We currently lease many of our farms to family-owned farms and small and medium-sized independent farming operations, which may have limited financial and personnel resources and, therefore, may be less stable than larger companies or agribusinesses, which could impact our ability to generate rental revenue.
We expect to lease many of our farms to family-owned farms and medium-sized farming operations, which will expose us to a number of unique risks related to these entities. For example, family-owned farms and medium-sized agricultural businesses are more likely than larger farming operations to have difficulty making lease payments when they experience adverse events. They also tend to experience significant fluctuations in their operating results and to be more vulnerable to competitors' actions and market conditions, as well as general economic downturns. In addition, our target tenants for our commodity row farms may face intense competition, including competition from companies with greater financial resources, which could lead to price pressure on crops that could lower our tenants' income, which in turn could impact our ability to generate rental revenue.
Furthermore, the success of a family-owned farm or medium-sized business may also depend on the management talents and efforts of one or a small group of persons. The death, disability or resignation of one or more of these persons could have a material adverse impact on our tenant and, in turn, on us.
Our shorter-term leases, which are less than three years in duration, make us more susceptible to decreases in prevailing market rental rates than would be the case if we entered into longer-term leases, which could have a material adverse effect on our results of operations and ability to make distributions to our stockholders.
Currently, leases representing 29.7% of our 2014 contractual rent and 23.8% of first quarter 2015 contractual rent are set to expire in 2015 and will need to be renewed for 2016, some of which are for mature permanent farms with longer-term leases. For our six non-development farms that are farmed for specialty/vegetable and commodity row crops, our leases have, and we expect to continue to primarily enter into leases having terms of one to three years. As a result, we will be required to frequently re-lease our farms upon the expiration of our leases, which will make us more susceptible to declines in market rental rates than we would be if we were to enter into longer-term leases. As a result, decreases in the prevailing market rental rates in the geographic areas in which we own farms could have a material adverse effect on our results of operations and ability to make distributions to our stockholders.
Our investments in mature permanent crop farms have long-term participating leases, which means that a portion of our cash flow attributable to participating rent is exposed to various risks, including risks related to declining crop prices, lower than average crop production due to alternate bearing crops, interest rate risk and the risk of being unable to take advantage of prevailing market rates, which could have a material adverse effect on our results of operations and ability to make distributions to our stockholders.
As of March 31, 2015, none of our leases have expiration dates of more than four years. In the future, as we acquire more permanent crop farms or renew our current permanent crop property leases, we may enter into multi-year fixed or participating leases consistent with our past practice for mature permanent farms. Participating leases may continue to be either flexible or crop share leases,
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and the gross revenue participation may vary based on crop prices or crop yield. Such leases may also provide for annual rent escalations based on a fixed dollar amount or a percentage per acre. By entering into long-term leases with participating rent components, we are subject to various risks, including risks relating to declining crop prices, lower than average crop production due to alternate bearing crops and interest rate risk, each of which could reduce the amount of rent we receive under such leases. Additionally, our inability to increase our rental rates if prevailing land values or rental rates increase could have a material adverse effect on our results of operations and ability to make distributions to our stockholders.
Our investments in development farmland may have inherent risks, including those relating to the longer period between development and commercial productivity for our permanent crop development farms, the cost of development, profitability of newly-developed farms, higher ongoing costs and delayed development, all of which could adversely impact our results of operations and cash flow.
Our development farms involve risks that are different and, in most cases, greater than, the risks associated with our acquisition of fully developed and commercially productive farms.
In addition to the risks associated with real estate investments in general as described elsewhere, the risks associated with our development farms include, among other things:
Additionally, the time frame required for development and for the permanent development farms to become commercially productive means that we may not be able to lease the farms and in turn generate revenue with respect to such farms for several years. If any of the above events occur, the development of such farms may hinder our growth and have a material adverse effect on our results of operations and cash flow. In addition, new development farms, regardless of whether or not they are ultimately productive, typically require substantial time and attention from management.
Our business is dependent in part upon the profitability of our tenants' farming operations, and any downturn in the profitability of their farming operations could have a material adverse effect on the amount of rent we can collect and, consequently, our cash flow and ability to make distributions to our stockholders.
We depend on our tenants to operate the farms we own in a manner that generates revenues sufficient to allow them to meet their obligations to us, including their obligations to pay rent and real estate taxes, maintain certain insurance coverage and maintain the farms generally. The ability of our tenants to fulfill their obligations under our leases depends, in part, upon the overall profitability of their farming operations, which could be adversely impacted by, among other things, adverse weather conditions, crop prices, global supply of arable farmland, crop disease, pests, contaminants, and unfavorable or uncertain political, economic, business or regulatory conditions. We do not typically receive financial statements from our tenants in the ordinary course of business. We will be particularly susceptible to any decline in the profitability of our tenants' farming operations in connection with our leases that do not require 100% of the annual rent to be paid in advance of each spring planting
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season or if we utilize percentage rent clauses, in each case, such as the leases for Kimberly Vineyard, Blue Heron Farms, Quail Run Vineyard, Golden Eagle, Falcon Farms and the mature portion of Condor Ranch, pursuant to which a portion of the rent is a fixed base rent and the remaining amount of rent depends on crop yields and prices realized by our tenants. The portion of our revenue that we derive from flexible leases could be adversely affected by a general economic downturn. Also, many farms are dependent on a limited number of key individuals whose injury or death may significantly affect the successful operation of the farm. As a result of such circumstances, our operating results and financial condition would be materially adversely affected. We can provide no assurances that, if a tenant defaults on its obligations to us under a lease, we will be able to lease or re-lease that property on economically favorable terms in a timely manner, or at all. In addition, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment.
The rents we are able to negotiate for the farms we own will be based, in part, on each tenant's expectation of the land's future productivity. To the extent we lease to tenants whose operations become less profitable, prospective tenants may assume reduction in profitability is due, in part, to less productive land, which could make it more difficult to negotiate favorable rental rates for such farms. Our tenants' profitability could also be adversely affected by declines in market prices for permanent crops, specialty/vegetable row crops or commodity row crops grown on our farms.
As a result, any downturn in the profitability of the farming operations of our tenants or a downturn in the agricultural industry as a whole could have a material adverse effect on our financial condition, results of operations, cash flow and ability to make distributions to our stockholders.
We may be subject to risks associated with our tenants' financial condition and liquidity position.
A majority of our leases do not require the full payment of rent in cash in advance of the planting season, which subjects us to credit risk exposure to our farm-operator tenants and the risks associated with farming operations, such as weather, commodity price fluctuations and other factors. We will also be exposed to these risks with respect to flexible leases for which a portion of the rent is based on a percentage of a tenant's farming revenues (such as our leases for Golden Eagle, Kimberly Vineyard, Blue Heron Farms, Falcon Farms, the mature portion of Condor Ranch and Quail Run Vineyard) and leases with terms greater than one year (which as of the date of this prospectus includes all of our leases except for Tillar Farm). We also may not become aware of a tenant's financial distress until the tenant fails to make payments to us when due, which may significantly reduce the amount of time we have to evict the tenant and re-lease the property to a new tenant before the start of the spring planting season, and in the event of a tenant bankruptcy we may not be able to terminate the lease. Further, we expect that many of our future tenants will be independent farming operations, about which there is generally little or no publicly available operating and financial information. As a result, we may not learn all of the material information we need to know regarding these businesses through our investigations, making it possible that we could lease farms to tenants that ultimately are unable to pay rent to us. We can provide no assurance that, in the event we terminate a lease in connection with a tenant bankruptcy, we will be able to lease or re-lease that property on economically favorable terms in a timely manner or at all, which could have a material adverse effect on our revenues and financial condition.
We may be unable to collect balances due on our leases from any tenants in bankruptcy, which could materially adversely affect our financial condition, results of operations and cash flow.
We are subject to tenant credit risk. Our tenants, particularly those that may depend on debt and leverage, could be susceptible to bankruptcy in the event that their cash flows are insufficient to satisfy their financial obligations, including meeting their obligations to us under their leases. A tenant in bankruptcy may be able to restrict our ability to collect unpaid rent and interest during the bankruptcy proceeding and may reject the lease. If a bankrupt tenant rejects a lease with us, any claim we might
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have for breach of the lease, excluding a claim against collateral securing the lease, would be treated as a general unsecured claim. Our claim would likely be capped at the amount the tenant owed us for unpaid rent prior to the bankruptcy unrelated to the termination, plus the greater of one year of lease payments or 15% of the remaining lease payments payable under the lease, but in no case more than three years of lease payments. In addition, a tenant may assert in a bankruptcy proceeding that its lease should be re-characterized as a financing agreement. If such a claim is successful, our rights and remedies as a lender, compared to a landlord, will generally be more limited. In the event of a tenant bankruptcy, we may also be required to fund certain expenses and obligations ( e.g., real estate taxes, debt costs and maintenance expenses) to preserve the value of our farms, avoid the imposition of liens on our farms or transition our farms to a new tenant. In the event of the tenant's breach of its obligations to us or its rejection of the lease in bankruptcy proceedings, we may be unable to locate a replacement tenant in a timely manner or on comparable or better terms. As a result, our financial condition, results of operations and ability to make distributions to our stockholders could be materially adversely affected if a tenant declares bankruptcy.
Our failure to identify and consummate acquisitions that meet our investment criteria would significantly impede our ability to achieve our business objectives, including growing our portfolio and diversifying by geography, crop type and tenant, which could materially adversely affect our results of operations and ability to make distributions to our stockholders.
Our ability to expand through acquisitions is integral to our business strategy and requires that we identify and consummate suitable acquisition or investment opportunities that meet our investment criteria and are compatible with our growth strategy. While we continue to actively seek and evaluate farms for potential purchase, there is no guarantee that we will be able to continue to find and acquire such farms at attractive prices.
Additionally, we compete for the acquisition of farmland and farms related to farming with many other entities engaged in agricultural and real estate investment activities, including individual and family operators of farming businesses, corporate agriculture companies, financial institutions, institutional pension funds, real estate companies, private equity funds and other private real estate investors. These competitors may prevent us from acquiring desirable farms or may cause an increase in the price we must pay for such farms. Our competitors may have greater resources than we do and may be willing to pay more for certain assets or may have a more compatible operating philosophy with our acquisition targets. In particular, larger institutions may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. Our competitors may also adopt transaction structures similar to ours, which would decrease our competitive advantage in offering flexible transaction terms. In addition, the number of entities and the amount of funds competing for suitable investment farms may increase, resulting in increased demand and increased prices paid for these farms. New entrants are also a competitive threat. If we pay higher prices for farms, our profitability may decrease, and you may experience a lower return on your investment. Our failure to identify and consummate acquisitions that meet our investment criteria would significantly impede our ability to achieve our business objectives, including growing our portfolio and diversifying by geography, crop type and tenant, which could materially adversely affect our results of operations and ability to make distributions to our stockholders.
Some state laws prohibit or restrict the ownership of agricultural land by business entities, which could impede the growth of our portfolio and our ability to diversify geographically.
Certain states, including Iowa, North Dakota, South Dakota, Minnesota, Oklahoma, Wisconsin, Missouri and Kansas, in which a substantial amount of farmland is located, have laws that prohibit or restrict to varying degrees the ownership of agricultural land by corporations or business entities like us. Additional states may, in the future, pass similar or more restrictive laws, and we may not be legally permitted, or it may become overly burdensome or expensive, to acquire farms in these states, which could impede the growth of our portfolio and our ability to diversify geographically in states that might otherwise offer compelling investment opportunities.
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Failure to succeed in new markets could have a material adverse effect on our results of operations and ability to make distributions to our stockholders.
Our portfolio is comprised of farms located in Alabama, Arkansas, California, Florida, Georgia and Illinois. If we acquire farms located in new markets, we may face risks associated with a lack of market knowledge or understanding of the local market, including the availability and identity of quality tenant farmers, forging new business relationships in the area and unfamiliarity with local government requirements and procedures. Furthermore, the negotiation of a potential expansion into new markets would divert management time and other resources. As a result, we may have difficulties executing our business strategy in these new markets, which could have a material adverse effect on our results of operations and ability to make distributions to our stockholders.
Our platform may not be as scalable as we anticipate, and we could face difficulties growing our business without significant new investment in personnel and infrastructure, which could disrupt our business and operations and impede the growth of our business.
Our platform for operating our business may not be as scalable as we anticipate or able to support significant growth without substantial new investment in personnel and infrastructure. Prior to the Internalization, we did not have any employees and we will rely to a significant degree on the services provided pursuant to the Transitional Services Agreement that we will enter into with Optima for the first year following the Internalization as well as on the skills of our Agricultural Sub-Adviser in sourcing, managing and disposing of our investments. Accordingly, we will need to make significant new investments in personnel and infrastructure to support that transition as well as to support our growth. The Transitional Services Agreement is terminable by us on 30 days' notice or by Optima on 6 months' written notice, and will terminate 12 months after the Internalization, unless otherwise extended or renewed. If we are unable to make significant investments on a timely basis or at reasonable costs, if the Transitional Services Agreement is terminated or not renewed, or if we are unable to renew the agreement with our Agricultural Sub-Adviser, our business and operations could be materially adversely affected.
We depend upon our President and Chief Investment Officer and our Agricultural Sub-Adviser and its key personnel, and we may not be able to secure suitable replacements in the event that we fail to retain their services.
Some of our senior executive officers have limited experience acquiring, owning and net leasing farmland. Accordingly, we rely on the skills of our Agricultural Sub-Adviser and its key personnel, as well as the experience of our President and Chief Investment Officer, in sourcing, managing and disposing of our investments. Our Agricultural Sub-Adviser's ability to successfully manage our investments depends on the experience, relationships and expertise of its key personnel. There can be no assurance that these individuals will remain in the employ of our Agricultural Sub-Adviser or otherwise continue to be able to carry on their current duties. Our Agricultural Sub-Adviser may not be able to successfully recruit additional personnel and any additional personnel that are recruited may not have the requisite skills, knowledge or experience necessary or desirable to enhance the incumbent management. The officers and employees of our Agricultural Sub-Adviser have substantial responsibilities outside the management of our investments. Our Agricultural Sub-Adviser sources farms for other clients, and we are subject to our Agricultural Sub-Adviser's allocation procedures and, therefore, we may not receive the opportunity to purchase all of the farms sourced by our Agricultural Sub-Adviser. The Amended and Restated Sub-Advisory Agreement expires four years after its commencement, which will be the consummation of this offering, and may be terminated by AFA or the Agricultural Sub-Adviser without cause as of December 31 of any calendar year, by providing notice to the other party on or before June 30 of such year. Accordingly, any loss of our President and Chief Investment Officer or our Agricultural Sub-Adviser and its key personnel could have a material adverse effect on our ability to implement our business strategy and achieve our investment objectives.
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Our Amended and Restated Sub-Advisory Agreement and relationship with our Agricultural Sub-Adviser may create conflicts of interest or the perception of such conflicts.
Our Agricultural Sub-Adviser will receive a quarterly management fee from us that is based on the appraised value of our portfolio, regardless of the revenues generated by our portfolio. For example, we will pay our Agricultural Sub-Adviser a management fee for a specific period even if we experienced a net loss during the same period. The management fee may not sufficiently incentivize our Agricultural Sub-Adviser to recommend properties and manage our properties in a manner that generates attractive risk-adjusted returns for us. This could hurt both our ability to make distributions to our stockholders and the market price of our common stock.
In addition, we will pay our Agricultural Sub-Adviser fees upon the acquisition and disposition of properties. In evaluating properties, the opportunity to earn fees upon the acquisition and disposition of properties may lead our Agricultural Sub-Adviser to place undue emphasis on acquiring and disposing properties in order to generate additional fees, or it could give rise to such perception. To the extent our Agricultural Sub-Adviser engaged in such behaviors or was perceived to have engaged in such behaviors, it could negatively impact the market price of our common stock.
If our farms do not have access to adequate water supplies or proper drainage, it could harm our ability to lease the farms or to farm them on favorable terms or at all, which could have a material adverse impact on the value of our farms and our results of operations and our ability to make distributions to our stockholders.
In order to lease farmland, there must be access to sufficient water as well as proper drainage to make the property suitable for farming. Additionally, the ability of our current tenants to make their rental payments is also dependent upon sufficient water access and supply and proper drainage. Although we believe the farms in our current portfolio have, and we expect to acquire farms with, sufficient water and access proper drainage, our analysis and surveys of the water availability and our properties may be incorrect, and water availability and rights may be affected by federal, state and local government regulations, policies and practices as well as private sector rights, actions and inactions. On farms that presently have access to sufficient water, future regulatory or government actions could restrict the ability to draw upon those water sources. Accordingly, there may be a need to drill additional wells in the future, and we would be required to obtain permits prior to drilling such wells, which are required by state and county regulations. Such permits may be difficult or costly to obtain, particularly in areas where there is a limited supply of water, such as the farming regions of California, and there can be no assurance that such additional wells would produce sufficient water supplies to support farming operations adequately. Similarly, our farms may be subject to governmental regulations relating to the quality and disposition of rainwater runoff or other water to be used for irrigation, and in such case we could incur costs in order to retain this water and comply with such regulations. Currently, three of our California farms are located in state water districts and thus are more likely to be impacted by any such government-regulated restrictions. If we are unable to obtain or maintain sufficient water supplies for our farms or if they do not have proper drainage, or the costs incurred to obtain or maintain the water supplies cause the farming operation to be less profitable, our ability to lease our farms for farming on favorable terms or at all would be significantly impaired, which could have a material adverse impact on the value of our farms and our results of operations and ability to make distributions to our stockholders. See "Our Business and PropertiesWater Access and Rights."
Additionally, our current farms in the Midwest, including our Pleasant Plains, Macomb Farm and Kane County Farms properties, and any farms that we invest in in the future that depend upon rain water rather than local water access, our tenants on that property may be susceptible to extended droughts, and any failure on the part of such tenants to procure adequate crop insurance would impact the ability of such tenants to make rental payments, which would have a material adverse impact on our ability to generate returns on our farms.
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Our farms may be subject to adverse weather conditions, seasonal variability or alternate bearing, crop disease and other contaminants, which may affect our tenants' ability to pay rent and thereby have a material adverse effect on our results of operations, financial condition and our ability to make distributions to stockholders.
Our farms are vulnerable to adverse weather conditions, including drought, windstorms, tornados, floods and temperature extremes, which are quite common but difficult to predict. Unfavorable growing conditions can reduce both crop size and crop quality. Seasonal factors, including supply and consumer demand, may also have an effect on the crops grown by our tenants. In extreme cases, entire harvests may be lost in some geographic areas.
A significant portion of the U.S. has experienced severe drought conditions over the past few years, most recently in California. While this current drought has affected a majority of California, and could have negative short-term impacts on U.S. agriculture generally, including less crop production, increased competition for farmland due to distressed sales and lower farm income, it has yet to significantly adversely impact our farms. However, if the drought were to increase in severity or to continue for a more extended period of time, it could have a materially adverse impact on our farming operations on our farms in that region or longer-term effects on the U.S. agricultural industry generally. In addition, farms located near rivers or other water sources may be more susceptible to floods and drainage problems in periods of sustained rains. Our farms may also be vulnerable to crop disease, pests and other contaminants. Damages to tenants' crops from drainage issues, crop disease or pests may vary in severity and effect, depending on the stage of production at the time of the drainage issue, infection or infestation, and, with respect to infestation or infection, the type of treatment applied and climatic conditions. The costs to control infestations vary depending on the severity of the damage and the extent of the plantings affected. These drainage issues or infestations can increase the costs and decrease the revenues of our tenants. Tenants may also incur losses from product recalls, fines or litigation due to other contaminants that may cause food borne illness. It is difficult to predict the occurrence or severity of such product recalls, fines or litigation as well as their impact upon our tenants.
We utilize participating leases for all of our mature permanent crop farms pursuant to which the amount of the rent depends, to a certain extent, on crop yields and prices in regions where such arrangements are prevalent. Further, we invest in property used for permanent crops, which are more expensive to replace and more susceptible to disease and poor weather than specialty/vegetable and commodity row crops because permanent crops produce yearly crops without being replanted. If a farmer loses a permanent crop to drought, flooding, fire or disease, there would generally be significant time and capital needed to return the land to production because a tree or vine may take years to grow before bearing fruit. Permanent crop farmland also prevents the farmer from being able to rotate crop types to keep up with changes to the weather or soil. As a result, the risks associated with weather conditions, seasonal variability, crop disease and other contaminants are magnified in the case of permanent crops. Therefore, adverse weather conditions, seasonal variability, crop disease, pests and other contaminants could adversely affect our tenants' ability to continue to meet their obligations to us and our ability to lease or re-lease farms on favorable terms, or at all, which could have a material adverse effect on the value of our farms, our results of operations, financial condition and our ability to make distributions to our stockholders.
The seasonal variability of the crops grown on our farms that are subject to flexible leases or that may be subject to crop share leases in the future could have a material adverse effect on our revenues and ability to make distributions to our stockholders.
We utilize participating leases for all of our mature permanent farms, pursuant to which the amount of rent depends, to a certain extent, on crop yields and prices and the timing of receipt of crop revenue by our tenants. A crop season is characterized by cultivation and the growing of the crop during the course of the year, with the resultant harvest generally occurring in the fall. Rent derived from flexible leases will generally be recorded in the fourth quarter of each calendar year in the case of citrus crop and the vineyards. However, in the case of tree nuts (almonds, walnuts and pecans), our
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share of the crop revenue only generates income for us at the point in time our tenant is irrevocably entitled to receive a payment for the delivery of the crop. Our tenants receive the income from the sale of such crop generally when delivered by the packing house to the ultimate distributor. That process of selling tree nuts in different stages stretches over a period of months in the year following the harvest and the percentage of the crop sold in each quarter of the following year is not consistent from year to year. Accordingly, the seasonal variability of the crops grown on such farms can be expected to cause quarterly fluctuations in our revenues.
Additionally, our quarterly earnings may be adversely affected by factors outside our control, including weather conditions and poor economic factors in certain markets in which we operate. This seasonality can be expected to cause periodic fluctuations in productivity, which in turn could affect a tenant's ability to meet its obligations to us under its lease. We can provide no assurances that our cash flows will be sufficient to offset any shortfalls that occur as a result of these fluctuations, and we may have to enter into short-term borrowings in certain quarters in order to make distributions to our stockholders. As a result, volatility in our financial performance resulting from the seasonal variability of the crops grown on our farms that are subject to flexible leases could have a material adverse effect on our revenues and our ability to make distributions to our stockholders.
Future climate changes could materially adversely impact the value of our farms, our ability to lease our farms, our results of operations and our ability to make distributions to our stockholders.
In addition to the general risks that adverse weather conditions pose for the tenants of our farms and their subsequent ability to comply with the terms of their leases, including their ability to make their rental payments, the value of our farms and the operations of our tenants may be subject to risks associated with long-term effects of climate change. Some climatologists have predicted that the impacts of climate change could include increases in average temperatures, more extreme temperatures, changes in rainfall patterns, severe droughts and increases in volatile weather over time. The effects of climate change may be more significant along coastlines, such as in California and Florida, where 12 of our 17 farms are currently located and where future farms we acquire may be located, due to rising sea levels resulting from melting of polar ice caps, which could result in increased risk of coastal erosion, flooding, degradation in the quality of groundwater aquifers and expanding agricultural weed and pest populations. Such effects of climate change could make our farms less suitable for farming or other alternative uses, which could materially adversely impact the value of our farms, our ability to lease our farms or otherwise generate revenues from our farms, our results of operations and our ability to make distributions to our stockholders.
Agricultural technology enhancements, including genetic engineering, could adversely impact our anticipated returns, which in turn could have a materially adverse effect on our results of operations and financial condition.
Future advances in seed technology, genetic engineering, irrigation improvements and other agricultural technology enhancements may lead to higher crop production on existing farmland, which could put downward pressure on the demand for crops. As a result, we could experience a reduction in our anticipated returns, which are, in part, based on certain assumptions regarding increased global demand for permanent crops and commodity crops and declining availability of farmland, which in turn could have a materially adverse effect on our results of operations and financial condition.
The market prices of the crops that our tenants may produce on our farms have experienced volatility in the past and may experience volatility in the future, which may affect our tenants' ability to pay rent and, accordingly, may have a material adverse impact on our financial condition, results of operations and our ability to make distributions to our stockholders.
Prices of crops are volatile and can fluctuate due to conditions that are difficult to predict, including global competition with respect to supply and resources, crop yields, technological developments, severe weather and crop disease in the major crop production regions worldwide,
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domestic and international demand for a given crop and for U.S. agricultural products generally, and changes in governmental policies regarding agriculture, energy, trade, fiscal and monetary issues, particularly with regard to subsidies and tariffs, any of which may result in either increases or decreases in the value of the crops that our tenants produce each year. For example, with respect to soybean crops for 2014, large crops are expected from the U.S. as well as from South America, including from Brazil and Argentina, which will drive an increase in supply and may result in pressure on pricing and exports. Other material factors contributing to fluctuations in crop prices are changes in global prosperity, fluctuations in foreign trade and export markets, and eruptions in military conflicts or civil unrest. Additionally, in periods of increased prices, global consumers may prefer low cost producers. Competition may also increase from alternative farming ventures, such as vertical farming (cultivation in skyscraper greenhouses or vertical structures) and hydroponic farming (cultivation in water with mineral supplements, without soil). Any of these factors could adversely affect our tenants' ability to meet their obligations to us and our ability to lease or re-lease farms on favorable terms, or at all, which could have a material adverse impact on the value of our farms, our financial condition, results of operations and our ability to make distributions to our stockholders.
Adverse changes in government policies related to farming, including decreases in farm subsidies, tax incentives or the percentage of ethanol that must be blended into fuel, could reduce prices of crops and the profitability of farming operations, which could materially adversely affect the value of our farms and our results of operations.
There are a number of government programs that provide subsidies and tax and other incentives to farm operators. Some of these programs have been in operation since the 1930s and were intended to stabilize the income to farm operators and protect them from agricultural setbacks such as wind damage, floods, drought and crop disease. In addition, in recent years both the U.S. federal government and certain state governmental agencies have required that transportation fuel sold in the U.S. contain a minimum volume of renewable fuel, including ethanol. These renewable fuel requirements have caused ethanol demand to increase substantially, which in turn has had a positive impact on the price of corn and specialty/vegetable and commodity row crop farmland prices in general. The elimination or reduction of any of these subsidies or other incentives, the widespread use of other forms of renewable fuel or reduction in renewable fuel requirements in the future could reduce the prices of crops and the profitability of farming operations, which could materially adversely impact the value of our farms and our ability to lease them on favorable terms, or at all, which would have a material adverse effect on our results of operations.
Acquiring farmland and farms related to farming during periods when such farms are experiencing substantial inflows of capital and intense competition may result in inflated purchase prices and increase the likelihood that our farms will not appreciate in value and may, instead, decrease in value.
The allocation of substantial amounts of capital for investment in farmland and farming related farms and significant competition for income-producing real estate may inflate the purchase prices for such assets. If we acquire farms in such an inflated environment, it is possible that the value of our assets may not appreciate and may, instead, decrease in value, perhaps significantly, below the amount we paid for such assets. In addition to macroeconomic and local economic factors, technical factors, such as a decrease in the amount of capital allocated to the purchase of farmland and farming related farms and the number of investors participating in the sector, could cause the value of our assets to decline.
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If the U.S. Federal Reserve or other central banks embark on a substantial tightening of monetary policy in the future that causes real interest rates to rise, it may cause land prices to decline if the rise in real interest rates is not accompanied by rises in the general levels of inflation, and we would also experience higher costs of our financing. A stronger U.S. dollar could also negatively impact exports, which could negatively impact our financial results.
A substantial tightening of monetary policy by the U.S. Federal Reserve or other central banks would increase credit costs (through the resulting increase in interest rates) and decrease credit availability. This could hurt farm operators because higher real interest rates make it more difficult for farm operators to qualify for loans and increase their borrowing costs. Higher interest rates also tend to decrease U.S. and world economic growth, thus decreasing the demand for agricultural crops. Moreover, a stronger U.S. dollar could affect the level of agricultural exports from the United States, potentially causing demand for exports to decline, which could negatively impact our financial results.
All of these consequences could reduce farm income. If increases in real interest rates (which is defined as nominal interest rates minus the inflation rate) or changes in the value of the U.S. dollar are not accompanied by higher levels of farm income and rents, this could lead to declines in agricultural land values and a reduction in our profitability, either of which would have a material adverse effect on our business or results of operations, financial condition and ability to make distributions to our stockholders. Furthermore, increases in interest rates would also increase our costs of borrowing money, which would negatively impact our financial condition and ability to make distributions to our stockholders.
The employees who manage and operate our business and operations in most instances will dedicate a significant portion of their time to us and such portion of time may vary.
Optima has employees at the executive management level (i.e., Messrs. Gimbel and Lewis and Ms. Sichel) as well as at the non-executive level for certain functions (i.e., analyst) who provide services to us to varying degrees, as needed. The employees of Optima who provided services to us prior to the Internalization will continue to provide services to us after the Internalization as outlined in either the Transitional Services Agreement or the applicable Employment Agreement. See "Certain Relationships and Related Party TransactionsTransitional Services Agreement" and "Certain Relationships and Related Party TransactionsEmployment Agreements." The amount of time these employees will dedicate to us will vary over time and may be hard to predict, as a result of which there could be disruptions to our business. While, Mr. Lewis, our Chief Financial Officer and Treasurer, is expected to dedicate a significant amount of his time to our business, he is expected to also dedicate a substantial amount of his time to Optima. Accordingly, we intend to hire additional dedicated senior-level financial/accounting personnel to support our internal accounting function following the consummation of this offering. However, we cannot assure you that we will be able to hire qualified candidates in a timely manner or that the candidates we hire will be successful.
The Internalization will expose us to new and additional responsibilities, costs and risks and we may not manage the Internalization effectively.
We expect that the Internalization will be completed simultaneously with, and conditioned upon, the completion of this offering. The Internalization could be a time consuming and costly process and we will be exposed to new and additional responsibilities, costs and risks. For example, once we are self-managed, our expenses will include the compensation and benefits of our officers and other personnel and consultants, as well as overhead costs previously paid by AFA and its affiliates. Furthermore, our officers and other personnel will provide us services that were previously provided by AFA and its affiliates. We can provide no assurance that we will be able to continue to provide those services at the same level or for the same costs as provided by AFA and its affiliates, and there may be unforeseen costs, expenses and difficulties associated with continuing to provide those services on a self-managed basis. We will also be subject to potential liabilities that are commonly faced by employers, such as workers disability and compensation claims, potential labor disputes and other employee-related liabilities and grievances. Further, we will bear the costs of the establishment and
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maintenance of health, retirement and similar benefit plans of our employees. Accordingly, the Internalization could materially adversely affect our financial condition and operating results.
In connection with the Internalization, we will enter into the Transitional Services Agreement with our operating partnership and Optima, pursuant to which Optima will agree to, among other things, provide us with access to certain infrastructure and supporting services, information technology systems and financial reporting infrastructure, including relevant employees. Until we establish a more substantial independent employee base, infrastructure and internal capabilities, we will rely significantly on Optima's infrastructure and supporting services to operate our business successfully. If Optima does not perform its obligations under the Transitional Services Agreement, if the Transitional Services Agreement is terminated by either party, if we do not build a sufficient management structure and cannot renew the Transitional Services Agreement, or if we fail to plan and manage the Internalization efficiently and effectively, we may be unable to manage our assets, farms or personnel, or timely report our financial results and our business will be materially adversely affected.
We have limited operating history as a REIT and no operating history as a publicly traded company, and we cannot assure you that the past experience of our senior management team will be sufficient to successfully operate our company as a REIT or a publicly traded company.
We have limited operating history as a REIT and no operating history as a publicly traded company. We cannot assure you that the past experience of our senior management team will be sufficient to successfully operate our company as a REIT or a publicly traded company, including the requirements to timely meet the disclosure requirements of the SEC. We are required to develop and implement control systems and procedures in order to qualify and maintain our qualification as a REIT, satisfy our periodic and current reporting requirements under applicable SEC regulations and comply with the listing standards, and this transition could place a significant strain on our management systems, infrastructure and other resources, any of which could materially adversely impact our business, results of operations and financial condition. See "Risks Related to Our Status as a REITFailure to qualify or to maintain our qualification as a REIT would have significant adverse consequences to the value of our common stock."
We depend on external sources of capital that are outside of our control and may not be available to us on commercially reasonable terms or at all, which could limit our ability to, among other things, acquire additional farms, meet our capital and operating needs or make the cash distributions to our stockholders necessary to qualify and maintain our qualification as a REIT.
In order to qualify and maintain our qualification as a REIT, we generally are required under the Code to, among other things, distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, we will be subject to income tax at regular corporate rates to the extent that we distribute less than 100% of our REIT taxable income, including any net capital gains. Because of these distribution requirements, we may not be able to fund future capital needs, including acquisition opportunities and principal and interest payments on any outstanding debt, from operating cash flow. Consequently, we rely on third-party sources to fund our capital needs. We may not be able to obtain such financing on favorable terms, in the time period we desire or at all. Any debt we incur will increase our leverage, expose us to the risk of default and may impose operating restrictions on us, and any additional equity we raise (including the issuance of Common Units) could be dilutive to existing stockholders. Our access to third-party sources of capital depends, in part, on:
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In addition, our revolving credit facilities contain certain customary restrictions, requirements and other limitations on our ability to incur indebtedness. Accordingly, we may be unable to obtain the third-party financing that we believe to be optimal, which may cause us to have less cash for distributions to stockholders. Our use of external sources of financing could also make us more vulnerable to a downturn in our business or the economy generally and a significant increase in the ratio of our indebtedness to our assets may have an adverse effect on the market price of our common stock.
Debt, and the use of debt to finance future acquisitions or for other purposes, could restrict our operations, inhibit our ability to grow our business and revenues, and negatively affect our business and financial results.
As of March 31, 2015, we had approximately $20.4 million of outstanding indebtedness. In addition, we intend to incur additional debt in connection with future acquisitions or for other purposes. If necessary, we also may borrow funds to make distributions to our stockholders in order to qualify and maintain our qualification as a REIT for U.S. federal income tax purposes. To the extent that we do not have sufficient funds to repay our debt at maturity, it may be necessary to refinance the debt through debt or equity financings, which may not be available on acceptable terms or at all and which could be dilutive to our stockholders. If we are unable to refinance our debt on acceptable terms or at all, we may be forced to dispose of farms at inopportune times or on disadvantageous terms, which could result in losses. To the extent we cannot meet our future debt service obligations, we will risk losing to foreclosure some or all of our farms that may be pledged to secure our obligations. An increase in our degree of leverage also could make us more vulnerable to a downturn in business or the economy generally.
Failure to hedge effectively against interest rate changes may materially adversely affect our results of operations.
We may experience interest rate volatility in connection with variable-rate debt that we may owe or may make, from time to time. The interest rates on our revolving credit facilities are variable. Although we have not entered into any derivative contracts to attempt to manage our exposure to interest rate fluctuations, we may, in a manner consistent with our qualification as a REIT, seek to mitigate our exposure to changing interest rates by using interest rate hedging arrangements such as interest rate swaps and caps in the future. These derivative instruments involve cost and risk and may not be effective in reducing our exposure to interest rate changes. Risks inherent in derivative instruments include the risk that counterparties to derivative contracts may be unable to perform their obligations, the risk that interest rates move in a direction contrary to, or move slower than the period contemplated by, the direction or time period that the derivative instrument is designed to cover, and the risk that the terms of such instrument will not be legally enforceable. While we intend to design our hedging strategies to protect against adverse movements in interest rates, derivative instruments that we are likely to use may also involve immediate costs, which could reduce our ability to make distributions to our stockholders. Likewise, ineffective hedges, as well as the occurrence of any of the risks inherent in derivatives, could materially adversely affect our results of operations or reduce your overall investment returns. We will review each of our derivative contracts and will periodically evaluate their effectiveness against their stated purposes.
Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code limit our ability to hedge our liabilities. Generally, income from a hedging transaction we enter into either to manage risk of interest rate changes with respect to borrowings incurred or to be incurred to acquire or carry real estate assets, or to manage the risk of currency fluctuations with respect to any item of income or gain (or any property which generates such income or gain) that constitutes "qualifying income" for purposes of the 75% or 95% gross income tests applicable to REITs, does not constitute "gross income" for purposes of the 75% or 95% gross
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income tests, provided that we properly identify the hedging transaction pursuant to the applicable sections of the Code and Treasury Regulations. To the extent that we enter into other types of hedging transactions, or fail to make the proper tax identifications, the income from those transactions is likely to be treated as non-qualifying income for purposes of both gross income tests. As a result of these rules, we may need to limit our use of otherwise advantageous hedging techniques or implement those hedges through a TRS. The use of a TRS could increase the cost of our hedging activities (because our TRS would be subject to tax on income or gain resulting from hedges entered into by it) or expose us to greater risks than we would otherwise want to bear. In addition, net losses in any TRS of ours will generally not provide any tax benefit except for being carried forward for use against future taxable income in the TRS.
We may be subject to litigation or threatened litigation, which may divert management time and attention, require us to pay damages and expenses or restrict the operation of our business.
We may be subject to litigation or threatened litigation, including claims relating to the actions of our tenants and otherwise in the ordinary course of business. In particular, we are subject to the risk of complaints by our tenants involving premises liability claims and alleged violations of landlord-tenant laws, which may give rise to litigation or governmental investigations, as well as claims and litigation relating to real estate rights or uses of our farms. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. Additionally, as a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition has become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. Whether or not any dispute actually proceeds to litigation, we may be required to devote significant management time and attention to its successful resolution (through litigation, settlement or otherwise), which would detract from our management's ability to focus on our business. Any such resolution could involve the payment of damages or expenses by us, which may be significant, or involve our agreement with terms that restrict the operation of our business. We generally intend to vigorously defend ourselves; however, we cannot be certain of the ultimate outcomes of those claims that may arise in the future. Resolution of these types of matters against us may result in our having to pay significant fines, judgments or settlements, which, if uninsured, or if the fines, judgments and settlements exceed insured levels, could materially adversely impact our earnings and cash flows, thereby having a material adverse effect on our financial condition, results of operations, cash flows and our ability to make distributions to our stockholders. Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage and could expose us to increased risks that would be uninsured, and/or adversely impact our ability to attract officers and directors, which could materially adversely impact our results of operations, cash flows and our ability to make distributions on, and the value of, our common stock.
Liability for uninsured or underinsured losses could adversely affect our financial condition and revenues.
Our farms may be damaged by adverse weather conditions and natural disasters, such as earthquakes, floods and tornados. Our insurance may not be adequate to cover all damages or losses from these events, or we may view it as not economically prudent to purchase insurance for certain types of losses. Should an uninsured loss or a loss in excess of insured limits occur, we could lose our capital investment in the affected property, as well as anticipated future revenues from such property and, in the case of debt which is recourse to us, we would remain obligated for any mortgage debt or other financial obligations related to the property. If an insured liability to a third party were to occur, we could incur the cost of defense and settlement with, or court ordered damages to, that third party. In addition, inflation, changes in building or zoning codes and ordinances, environmental considerations and other factors may also make it infeasible to use insurance proceeds to replace a property if it is damaged or destroyed. Under such circumstances, the insurance proceeds received by us might not be adequate to restore its economic position with respect to the affected property. Further, if any such loss is insured, we may be required to pay a significant deductible on any claim for recovery of such a loss prior to our insurer being obligated to reimburse us for the loss, or the amount of the loss may exceed our coverage for the loss, which could have a material adverse effect on our cash flow.
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In addition, although it is expected that most of our leases will provide for at least a minimum fixed rental payment, we have structured many leases to provide for some or all of the rent to be "percentage rent," determined as a percentage of the revenue from crops grown on land owned by us. There currently is no commercially reasonable insurance available that provides coverage for 100% of the lost revenue resulting from damage to crops grown on land owned by us. Our revenues could be materially adversely affected if damage to crops on land that are subject to leases with percentage rent provisions results in the revenue from such crops grown on such land to being diminished or lost.
Potential liability for environmental matters could adversely affect our financial condition.
We are subject to the risk of liabilities under federal, state and local environmental laws applicable to agricultural farms, including those related to wetlands, groundwater and water runoff. Some of these laws could subject us to:
Our costs of investigation, remediation or removal of hazardous substances may be substantial. In addition, the presence of hazardous substances on one of our farms, or the failure to properly remediate a contaminated property, could adversely affect our ability to sell or lease the property or to borrow using the property as collateral. We may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. Additionally, we could become subject to new, stricter environmental regulations, which could diminish the utility of our farms and have a material adverse impact on our results of operations.
The presence of endangered or threatened species on or near our acquired farms could restrict the activities of our tenants, which could in turn have a material adverse effect on the value of our farms and our results of operations.
Federal, state and local laws and regulations intended to protect threatened or endangered species could restrict certain activities on our farms. The size of any area subject to restriction would vary depending on the protected species at issue, the time of year and other factors, and there can be no assurance that such federal, state and local laws will not become more restrictive over time. If portions of our farms are deemed to be part of or bordering habitats for such endangered or threatened species that could be disturbed by the agricultural activities of our tenants, it could impair the ability of the land to be used for farming, which in turn could have a material adverse impact on the value of our assets and our results of operations.
We may be required to permit the owners of the mineral rights on our farms to enter and occupy parts of the farms for the purposes of drilling and operating oil or gas wells, which could materially adversely impact the rental value of our farms.
Although we own the surface rights to our farms and expect to own the surface rights to farms that we acquire, other persons may own the rights to any minerals, such as oil and natural gas that may be located under the surfaces of these farms. Currently there is no mineral development on any of our farms, but we can provide no assurances that third parties will not assert claims for mineral rights on
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our farms or that farms that we acquire in the future will not be subject to third-party mineral rights. To the extent that third parties have mineral rights on farms that we currently own or acquire in the future, we expect that we would be required to permit third parties to enter such farms for the purpose of drilling and operating oil or gas wells on the premises. We will also be required to set aside a reasonable portion of the surface area of our farms to accommodate these oil and gas operations. The devotion of a portion of our farms to these oil and gas operations would reduce the amount of the surface available for farming or farm-related uses. Such activities might also disrupt the productivity of the farmland or property related to farming or increase the risk of environmental liabilities, any of which could materially adversely impact the rents that we receive from leasing these farms.
If our tenants fail to comply with applicable labor regulations, it could have an adverse effect on our tenants' ability to make rental payments to us and, in turn, our ability to make distributions to our stockholders.
State, county and federal governments have implemented a number of regulations governing labor practices used in connection with farming operations. For example, these regulations seek to provide for minimum wages and minimum and maximum work hours, as well as to restrict the hiring of illegal immigrants. If one of our tenants is accused of violating, or found to have violated such regulations, it could have a material adverse effect on the tenant's results of operations, which could materially adversely affect its ability to make its rental payments to us and, in turn, our ability to make distributions to our stockholders.
New legislation or regulations affecting the U.S. agricultural sector, particularly with respect to water use in California, could materially adversely affect the value of our farms and results of operations.
If Congress implements new legislation or regulations affecting the U.S. agricultural sector, these changes could materially adversely affect the value of our farms and results of operations by requiring the reformulation of our business to meet new standards, including environmental standards. In the first quarter of 2014, The Agricultural Act of 2014, or the Act, was signed into U.S. law. It enacts a series of changes with respect to farmland, including, but not limited to, repealing direct payments and enhancing crop insurance. Given its recent passage, we cannot determine what prospective effect, if any, the Act will on U.S. farmland generally, and our business specifically. In addition, recent discussions on regulations and resulting restrictions to water use in California may have an impact on the water availability for our farms and therefore impact crop production, which may adversely effect our revenues or land valuations; however, the details of such water management decisions will take time to finalize and implementation will vary by water district. Moreover, legislation or regulation implemented in the U.S. or elsewhere in the world relating to genetically modified crops could negatively impact the price of impacted crops, which could impact the lease rates we can charge for our farms, thereby hurting our financial performance.
Risks Related to Our Organizational Structure
Our charter contains certain restrictions on ownership and transfer of our stock that may delay, defer or prevent a change of control or other transaction that might involve a premium price for our shares of common stock or that our stockholders otherwise believe to be in their best interests.
In order to qualify as a REIT, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by or for five or fewer individuals (as defined in the Code to include certain entities such as private foundations) at any time during the last half of any taxable year (beginning with our second taxable year as a REIT). In order to help us qualify as a REIT, our charter generally prohibits any person or entity from beneficially owning (i) more than 9.8% (in value or in number of shares, whichever is more restrictive) of the outstanding shares of our common stock or (ii) more than 9.8% in value of the aggregate of the outstanding shares of all classes and series of our stock, in each case, excluding any shares of our stock not treated as outstanding for U.S. federal income tax purposes. We refer to these restrictions as the "ownership limits." These ownership limits
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may prevent or delay a change in control and, as a result, could adversely affect our stockholders' ability to realize a premium for their shares of our common stock. Our Board of Directors, in its sole and absolute discretion, may exempt a person, prospectively or retroactively, from these ownership limits if certain conditions are satisfied. See "Description of Our Capital StockRestrictions on Ownership and Transfer." This ownership limit as well as other restrictions on ownership and transfer of our stock in our charter may:
We could increase the number of authorized shares of our stock, issue additional shares of our stock and classify and reclassify unissued stock without stockholder approval, which may delay, defer or prevent a change of control or other transaction that might involve a premium price for our shares of common stock or that our stockholders otherwise believe to be in their best interests.
Our charter authorizes our Board of Directors to, without stockholder approval, amend our charter to increase or decrease the aggregate number of authorized shares of stock, to authorize us to issue additional shares of our common or preferred stock and to classify or reclassify unissued shares of our common or preferred stock and to thereafter authorize us to issue such classified or reclassified shares of stock. See "Description of Our Capital StockPower to Increase or Decrease Authorized Stock and Issue Additional Shares of Common and Preferred Stock." We believe these charter provisions will provide us with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs that might arise. The additional classes or series, as well as the additional authorized shares of our common stock, will be available for issuance without further action by our stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Although our Board of Directors has no such intention at the present time, it could establish a class or series of preferred stock that could, depending on the terms of such series, delay, defer or prevent a transaction or a change of control that might involve a premium price for our shares of common stock or that our stockholders otherwise believe to be in their best interests.
Certain provisions of Maryland law could inhibit changes in control, which may discourage third parties from conducting a tender offer or seeking other change of control transactions that could involve a premium price for our shares of common stock or that our stockholders otherwise believe to be in their best interests.
Certain provisions of the Maryland General Corporation Law, or the MGCL, may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under certain circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such shares including the Maryland business combination and control share provisions. See "Certain Provisions of Maryland Law and Our Charter and Bylaws."
As permitted by the MGCL, our Board of Directors has adopted a resolution exempting any business combinations between us and any other person or entity from the business combination provisions of the MGCL, provided that the business combination is first approved by our Board of Directors (including a majority of directors who are not affiliates or associates of such persons). In addition, pursuant to a provision in our bylaws, we have opted out of the control share provisions of the MGCL. However, our Board of Directors may by resolution elect to opt in to the business
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combination provisions of the MGCL and we may, by amendment to our bylaws, opt in to the control share provisions of the MGCL in the future.
Title 3, Subtitle 8 of the MGCL permits our Board of Directors, without stockholder approval and regardless of what is currently provided in our charter or our bylaws, to implement takeover defenses, including adopting a classified board or increasing the vote required to remove a director. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for our company or of delaying, deferring or preventing a change in control of our company under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-current market price. Our charter contains a provision whereby we elect to be subject to the provisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our Board of Directors. See "Certain Provisions of Maryland Law and of Our Charter and Bylaws."
Our charter, our bylaws and Maryland law also contain other provisions, including the provisions of our charter on removal of directors and the advance notice provisions of our bylaws, that may delay, defer or prevent a transaction or a change of control that might involve a premium price for our shares of common stock or otherwise be in the best interest of our stockholders.
Each item discussed above may delay, deter or prevent a change in control of our company, even if a proposed transaction is at a premium over the then-current market price for our common stock. Further, these provisions may apply in instances where some stockholders consider a transaction beneficial to them. As a result, our stock price may be negatively affected by these provisions.
Certain provisions in the amended partnership agreement may delay or prevent unsolicited acquisitions of us.
Provisions in the amended partnership agreement may delay, or make more difficult, unsolicited acquisitions of us or changes of our control. These provisions could discourage third parties from making proposals involving an unsolicited acquisition of us or change of our control, although some of our stockholders might consider such proposals, if made, desirable. These provisions include, among others:
Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our management.
Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our senior management and may prevent a change in control of our company that is in the best interests of our stockholders. Our charter provides that a director may only be removed for cause upon the affirmative vote of holders of two-thirds of all the votes entitled to be cast generally in the election of directors. Vacancies may be filled only by a majority of the remaining directors in office, even if less than a quorum. These requirements make it more difficult to change our senior management by removing and replacing directors and may prevent a change in control of our company that is in the best interests of our stockholders.
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Our Board of Directors may change our strategies, policies and procedures without stockholder approval.
Our policies, including any policies with respect to investments, financing, leverage, growth, debt, capitalization and distributions, are determined exclusively by our Board of Directors or those committees of officers to whom our Board of Directors may delegate such authority. Our Board of Directors or the committees or officers to which such decisions are delegated have the ability to amend or revise these and our other policies at any time, without notice to or a vote of our stockholders. This could result in us conducting operational matters, making investments or pursuing different business or growth strategies than those contemplated in this prospectus. In addition, a change in our investment policies, including the manner in which we allocate our resources across our portfolio or the types of assets in which we seek to invest, may increase our leverage and/or our exposure to interest rate risk, real estate market fluctuations and liquidity risk. Changes to our policies with regards to the foregoing could materially adversely affect our financial condition, results of operations and cash flow.
Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions that you do not believe are in your best interests.
Maryland law provides that a director or officer has no liability in that capacity if he or she satisfies his or her duties to us and our stockholders. Upon completion of this offering, as permitted by Maryland law, our charter will limit the liability of our directors and officers to us and our stockholders for money damages to the maximum extent permitted by Maryland law. Under current Maryland law and our charter, our directors and officers will not have any liability to us or our stockholders for money damages, except for liability resulting from:
In addition, our charter and bylaws will authorize us, and our bylaws will require us, to indemnify each present and former director or officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to advance the defense costs incurred by our directors and officers. We also have entered into indemnification agreements with our officers and directors granting them express indemnification rights. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist. Accordingly, in the event that actions taken in good faith by any of our directors or officers impede the performance of our company, your ability to recover damages from such director or officer will be limited with respect to directors and may be limited with respect to officers.
We rely on funds received from our operating partnership to pay liabilities, and the interests of our stockholders are structurally subordinated to all liabilities and obligations of our operating partnership and its subsidiaries.
All of our farms are owned by, and we conduct substantially all of our operations through, our operating partnership and our other subsidiaries. We do not have, apart from an interest in our operating partnership, any independent operations. As a result, we rely on cash distributions and other payments from our operating partnership and our other subsidiaries to pay any dividends we might declare on shares of our common stock. We also rely on distributions from our operating partnership and other subsidiaries to meet our other financial obligations, including any tax liability on taxable income allocated to us from our operating partnership or other subsidiaries. As an equity investor in our operating partnership and other subsidiaries, our right to receive assets upon their liquidation or reorganization will be effectively subordinated to the claims of their creditors. To the extent that we are recognized as a creditor of such subsidiaries, our claims may still be subordinate to any security interest
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in or other lien on their assets and to any of such subsidiaries' debt or other obligations that are senior to our claims. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our operating partnership and its subsidiaries will be available to satisfy the claims of our stockholders only after all of our and our operating partnership's and its subsidiaries' liabilities and obligations have been paid in full.
Conflicts of interest may exist or could arise in the future between the interests of our stockholders and the interests of holders of Common Units, which may impede business decisions that could benefit our stockholders.
Conflicts of interest may exist or could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and our operating partnership or any of its partners, on the other. Our directors and officers have duties to us under Maryland law in connection with their management of us. At the same time, we will have duties and obligations to our operating partnership and its limited partners under Delaware law as modified by the amended partnership agreement of our operating partnership in connection with the management of our operating partnership as the sole general partner. The limited partners of our operating partnership expressly will acknowledge that the general partner of our operating partnership will be acting for the benefit of our operating partnership, the limited partners and our stockholders collectively. When deciding whether to cause our operating partnership to take or decline to take any actions, the general partner will be under no obligation to give priority to the separate interests of (i) the limited partners of our operating partnership (including, without limitation, the tax interests of our limited partners, except as provided in a separate written agreement) or (ii) our stockholders. Nevertheless, the duties and obligations of the general partner of our operating partnership may come into conflict with the duties of our directors and officers to us and our stockholders.
Our operating partnership may issue additional Common Units to third parties without the consent of our stockholders, which would reduce our ownership percentage in our operating partnership and could have a dilutive effect on the amount of distributions made to us by our operating partnership and, therefore, the amount of distributions we can make to our stockholders.
After giving effect to this offering and the issuance of shares as part of the Internalization, we will own approximately % of the outstanding Common Units in our operating partnership (on a fully diluted basis). We may, in connection with our acquisition of farms, as compensation or otherwise, issue additional Common Units. Such issuances would reduce our ownership percentage in our operating partnership and could affect the amount of distributions made to us by our operating partnership and, therefore, the amount of distributions we can make to our stockholders. Because you will not directly own Common Units, you will not have any voting rights with respect to any such issuances or other partnership level activities of our operating partnership.
Risks Related to Our Status as a REIT
Failure to qualify or to maintain our qualification as a REIT would have significant adverse consequences to the value of our common stock.
We elected to be treated as a REIT commencing with our taxable year ended December 31, 2012. The Code generally requires that a REIT distribute at least 90% of its taxable income (without regard to the dividends paid deduction and excluding net capital gains) to stockholders annually, and a REIT must pay tax at regular corporate rates to the extent that it distributes less than 100% of its taxable income (including capital gains) in a given year. In addition, a REIT is required to pay a 4% nondeductible excise tax on the amount, if any, by which the distributions it makes in a calendar year are less than the sum of 85% of its ordinary income, 95% of its capital gain net income and 100% of
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its undistributed income from prior years. To avoid entity-level U.S. federal income and excise taxes on retained income, we anticipate distributing at least 100% of our taxable income.
We believe that we have been and are organized, and have operated and will operate, in a manner that will allow us to qualify as a REIT commencing with our taxable year ended December 31, 2012. However, we cannot assure you that we have been and are organized and have operated or will operate as such. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Code as to which there is only limited judicial and administrative interpretations and involves the determination of facts and circumstances not entirely within our control. We have not requested and do not intend to request a ruling from the U.S. Internal Revenue Service, or the IRS, that we qualify as a REIT. The complexity of these provisions and of the applicable Treasury Regulations is greater in the case of a REIT that, like us, was a C corporation before electing to be taxable as a REIT, holds its assets through one or more partnerships and cannot operate its properties (which must be leased to unrelated tenants). Moreover, in order to qualify as a REIT, we must meet, on an ongoing basis, various tests regarding the nature and diversification of our assets and our income, the ownership of our outstanding stock, the absence of retained earnings from non-REIT periods and the amount of our distributions. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination. Our compliance with the REIT gross income and quarterly asset requirements also depends upon our ability to manage successfully the composition of our gross income and assets on an ongoing basis. Future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT for U.S. federal income tax purposes or the U.S. federal income tax consequences of such qualification. Accordingly, it is possible that we may not meet the requirements for qualification as a REIT.
If, with respect to any taxable year, we fail to maintain our qualification as a REIT, we would not be allowed to deduct distributions to stockholders in computing our taxable income. If we were not entitled to relief under the relevant statutory provisions, we would also be disqualified from treatment as a REIT for the four subsequent taxable years. If we fail to qualify as a REIT, we would be subject to entity-level income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate tax rates. As a result, the amount available for distribution to holders of our common stock would be reduced for the year or years involved, and we would no longer be required to make distributions. In addition, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and adversely affect the value of our common stock.
The opinion of our tax counsel regarding our status as a REIT does not guarantee our ability to qualify as a REIT.
Our tax counsel, Goodwin Procter LLP, will render an opinion to us to the effect that (i) commencing with our taxable year ended December 31, 2012 we have been organized in conformity with the requirements for qualification and taxation as a REIT and (ii) our prior and proposed organization, ownership and method of operation as represented by management have enabled and will enable us to satisfy the requirements for qualification and taxation as a REIT for subsequent taxable years. This opinion will be based on representations made by us as to certain factual matters relating to our prior and intended and expected organization, our past and contemplated future ownership, the valuation of our shares and our prior and intended or expected manner of operation. Goodwin Procter LLP has not verified and will not verify those representations, and their opinion will assume that such representations and covenants are accurate and complete, that we have operated and will continue to operate in accordance with such representations and covenants and that we will take no action inconsistent with our status as a REIT. In addition, this opinion will be based on the law existing and in effect as of its date and will not cover subsequent periods. Our qualification and taxation as a
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REIT will depend on our ability to meet on a continuing basis, through actual operating results, asset composition, distribution levels and diversity of share ownership, the various qualification tests imposed under the Code discussed below. Goodwin Procter LLP has not reviewed and will not review our compliance with these tests on a continuing basis. Accordingly, the opinion of our tax counsel does not guarantee our ability to qualify as or remain a REIT, and no assurance can be given that we will satisfy such tests for our taxable year ending December 31, 2012 or for any subsequent period. Also, the opinion of Goodwin Procter LLP is not binding on the IRS or any court and could be subject to modification or withdrawal based on future legislative, judicial or administrative changes to U.S. federal income tax laws, any of which could be applied retroactively. Goodwin Procter LLP will have no obligation to advise us or the holders of our stock of any subsequent change in the matters stated, represented or assumed in its opinion or of any subsequent change in applicable law.
We may owe certain taxes notwithstanding our qualification as a REIT.
Even if we qualify as a REIT, we will be subject to certain U.S. federal, state and local taxes on our income and property, on taxable income that we do not distribute to our stockholders, on net income from certain "prohibited transactions" and on income from certain activities conducted as a result of foreclosure. We may, in certain circumstances, be required to pay an excise or penalty tax (which could be significant in amount) in order to utilize one or more relief provisions under the Code to maintain our qualification as a REIT. In addition, we may engage in certain activities through one or more TRSs, and the income of those subsidiaries will be subject to U.S. federal income tax at regular corporate rates. Furthermore, to the extent that we conduct operations outside of the United States, our operations would subject us to applicable foreign taxes, regardless of our status as a REIT for U.S. federal income tax purposes.
In the case of assets we owned as of January 1, 2012, the start of our first REIT taxable year, we also will be subject to U.S. federal income tax, sometimes called the "sting tax," at the highest regular corporate tax rate, which is currently 35%, on all or a portion of the gain recognized from a taxable disposition of any such assets occurring within the 10-year period following that date, to the extent of the asset's built-in gain based on the fair market value of the asset as of that date in excess of our then tax basis in the asset. Gain from a sale of such an asset occurring after the 10-year period ends will not be subject to this sting tax. We are under no obligations to retain these assets to avoid this tax. We estimate the maximum amount of built-in gain potentially subject to the sting tax is approximately $7,077,000, which corresponds to a maximum potential tax of approximately $2,477,000 (based on current tax rates and the valuation of the properties based on the estimated price per share of this offering or negotiated prices).
If our operating partnership is treated as a corporation for U.S. federal income tax purposes, we will cease to qualify as a REIT.
We believe our operating partnership has qualified and will continue to qualify as a partnership for U.S. federal income tax purposes. Assuming that it qualifies as a partnership for U.S. federal income tax purposes, our operating partnership generally will not be subject to U.S. federal income tax on its income. Instead, its partners, including us, generally are required to pay tax on their respective allocable share of our operating partnership's income. No assurance can be provided, however, that the IRS will not challenge our operating partnership's status as a partnership for U.S. federal income tax purposes or that a court would not sustain such a challenge. If the IRS were successful in treating our operating partnership as a corporation for U.S. federal income tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, therefore, cease to qualify as a REIT, and our operating partnership would become subject to U.S. federal, state and local income tax. The payment by our operating partnership of income tax would reduce significantly the amount of
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cash available to our partnership to satisfy obligations to make principal and interest payments on its debt and to make distribution to its partners, including us.
There are uncertainties relating to our distribution of non-REIT earnings and profits.
To qualify as a REIT, we must not have any non-REIT accumulated earnings and profits, as measured for U.S. federal income tax purposes, at the end of any REIT taxable year. Thus, we had to distribute any such non-REIT accumulated earnings and profits that we had when we elected to be taxable as a REIT prior to the end of our first REIT taxable year ended December 31, 2012. We believe we made sufficient distributions in 2012 and had no accumulated earnings and profits in our prior years so that we did not have any undistributed non-REIT earnings and profits at the end of 2012. However, the determination of the amounts of any such non-REIT earnings and profits is a complex factual and legal determination. If it is subsequently determined that we had undistributed non-REIT earnings and profits as of the end of our first taxable year as a REIT or at the end of any subsequent taxable year, we could fail to qualify as a REIT.
Dividends payable by REITs generally do not qualify for reduced tax rates.
The maximum U.S. federal income tax rate for certain qualified dividends payable to U.S. stockholders that are individuals, trusts and estates generally is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates and therefore may be subject to a 39.6% maximum U.S. federal income tax rate on ordinary income when paid to such stockholders. Although the reduced U.S. federal income tax rate applicable to dividend income from regular corporate dividends does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates or are otherwise sensitive to these lower rates to perceive investments in REITs to be relatively less attractive than investments in the stock of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock.
A portion of our distributions may be treated as a return of capital for U.S. federal income tax purposes, which could reduce the basis of a stockholder's investment in shares of our common stock and may trigger taxable gain.
A portion of our distributions may be treated as a return of capital for U.S. federal income tax purposes. As a general matter, a portion of our distributions will be treated as a return of capital for U.S. federal income tax purposes if the aggregate amount of our distributions for a year exceeds our current and accumulated earnings and profits for that year. To the extent that a distribution is treated as a return of capital for U.S. federal income tax purposes, it will reduce a holder's adjusted tax basis in the holder's shares, and to the extent that it exceeds the holder's adjusted tax basis will be treated as gain resulting from a sale or exchange of such shares. See "Material U.S. Federal Income Tax Considerations."
Complying with the REIT requirements may cause us to forego otherwise attractive opportunities or liquidate certain of our investments.
To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. We may be required to make distributions to our stockholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with the REIT requirements may, for instance, hinder our ability to make certain otherwise attractive investments or undertake other activities that might otherwise be beneficial to us and our stockholders, or may require us to borrow or liquidate investments in unfavorable market conditions and, therefore, may hinder our investment performance.
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As a REIT, at the end of each calendar quarter, at least 75% of the value of our assets must consist of cash, cash items, government securities and qualified real estate assets. The remainder of our investments in securities (other than cash, cash items, government securities, securities issued by a TRS and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our total assets (other than cash, cash items, government securities, securities issued by a TRS and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by securities of one or more TRSs. After meeting these requirements at the close of a calendar quarter, if we fail to comply with these requirements at the end of any subsequent calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification. As a result, we may be required to liquidate from our portfolio otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
We may be subject to a 100% penalty tax on any prohibited transactions that we enter into or may be required to forego certain otherwise beneficial opportunities in order to avoid the penalty tax on prohibited transactions.
If we are found to have held, acquired or developed inventory or property primarily for sale to customers in the ordinary course of business, we may be subject to a 100% tax on net income from "prohibited transactions" under U.S. federal tax laws on the gain from disposition of the property unless the disposition qualifies for one or more safe harbor exceptions for properties that have been held by us for at least two years and satisfy certain additional requirements (or the disposition is made through a TRS and, therefore, is subject to corporate U.S. federal income tax).
The term "prohibited transactions" generally includes a sale or other disposition of property (other than foreclosure property) that is (i) of a kind that is properly included in inventory if on hand at the close of the taxable year or (ii) held primarily for sale to customers in the ordinary course of a trade or business. Whether property is held "primarily for sale to customers in the ordinary course of a trade or business" depends on the specific facts and circumstances. The Code provides a safe harbor pursuant to which sales of properties held for at least two years and meeting certain additional requirements will not be treated as prohibited transactions, but compliance with the safe harbor may not always be practical.
We intend to conduct our operations so that no farm (or other interests in real property) that we own outside of a TRS will be treated as, or as having been, held for sale to customers in the ordinary course of our business. We intend to hold our farms for investment with a view to long-term appreciation, to engage in the business of acquiring, owning, leasing and developing farms and to make sales of farms (or other interests in real property) that are consistent with our investment objectives; however, no assurance can be given that any particular farm or other interest in real property in which we hold a direct or indirect interest will not be treated as property held for sale to or that the safe-harbor provisions will apply.
Additionally, the potential application of the prohibited transactions tax could cause us to forego potential dispositions of our farms or interests therein or to forego other opportunities that might otherwise be attractive to us, or to hold investments or undertake such dispositions or other opportunities through a TRS, which would generally result in corporate income taxes being incurred.
We have acquired and expect to continue to acquire from time to time crops that we believe are treated as inventory, including (i) crops received as in-kind payments of rent and/or (ii) with respect to certain of our farms under development, crops we harvest during the development phase prior to leasing the farm. In past years, we have not sold any such crops through a TRS, and going forward it
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may not be feasible (or desirable) to earn the revenue from such sales through a TRS for tax purposes. Any gain from a sale of inventory in excess of directly connected deductions (and without any offset for any losses from other inventory sales) is subject to the 100% prohibited transaction tax. We have incurred prohibited transaction tax in the past, and we may incur such tax in future periods. Moreover, current law provides little guidance as to the deductions that are allowed to offset the gain subject to 100% tax, and thus the IRS might disagree with our calculations of the amount of gain subject to 100% tax.
REIT distribution requirements could adversely affect our liquidity and adversely affect our ability to execute our business plan.
In order to maintain our qualification as a REIT and to meet the REIT distribution requirements, we may need to modify our business plans. Our cash flow from operations may be insufficient to fund required distributions, for example, as a result of differences in timing between our cash flow, the receipt of income for GAAP purposes and the recognition of income for U.S. federal income tax purposes, the effect of non-deductible capital expenditures, the creation of reserves, payment of required debt service or amortization payments, or the need to make additional investments in qualifying real estate assets. The insufficiency of our cash flow to cover our distribution requirements could require us to (i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms, (iii) distribute amounts that would otherwise be invested in future acquisitions or capital expenditures or used for the repayment of debt, (iv) pay dividends in the form of "taxable stock dividends" or (v) use cash reserves, in order to comply with the REIT distribution requirements. As a result, compliance with the REIT distribution requirements could adversely affect the market value of our common stock. The inability of our cash flow to cover our distribution requirements could have an adverse impact on our ability to raise short- and long-term debt or sell equity securities. In addition, if we are compelled to liquidate our assets to repay obligations to our lenders or make distributions to our stockholders, we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as property held primarily for sale to customers in the ordinary course of business, and, in the case of properties held at the end of 2011 (or subsequently acquired in tax deferred transactions from regular C corporations), we may be subject to an entity-level sting tax. See "Material U.S. Federal Income Tax ConsiderationsClassification and Taxation of American Farmland Company as a REIT."
The ability of our Board of Directors to revoke our REIT qualification without stockholder approval may cause adverse consequences to our stockholders.
Our charter provides that our Board of Directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to be a REIT, we will not be allowed a deduction for dividends paid to stockholders in computing our taxable income and will be subject to U.S. federal income tax at regular corporate rates and state and local taxes, which may have adverse consequences on our total return to our stockholders.
Our ability to provide certain services to our tenants may be limited by the REIT rules or may have to be provided through a TRS.
As a REIT, we generally cannot provide services to our tenants other than those that are customarily provided by landlords, nor can we derive income from a third party that provides such services. If we forego providing such services to our tenants, we may be at disadvantage to competitors who are not subject to the same restrictions. However, we can provide such non-customary services to tenants or share in the revenue from such services if we do so through a TRS, though income earned through the TRS will be subject to corporate income taxes.
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Although our use of TRSs may partially mitigate the impact of meeting certain requirements necessary to maintain our qualification as a REIT, there are limits on our ability to own TRSs, and a failure to comply with the limits would jeopardize our REIT qualification and may result in the application of a 100% excise tax.
A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 25% of the value of a REIT's assets may consist of securities of one or more TRSs. In addition, rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. Rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are treated as not being conducted on an arm's-length basis.
We intend to jointly elect with AFTRS for it to be treated as a TRS under the Code for U.S. federal income tax purposes. AFTRS and any other TRSs that we form will pay U.S. federal, state and local income tax on their taxable income, and their after-tax net income will be available for distribution to us but is not required to be distributed to us unless necessary to maintain our REIT qualification. Although we will monitor the aggregate value of the securities of such TRSs and intend to conduct our affairs so that such securities will represent less than 25% of the value of our total assets, there can be no assurance that we will be able to comply with the TRS limitation in all market conditions.
The IRS may treat sale-leaseback transactions as loans, which could jeopardize our REIT status.
The IRS may take the position that transactions in which we acquire a property and lease it back to the seller do not qualify as leases for U.S. federal income tax purposes but are, instead, financing arrangements or loans. If a sale-leaseback transaction were so re-characterized, we might fail to satisfy the asset or income tests required for REIT qualification and consequently could lose our REIT status. Alternatively, the amount of our REIT taxable income could be recalculated, which could cause us to fail the distribution test for REIT qualification. See "Material U.S. Federal Income Tax ConsiderationsClassification and Taxation of American Farmland Company as a REITSale-Leaseback Transactions."
Possible legislative, regulatory or other actions could adversely affect our stockholders and us.
The rules dealing with U.S. federal, state and local income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. Changes to tax laws (which changes may have retroactive application) could adversely affect our stockholders or us. In recent years, many such changes have been made and changes are likely to continue to occur in the future. We cannot predict whether, when, in what form, or with what effective dates, tax laws, regulations and rulings may be enacted, promulgated or decided, which could result in an increase in our, or our stockholders', tax liability or require changes in the manner in which we operate in order to minimize increases in our tax liability. A shortfall in tax revenues for states and municipalities in which we operate may lead to an increase in the frequency and size of such changes. If such changes occur, we may be required to pay additional taxes on our assets or income and/or be subject to additional restrictions. These increased tax costs could, among other things, adversely affect our financial condition, the results of operations and the amount of our dividend payments.
Stockholders are urged to consult with their own tax advisors with respect to the impact that recent legislation may have on their investment and the status of legislative, regulatory or administrative developments and proposals and their potential effect on their investment in our shares.
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In 2014, certain members of Congress circulated a draft of proposed legislative changes to the REIT rules that, if ultimately adopted, could adversely affect our REIT status, including redefining "real property" for REIT purposes to exclude trees and vines and reducing the maximum amount of our gross asset value in TRSs from 25% to 20%. If any of these proposals or legislation containing similar provisions were to become law, it could severely impact our ability to qualify to be taxed as a REIT and/or subject us to significant amount of U.S. federal income tax at the corporate level. Any resulting corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of our common stock.
Our property taxes could increase due to property tax rate changes or reassessment, which could impact our cash flow.
Even if we qualify as a REIT for U.S. federal income tax purposes, we will be required to pay state and local taxes on our properties. The real property taxes on our properties may increase as property tax rates change or as our properties are assessed or reassessed by taxing authorities. In particular, our portfolio of properties may be reassessed as a result of this offering. Therefore, the amount of property taxes we pay in the future may increase substantially from what we have paid in the past and such increases may not be covered by tenants pursuant to our lease agreements. If the property taxes we pay increase, our financial condition, results of operations, cash flow, per share trading price of our common stock and our ability to satisfy our principal and interest obligations and to make distributions to our stockholders could be adversely affected.
Risks Related to this Offering and the Market for Our Common Stock
There has been no public market for our common stock prior to this offering and an active trading market for our common stock may not develop or be sustained following this offering.
Prior to this offering, there has not been any public market for our common stock, and there can be no assurance that an active trading market will develop or be sustained or that shares of our common stock will be resold at or above the initial public offering price. The initial public offering price of our common stock will be determined by agreement among us and the underwriters, but there can be no assurance that our common stock will not trade below the initial public offering price following the completion of this offering. See "Underwriting." The market value of our common stock could be substantially affected by general market conditions, including the extent to which a secondary market develops for our common stock following the completion of this offering, the extent of institutional investor interest in us, the general reputation of REITs and the attractiveness of their equity securities in comparison to other equity securities (including securities issued by other real estate-based companies), our financial performance and general stock and bond market conditions.
The market price and trading volume of our common stock may be volatile following this offering.
Even if an active trading market develops for our common stock after this offering, the per share trading price of our common stock may be highly volatile. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur, and investors in shares of our common stock may from time to time experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects. If the per share trading price of our common stock declines significantly, you may be unable to resell your shares at or above the initial public offering price.
Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:
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In the past, securities class action litigation has often been instituted against companies following periods of volatility in the price of their common stock. This type of litigation could result in substantial costs and divert our management's attention and resources, which could have a material adverse effect on us, including our financial condition, results of operations, cash flow and per share trading price of our common stock.
We do not have any specific farms under contract or other legally binding obligation, or that could be considered probable acquisitions, that we will acquire with the net proceeds from this offering and, therefore, you will not have the opportunity to evaluate any acquisitions funded with the net proceeds from this offering before we make them.
With the exception of a California pistachio farm and a California almond farm, which are subject to definitive purchase and sale agreements, we have not yet identified any specific acquisitions that we may make in the future and we will not provide you with information to evaluate our investments prior to our acquisition of additional farms, other than through our disclosures required by the rules of the SEC. For a discussion of our business and growth strategies, see "Our Business and PropertiesOur Business and Growth Strategies" and "Our Business and PropertiesInvestment Focus," and for a discussion of certain potential acquisitions that we are currently evaluating, see "Our Business and
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PropertiesCropland Acquisitions under Evaluation." We have not entered into binding commitments with respect to any of the potential acquisition opportunities described in this prospectus and there can be no assurance that we will complete any of them on favorable terms, or at all. See "Risks Related to Our Business and FarmsOur failure to identify and consummate acquisitions that meet our investment criteria would significantly impede our ability to achieve our business objectives, including growing our portfolio and diversifying by geography, crop type and tenant, which could materially adversely affect our results of operations and ability to make distributions to our stockholders.
Although we intend to use the net proceeds from this offering (exclusive of the portion used to repay outstanding indebtedness) to acquire farms, we cannot assure you that we will be able to do so. Our failure to apply the net proceeds from this offering effectively or find suitable assets to acquire in a timely manner or on acceptable terms could result in losses or returns that are substantially below expectations.
Pending application of the net proceeds from this offering, we intend to invest the net proceeds in interest-bearing accounts, money market accounts and interest-bearing securities in a manner that is consistent with our intention to qualify for taxation as a REIT. We expect that these initial investments will provide a lower net return than we expect to receive from the investments described above. We may not be successful in completing any investments we identify and the farms we acquire may not produce our anticipated, or any, positive returns.
Our cash available for distribution to stockholders may not be sufficient to make distributions, and we may need to borrow in order to make such distributions or may not be able to make such distributions at all.
In order to remain competitive with alternative investments, our distribution rate may exceed our cash available for distribution, including cash generated from operations. In the event this happens, we intend to fund the difference out of any excess cash on hand, from borrowings or from the net proceeds from this offering. To the extent we borrow to fund distributions, our future interest costs would increase, thereby reducing our earnings and ability to make distributions from what they otherwise would have been. If we do not have sufficient cash available for distribution generated by our assets to pay the quarterly distribution set by our Board of Directors, or if cash available for distribution decreases in future periods, the market price of our common stock could decrease.
All distributions will be made at the discretion of our Board of Directors and will depend on our earnings, our financial condition, whether or not we have qualified as a REIT, and other factors as our Board of Directors may deem relevant from time to time. We may not be able to make distributions in the future. In addition, some of our distributions may include a return of capital. To the extent that our Board of Directors approves distributions in excess of our then current and accumulated earnings and profits, these excess distributions would generally be considered a return of capital for U.S. federal income tax purposes to the extent of your adjusted tax basis in your shares. A return of capital is not taxable, but it has the effect of reducing your adjusted tax basis in your investment. To the extent that distributions exceed the adjusted tax basis of your shares, they will be treated for tax purposes as a gain from the sale or exchange of your stock. See "Material U.S. Federal Income Tax Considerations." If we borrow to fund distributions, our future interest costs would increase, thereby reducing our earnings and ability to make distributions from what they otherwise would have been.
We may use a portion of the net proceeds from this offering to make distributions to our stockholders, which would, among other things, reduce our cash available to acquire farms and may reduce the returns on your investment in our common stock.
Prior to the time we have fully invested the net proceeds from this offering, we may fund distributions to our stockholders out of the net proceeds from this offering, which would reduce the amount of cash we have available to acquire farms and may reduce the returns on your investment in
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our common stock. The use of these net proceeds for distributions to stockholders could adversely affect our financial results. In addition, funding distributions from the net proceeds from this offering may constitute a return of capital to our stockholders, which would have the effect of reducing each stockholder's tax basis in our common stock. In addition, our failure to rapidly invest the net proceeds from this offering or to make investments at acceptable rates of return could force us to set or reduce our distribution rate after setting such rate to a rate that is not competitive with alternative investments, which could materially adversely affect the market price for our common stock.
The number of shares of our common stock available for future issuance or sale may have adverse effects on the market price of our common stock.
Upon completion of this offering, we will have a total of shares of our common stock outstanding (or shares of our common stock assuming the underwriters exercise in full their option to purchase additional shares of our common stock), including an aggregate of $ in shares of restricted common stock equal to an aggregate of shares (based on the midpoint of the price range set forth on the front cover of this prospectus) granted to and and an aggregate of $ in restricted shares of our common stock equal to an aggregate of shares (based on the midpoint of the price range set forth on the front cover of this prospectus) granted to our independent directors. The shares of our common stock sold in this offering (or shares of our common stock assuming the underwriters exercise in full their option to purchase additional shares of our common stock) will be freely transferable without restriction or further registration under the Securities Act, by persons other than our directors, director nominees and executive officers and except for restrictions on ownership and transfer in our charter intended to preserve our qualification as a REIT. See "Shares Eligible for Future Sale." After giving effect to grants of restricted common stock concurrently with the completion of this offering, we expect that an aggregate of shares of our common stock will be available for future issuance under our 2014 Equity Incentive Plan. See "ManagementExecutive Officer and Director Compensation2014 Equity Incentive Plan." We intend to file with the SEC a Registration Statement on Form S-8 covering the shares of common stock issuable under our 2014 Equity Incentive Plan. Shares of our common stock covered by this registration statement, including any shares of our common stock issuable upon the exercise of options or shares of restricted common stock, will be eligible for transfer or resale without restriction under the Securities Act unless held by affiliates. All of these shares of our common stock will be eligible for future sale following the expiration of the 180-day lock-up period and, concurrently with the consummation of the Internalization, we will enter into a registration rights agreement pursuant to which each person who received Common Units as a result of the Internalization will have a right to cause us to register with the SEC the shares of our common stock that they receive upon the redemption of the Common Units, which we refer to as the registrable securities. Pursuant to this registration rights agreement, within 10 business days following the first date when we become eligible to file a shelf registration statement with respect to the registrable securities, we will agree to file a shelf registration statement relating to the issuance of such parties' registrable securities, or a resale shelf registration statement, and maintain the effectiveness of the shelf registration statement until all of the registrable securities have been disposed of by the holders or the date on which all registrable securities may be sold pursuant to Rule 144 under the Securities Act. In addition, all shares owned by our existing shareholders are subject to at least a 180 day lock-up following this offering, but may be sold thereafter. See "Shares Eligible For Future SaleRegistration Rights" and "Certain Relationships and Related Party TransactionsRegistration Rights."
We cannot predict the effect, if any, of future sales of our common stock, or the availability of shares for future sales, on the market price of our common stock. The market price of our common stock may decline significantly when the restrictions on resale by certain of our stockholders lapse. Sales of substantial amounts of common stock, including shares of common stock issuable upon the redemption of Common Units issued in connection with the Internalization and that we may issue from
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time to time in the future, or the perception that such sales could occur, may adversely affect the prevailing market price for our common stock.
In addition, we may issue additional shares in subsequent public offerings or private placements to make new investments or for other purposes. We are not required to offer any such shares to existing stockholders on a preemptive basis. Therefore, it may not be possible for existing stockholders to participate in such future share issuances, which may dilute the existing stockholders' interests in us.
Future offerings of debt securities, which would be senior to our common stock upon liquidation, preferred equity securities, which may be senior to our common stock for purposes of dividend distributions or upon liquidation, and Common Units in connection with future acquisitions may materially adversely affect us, including the per share trading price of our common stock.
Our charter provides that we may issue up to 300,000,000 shares of our common stock, $0.01 par value per share, and up to 10,000,000 shares of preferred stock, $0.01 par value per share. Moreover, under Maryland law and our charter, our Board of Directors has the power to increase the aggregate number of shares of stock or the number of shares of stock of any class or series that we are authorized to issue without stockholder approval. See "Description of Our Capital Stock." Similarly, the amended partnership agreement authorizes us to issue an unlimited number of additional Common Units, which may be exchangeable for shares of our common stock. In addition, upon completion of this offering and taking into account the initial grant of equity awards under the 2014 Equity Incentive Plan, equity awards representing share equivalents will be available for future issuance under the 2014 Equity Incentive Plan (with full value awards counting as one share equivalent and options counting as one-half of a share equivalent).
In the future, we may issue debt or equity securities or incur other financial obligations, including stock dividends and shares that may be issued in exchange for Common Units and equity plan shares/units. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will be entitled to receive payments prior to distributions to the holders of our common stock. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and may result in dilution to owners of our common stock. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability pay dividends to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk that our future offerings could reduce the per share trading price of our common stock and dilute their interest in us. In addition, the issuance of Common Units in connection with future acquisitions and the redemption of such Common Units for common stock may be dilutive to our stockholders and could have an adverse effect on the per share trading price of our common stock.
Increases in market interest rates may have an adverse effect on the market price of our common stock.
One of the factors that investors may consider in deciding whether to buy or sell our common stock is our distribution yield, which is our distribution rate as a percentage of our share price, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher distribution yield on our common stock or may seek securities paying higher dividends or interest. The market price of our common stock likely will be based primarily on the earnings that we derive from rental income with respect to our farms and our related distributions to stockholders, and not from the underlying appraised value of the farms themselves. As a result, interest rate fluctuations and capital market conditions are likely to affect the market price of our common stock, and such effects could be significant. For instance, if interest rates rise without an increase in our distribution rate, the market
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price of our common stock could decrease because potential investors may require a higher distribution yield on our common stock as market rates on interest-bearing securities, such as bonds, rise.
We are an "emerging growth company," and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make shares of our common stock less attractive to investors.
We are an "emerging growth company," as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including the requirements to:
We will remain an "emerging growth company" until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenue equals or exceeds $1 billion (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of this offering, (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt or (iv) the date on which we are deemed to be a "large accelerated filer" under the Exchange Act.
We cannot predict if investors will find shares of our common stock less attractive because we will not be subject to the same reporting and other requirements as other public companies. If some investors find shares of our common stock less attractive as a result, there may be a less active trading market for our common stock, and the per share trading price of our common stock could decline and may be more volatile.
We will incur new costs as a result of becoming a public company, and such costs may increase if and when we cease to be an "emerging growth company," which could materially adversely impact our results of operations.
As a public company, we will incur significant legal, accounting, insurance and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the New York Stock Exchange and other applicable securities rules and regulations. Compliance with these rules and regulations has increased our legal and financial compliance costs, made some activities more difficult, time-consuming or costly and increased demand on our systems and resources. As a result, our executive officers' attention may be diverted from other business concerns, which could materially adversely affect our business and results of operations. In addition, the expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect compliance with these public reporting requirements and associated rules and regulations to increase expenses, particularly after we are no
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longer an emerging growth company, although we are currently unable to estimate these costs with any degree of certainty. We could be an emerging growth company until December 31, 2020, although circumstances could cause us to lose that status earlier, which could result in our incurring additional costs applicable to public companies that are not emerging growth companies.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, which are subject to varying interpretations, are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of our executive officers' time and attention from revenue-generating activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.
As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal control over financial reporting. If there are deficiencies in our disclosure controls and procedures or internal control over financial reporting, we may be unable to accurately present our financial statements, which could materially adversely affect us, including our business, reputation, results of operations, financial condition or liquidity.
Effective internal controls are necessary for us to accurately report our financial results. Section 404 of the Sarbanes-Oxley Act of 2002 will require us to evaluate and report on our internal control over financial reporting. There can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Furthermore, as we grow our business, our internal controls will become more complex, and we may require significantly more resources to ensure our internal controls remain effective. Deficiencies, including any material weakness, in our internal control over financial reporting which may occur in the future could result in misstatements of our financial statements that could require a restatement, failing to meet our public company reporting obligations and causing investors to lose confidence in our reported financial information. These events could materially adversely affect us, including our business, reputation, results of operations, financial condition or liquidity.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this prospectus that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, future events, financial condition or performance, expectations, competitive environment, availability of resources, regulation, liquidity, results of operations, strategies, plans and objectives. These forward-looking statements include, without limitation, statements concerning projections, predictions, expectations, estimates, or forecasts as to our business, financial and operational results, and future economic performance, as well as statements of management's goals and objectives and other similar expressions concerning matters that are not historical facts. When we use the words "may," "should," "could," "would," "predicts," "forecasts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" or similar expressions or their negatives, as well as statements in future tense, we intend to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Statements regarding the following subjects are forward-looking by their nature:
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information available to us at the time those statements are made or management's good faith belief as of that time with respect to future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our common stock, along with the following factors that could cause actual results to vary from our forward-looking statements:
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Forward-looking statements speak only as of the date the statements are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
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After deducting the underwriting discount and commissions, estimated expenses of this offering and advisory fees of approximately $ million payable by us, we expect to receive net proceeds from this offering of approximately $ million, or approximately $ million if the underwriters' option to purchase additional shares is exercised in full.
We intend to contribute the net proceeds from this offering to our operating partnership in exchange for Common Units, and our operating partnership intends to use the net proceeds from this offering (i) to pay down $20.4 million our revolving credit facilities and (ii) for working capital purposes, including to fund a combination of (a) new acquisitions, including $24.7 million for the two acquisitions described herein, and (b) capital expenditures and/or development costs for our existing farms currently expected to total approximately $8.0 million for 2015, with the majority of such proceeds intended to be used to fund new acquisitions, depending on our ability to successfully identify farms that satisfy our investment guidelines. Although we are currently reviewing multiple potential acquisitions, we have not, as of the date of this prospectus, entered into any definitive agreements with respect to such potential acquisitions, and we do not consider such potential farms as probable acquisitions. See "Risk FactorsRisks Related to this Offering and the Market for Our Common StockWe do not have any specific farms under contract or other legally binding obligation, or that could be considered probable acquisitions that we will acquire with the net proceeds from the offering and therefore, you will not have the opportunity to evaluate any acquisitions funded with the net proceeds from the offering before we make them." We have executed definitive purchase and sale agreements with the sellers of a California pistachio farm and a California almond farm. The pistachio farm consists of approximately 619 gross acres and approximately 510 tillable acres, with an agreed upon purchase price of $19.4 million. The almond farm consists of approximately 135 gross acres and approximately 132 tillable acres, with an agreed upon purchase price of $5.3 million. See "Our Business and PropertiesFarmland Acquisitions under Evaluation." These purchase and sale agreements are subject to significant contingencies and conditions and no assurances can be provided as to whether or when definitive documentation for such acquisitions may be executed.
As of March 31, 2015, we had drawn down an aggregate of approximately $20.4 million under the original revolving credit facility. The original revolving credit facility of $25 million matures on January 1, 2019 and bears interest at a rate per annum equal to (i) one quarter of one percent (0.25%) of the loan amount minus the average outstanding principal balance of the loan of the prior three (3) month period for unused amounts and (ii) for amounts drawn upon, the 90 days London Interbank Offer Rate, or LIBOR, plus 130 basis points (1.3%), and as of March 31, 2015, the original revolving credit facility had an effective annual interest rate on the amount drawn upon of approximately 1.6%. We make quarterly interest payments pursuant to the original revolving credit facility on April 1, July 1, October 1 and January 1 of each calendar quarter. The outstanding borrowings on the original revolving credit facility as of March 31, 2015 were primarily used to fund the acquisitions of Falcon Farms on November 14, 2014 for approximately $8.0 million and the second parcel of Kimberly Vineyard on December 9, 2014 for approximately $9.8 million, with the remainder used for general corporate purposes. The second revolving credit facility of $25 million matures on January 1, 2020 and bears interest at a rate per annum equal to (i) one quarter of one percent (0.25%) of the loan amount minus the average outstanding principal balance of the loan of the prior three (3) month period for unused amounts and (ii) for amounts drawn upon, the 90 days LIBOR, plus 130 basis points (1.3%), and as of March 31, 2015, the second revolving credit facility had an effective annual interest rate of approximately 1.6%. We make quarterly interest payments pursuant to the second revolving credit facility on April 1, July 1, October 1 and January 1 of each calendar quarter. As of March 31, 2015, there were no amounts outstanding under the second revolving credit facility. We intend to draw on the revolving credit facilities to free up liquidity for various corporate purposes, including property acquisitions.
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Pending application of the net proceeds from this offering, we intend to invest the net proceeds in interest-bearing accounts, money market accounts and interest-bearing securities in a manner that is consistent with our intention to qualify for taxation as a REIT. Such investments may include, for example, government and government agency certificates, government bonds, certificates of deposit, interest-bearing bank deposits, money market accounts and mortgage loan participations. We expect that these initial investments will provide a lower net return than we expect to receive from the investments described above.
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Historically, we have paid regular semi-annual distributions to holders of our common stock, with our distributions per common shares for 2013 and 2014 presented below. Following the completion of this offering, we intend to pay regular quarterly distributions to holders of our common stock. We intend to pay a pro rata distribution with respect to the period commencing on the completion of this offering and ending on the last day of the then current fiscal quarter, based on $ per share for a full quarter, which corresponds to $ per share annually. We intend to make aggregate distributions roughly comparable to our current aggregate distributions, which are supported by our earnings, subject to potential increases in line with increases in earnings from our growing portfolio. As a result of the shares issued in the offering per share dividend amounts will be lower than our historic dividends, as disclosed below.
We intend to continue to qualify as a REIT for U.S. federal income tax purposes. The Code generally requires that a REIT annually distribute 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain. We will be subject to income tax on our taxable income that is not distributed and to an excise tax to the extent that certain percentages of our taxable income are not distributed by specific dates. See "Material U.S. Federal Income Tax Considerations."
In order to satisfy the requirements for qualification as a REIT and avoid U.S. federal income and excise tax on retained income and gains, we intend to make regular quarterly distributions of all or substantially all of our REIT taxable income to holders of our common stock out of assets legally available for such purposes. Our future distributions will be at the sole discretion of our Board of Directors and will be dependent upon a number of factors, including restrictions under applicable law, the capital requirements of our company and the distribution requirements necessary to qualify and maintain our qualification as a REIT.
Our ability to make distributions in the future will depend upon our actual results of operations and earnings, economic conditions and other factors that could differ materially from our current expectations and from the assumptions used in our estimate. If our operations do not generate sufficient cash flow to allow us to satisfy the REIT distribution requirements, we may be required to fund distributions from working capital or with a portion of the net proceeds from this offering or borrow to provide funds for such distributions, borrow funds, liquidate assets, reduce such distributions or choose to make a portion of the required distributions in the form of a taxable stock dividend to preserve our cash balance or reduce our distribution. In particular, we may use a portion of the net proceeds of this offering to make distributions to our common shareholders while we are in the process of deploying the remainder of the net proceeds from this offering in connection with acquisitions and other corporate purposes. Our actual results of operations will be affected by a number of factors, including the revenue we receive from our farms, our operating expenses, interest expense, the ability of our tenants to meet their obligations and unanticipated expenditures. For more information regarding risk factors that could materially adversely affect our actual results of operations, see "Risk Factors."
The table below sets forth the semi-annual dividend distributions per common share for the years ended December 31, 2014 and 2013. We have declared a semi-annual dividend distribution of $0.125 per common share for the period from January 1, 2015 - June 30, 2015, which is payable to holders of record as of June 27, 2015.
|
2014 | 2013 | |||||
---|---|---|---|---|---|---|---|
January 1 - June 30 |
$ | 0.125 | $ | 0.100 | |||
July 1 - December 31 |
0.125 | 0.125 | |||||
| | | | | | | |
Total |
$ | 0.250 | $ | 0.225 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
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The following table sets forth our cash and cash equivalents and our capitalization as of March 31, 2015 on:
This table should be read in conjunction with "Use of Proceeds," "Selected Historical and Pro Forma Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our consolidated financial statements and the unaudited pro forma consolidated financial statements and related notes thereto included elsewhere in this prospectus.
|
As of March 31, 2015 | ||||||
---|---|---|---|---|---|---|---|
|
Actual | Pro Forma | |||||
Cash and cash equivalents |
$ | 5,182,647 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Debt: |
|||||||
Revolving credit facilities (1) |
$ | 20,400,000 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Equity: |
|||||||
Common stock, $0.01 par value, 300,000,000 shares authorized, and 10,890,847 shares issued and outstanding, actual; 300,000,000 shares authorized, and shares issued and outstanding, on a pro forma basis |
108,908 | ||||||
Series A Preferred stock, $0.01 par value, 35 shares authorized, and 29 shares issued and outstanding, actual; 35 shares authorized and 0 shares issued and outstanding, on a pro forma basis |
| ||||||
Additional paid-in capital |
110,690,875 | ||||||
Accumulated deficit |
(6,386,542 | ) | |||||
| | | | | | | |
Company stockholders' equity |
104,413,241 | ||||||
Non-controlling interest in our operating partnership |
20,540,482 | ||||||
| | | | | | | |
Total equity |
$ | 124,953,723 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
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If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the public offering price per share you will pay in this offering and the pro forma net tangible book value per share of our common stock immediately after this offering.
Our net tangible book value as of March 31, 2015 was $104,413,241, inclusive of both common and preferred shares, or $9.58 per share. Net tangible book value per share represents the amount of our total tangible assets net of total liabilities, less the portion attributable to non-controlling interests, divided by the total number of shares of common stock outstanding as of March 31, 2015.
After giving effect to the sale of the shares of our common stock we are offering at the public offering price of $ per share (which is the midpoint of the range on the front cover of this prospectus), and after deducting the underwriting discount and our estimated offering expenses, our pro forma net tangible book value as of March 31, 2015, less the portion attributable to non-controlling interests, would have been approximately $ , or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share and an immediate dilution of $ per share to new investors. The following table illustrates this calculation on a per share basis:
Public offering price per share of common stock (assuming the midpoint of the range on the front cover of this prospectus) |
$ | ||||||
Net tangible book value per share of common stock as of March 31, 2015 |
$ | 9.58 | |||||
Increase per share attributable to this offering |
|||||||
| | | | | | | |
Pro forma net tangible book value per share after this offering |
|||||||
| | | | | | | |
Pro forma dilution per share to new investors |
$ | ||||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
If the underwriters exercise their option to purchase additional shares in full, pro forma net tangible book value will increase to $ per share, representing an increase to existing holders of $ per share, and an immediate dilution of $ per share to new investors.
The following table summarizes, as of March 31, 2015:
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SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth selected financial and operating data on (i) a historical combined basis for our company and (ii) a pro forma basis for our company after giving effect to this offering, the Internalization and the redemption of our Series A Preferred Stock for $31,900 plus accrued and unpaid dividends through the date of redemption.
You should read the following selected financial data in conjunction with our historical combined financial statements and the related notes and with "Management's Discussion and Analysis of Financial Condition and Results of Operations," which are included elsewhere in this prospectus.
The selected historical consolidated financial data set forth below as of and for the years ended December 31, 2014 and 2013 have been derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. The selected consolidated financial data set forth below as of and for the years ended December 31, 2012 and 2011 have been derived from our audited consolidated financial statements not included in this prospectus.
The selected historical consolidated financial data set forth below as of March 31, 2015 and 2014 and for the three months ended March 31, 2015 and 2014 have been derived from our unaudited consolidated financial statements and related notes included elsewhere in this prospectus. These consolidated financial statements have been prepared on a basis consistent with our audited financial statements. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of this data. The results of any interim period are not necessarily indicative of the results that may be expected for a full fiscal year or for any future period or our financial condition at any future date.
Our selected unaudited pro forma consolidated financial and operating data as of and for the three months ended March 31, 2015 and the year ended December 31, 2014 reflect the completion of this offering, the completion of the Internalization and the redemption of our Series A Preferred Stock as if these transactions had occurred on January 1, 2014 for the operating data and as of the stated date for the balance sheet data. Our pro forma financial information is presented for informational purposes only and is not necessarily indicative of what our actual financial position and results of
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operations would have been as of the date and for the periods indicated, nor does it purport to represent our future financial position or results of operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those expected or implied in these forward looking statements as a result of certain factors, including those set forth under the heading "Risk Factors" and elsewhere in this prospectus. See "Cautionary Note Regarding Forward-Looking Statements." The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and related notes thereto as of and for the three months ended March 31, 2015, our audited consolidated financial statements and related notes thereto as of and for the years ended December 31, 2014 and 2013, and the unaudited pro forma consolidated financial statements and related notes thereto, each included elsewhere in this prospectus. Where appropriate, the following discussion includes analysis of the effects of this offering, the Internalization and the redemption of our Series A Preferred Stock. These effects are reflected in our unaudited pro forma consolidated financial statements located elsewhere in this prospectus.
Our Company
While we will be internally managed upon completion of this offering, we have previously been an externally managed real estate company. We focus primarily on the acquisition of a diversified portfolio of permanent crop, specialty/vegetable row crop and commodity row crop farmland, including development farmland located in the U.S. in select major agricultural states. We lease our farms to experienced farmer tenants under a variety of lease structures with staggered durations, including fixed leases and participating leases. As of March 31, 2015, our portfolio was comprised of 17 farms with approximately 15,378 gross acres, including nine farms in California, three farms in Florida, three farms in Illinois, one property in Arkansas and one property consisting of two aggregated parcels, one of which is in Alabama and the other of which is in Georgia. For a more detailed discussion of our farms, see "Our Business and FarmsOur Portfolio."
We were formed as a Maryland corporation in October 2009, and we have elected to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2012. We conduct all of our business activities through our operating partnership, of which we will be the sole general partner following the Internalization.
Internalization
Since commencing operations in October 2009, we have been externally managed by AFA, which is an affiliate of Optima. On November 25, 2014, we and our operating partnership entered into a Contribution Agreement with AFTRS and each of the holders of equity ownership interests in AFA pursuant to which, upon the completion of this offering, we will internalize the management functions historically provided by AFA. As consideration in the Internalization, our operating partnership will issue Common Units with an aggregate value of $12 million. On December 15, 2014, we received the requisite consent from a majority of our disinterested stockholders approving the Internalization. We expect that the Internalization will be completed simultaneously with, and conditioned upon, the completion of this offering. See "Structure of Our CompanyInternalization."
We expect that, after the Internalization, our management team will be comprised of the current employees of our company as well as shared employees with Optima pursuant to an arrangement described below. See "Certain Relationships and Related Party TransactionsTransitional Services Agreement." In addition, we will continue to rely upon our Agricultural Sub-Adviser, pursuant to an amended and restated Sub-Advisory Agreement that is described in more detail under "Our Business and PropertiesInvestment Focus and ProcessUnderwriting Criteria and Due Diligence ProcessAgricultural Sub-Adviser."
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Factors That May Affect Our Operating Results and Asset Value
Our operating results and the value of our farms are affected by a number of broad economic or fundamental factors, including global supply and demand trends and crop prices, as well as other more localized or property specific factors, including rental rates and lease structures, our ability to control expenses, weather events, including droughts, seasonality and the portion of our portfolio invested in development farms. For a discussion of economic conditions and the outlook regarding the farming industry, particularly with respect to the United States, see "Industry Overview and Market Opportunity."
Demand for Farmland and Agricultural Crops
The most significant driver of our operating results and portfolio value is, and we believe will continue to be, global demand for U.S. agricultural crops, which in turn is driven by global demographic and economic trends such as population growth and the increasing size and wealth of the middle class in emerging markets and, to a lesser extent, a trend toward increased reliance on alternative energy sources. Increasing demand for U.S. agricultural crops generally results in the support of and, over the long-term, increase in the value of U.S. farmland and increases in rental rates for those farms. Further, we believe that the U.S. has strong agricultural advantages in its topography and geographic position, with its varied climatic regions allowing for the production of a wide variety of agricultural crops and its central position between industrial centers in Asia, Europe, Canada and South America making it a favorable location for trading. Additionally, unlike many developing nations, the U.S. is a politically stable nation with well-developed infrastructure, including established railways and ports for transportation and export of crops, and has the financial resources (such as investor capital and government support through subsidies and crop insurance) to sustain its agriculture industry. These factors, among others, provide the U.S. a comparative advantage even when it is not the lowest-cost producer and should help sustain demand for U.S. agricultural crops over the long term.
The U.S. Census Bureau forecasts that the global population will grow by more than 381 million people over the next five years and by more than one billion people by 2028. We believe that population size is the primary driver of global demand for agricultural crops and further believe that higher prices for agricultural crops should translate into both higher rental rates for farmland as well as continued growth in the value of farmland, such as our farms, over the long-term.
Another significant demand driver is the increasing size and wealth of the middle class in emerging markets. To the extent that the middle class in emerging markets continues to expand, diets are expected to improve and diversify through increased caloric intake, greater spending on higher quality food and through greater consumption of protein (from both crops and livestock). These improvements to diets and nutrition in emerging markets drive increased demand for commodity row crops used as feedstock and for permanent crops, like nuts, which are an alternate source of protein. We also expect that increased consumer spending power in emerging markets will result in households allocating a larger percentage of their income to food products that may be considered discretionary, including wine and different nut types, which will result in an increased demand for certain of our permanent crops.
Additionally, the overall trend toward reducing the global "carbon footprint" has increased demand for alternative energy sources, which, in the long term, could impact our rental revenues and our results of operations. Key alternative energy commodities include corn, used in ethanol, and soybeans, used in biodiesel fuel. The current high levels of U.S. ethanol production are anticipated to continue over the next ten years and are projected to account for 35% of total expected corn use. Further, farmland can also be used to produce other types of alternative energy, including geothermal, solar and wind, as farm owners lease fields as locations for clean electricity generation, including wind farms and/or solar panels. Our business strategy is not significantly dependent on demand for biofuels,
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and we do not believe that demand for corn and soybeans as inputs in the production of biofuels will materially impact our results of operations or the value of our farmland portfolio.
Supply of Arable Farmland and Agricultural Crops
We believe that the global supply of arable land will continue to be limited in the future due to the finite nature of land resources generally. Even with technological advances improving productivity, the availability of arable land for agricultural use continues to diminish, and with an expectation of the global population continuing to expand, the amount of arable land per capita is expected to continue to decline in the future. Additionally, increased urbanization of rural lands, particularly outside of the United States, will also contribute to a reduction in the supply of farmland and potentially increase foreign dependence on agricultural imports from regions such as the U.S. We believe these constraints on the supply of arable farmland will result in increases in the value of farmland rental rates.
The global supply of arable land and the productivity of such land is adversely affected by the scarcity of water in many irrigated growing regions, both globally and within the U.S. For example, a significant portion of the U.S. has experienced severe drought conditions over the past few years, most recently in the Pacific region, including a majority of California. While such conditions could have negative short-term impacts on U.S. agriculture, including less crop production, increased competition for farmland due to distressed sales and lower farm income, from a long-term perspective, we believe a strategy of holding diversified assets both geographically and on a commodity basis may help to mitigate losses in any one area or crop type. Further, leased farmland may benefit from rental payments even in periods of lower than normal crop production.
In addition, there is often a related and mitigating relationship between crop supply and crop prices in certain crop types or regions. Typically, where there are concerns over supply due to a weather event (i.e. drought or frost) prices will increase, insulating overall gross revenues from potential decreases related to supply concerns. In times of weather uncertainty, properties with higher quality water access and/or soils tend to be more resilient to downturns in value and, accordingly, water and soil quality, along with water availability, are integral components of our pre-acquisition analysis. In that respect, all of our California farms have wells that are either onsite or shared and/or have access to surface water for which we have deeded or contractual rights. Consequently, our tenants have been able to reap the benefits of such increased crop prices, which has led to increases in our revenue under flexible lease or crop share lease structures. The continuance of the current drought or an increase in its severity or the occurrence of additional weather events, including droughts in other regions, may further impact the productivity and supply of arable farmland.
In addition to the amount of land dedicated to agricultural activity, the global supply of crops is affected by the productivity of farmland and technology. Historically, farmland productivity has been driven by advances in seed technology, farm equipment, irrigation techniques and chemical fertilizers and pesticides. We believe that trends toward the urbanization of rural land will offset the benefits of any technological advances that improve the productivity of farmland generally.
Rental Revenues from Fixed and Participating Leases
In order to maximize the benefit of the demand/supply dynamics discussed above, we use varying lease structures based on crop type and geographic regions.
We generally use fixed leases of one to three years for our specialty/vegetable and commodity row crop farms, including annual percentage or dollar escalators in some cases for leases of more than one year in duration. These fixed leases provide stability for our revenues and a level of protection against many risks inherent in farming operations, such as weather, drought or shorter-term crop fluctuations. These events generally have only a short-term adverse impact on the farmland because of the ability to replant crops or switch crops the next year. Rental payments for fixed leases on row crops are typically
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made on an annual basis prior to harvest or semi-annually, with 50% being made in advance of harvest and 50% being paid post-harvest.
However, due to the short term nature of these fixed leases on specialty/vegetable and commodity row crop farms, in any given year we may have multiple leases up for renewal or extension. We have nine leases (Sandpiper Ranch, Condor Ranch, Pleasant Plains Farm, Tillar Farm and Kane County Farms) expiring in 2015 that collectively accounted for 29.7% of our total annual rent for 2014 and 23.8% of our rent for the first quarter of 2015. With the exception of Condor Ranch, which is a permanent crop farm that is predominantly in development, each of the farms is a commodity or specialty/vegetable row crop farm, and we expect lease negotiations with respect to these farms to commence in the third and fourth quarter of 2015 as is customary with respect to leases for these types of farms in their respective geographies. We currently expect to renew each of these leases with the existing farmer tenant, though no assurances can be given that we will be successful in doing so. Regarding rental rates, Sandpiper Ranch, which has a fixed lease, and the mature portion of Condor Ranch, which has a participating lease with a base rent, are located in the USDA Pacific region where the crops produced have seen increased demand and prices. Accordingly, we anticipate being able to renew each of the leases associated with these farms at the same, if not higher rental rates. Our Pleasant Plains Farm, Tillar Farm and Kane County Farms, however, are located in the USDA Corn Belt and Delta regions, both of which have experienced a softening in commodity prices, which may adversely impact our ability to negotiate rental rates at equal or more favorable terms; however, we are unable to quantify this possible impact given that most leases in this region are negotiated in the third and fourth quarters.
For permanent crop farms, we typically use participating leases because the ability to share in favorable crop prices compensates for the increased risks of owning and developing permanent farmland, which takes several years to yield revenue-producing crops and which can suffer long-term damage from weather events. These leases typically require the tenant to pay a base rent and, after a threshold that allows the tenant to recoup agricultural expenses, revenues are shared formulaically based on one or multiple factors pursuant to the applicable lease. These leases are typically longer-term in nature, (four to six years), and have multiple payment installments, some for base rent amounts and others for the participating component. Revenues from participating leases exhibit more variability around fluctuating crop prices and harvest cycles and are subject to seasonality, the timing of crop harvests or when revenues are recognized or received. We expect such variability to continue as long as we continue to use such lease types.
Farms with fixed leases of multiple-year durations are less susceptible to the immediate impacts of changes in crop prices. However, land values for commodity row crop farms and resulting market rental rates are generally impacted by the overall three year average of crop prices, and perhaps sooner in times of notable price volatility. For leases where there is a participating or contingent revenue component, impacts of changing crop prices will have a more direct impact on revenues. Although annual rental payments under our leases will not be based on the quality or profitability of our tenants' harvests, any of these factors could adversely affect our tenants' ability to meet their obligations to us and our ability to lease or re-lease farms on favorable terms.
Rental revenue from larger farms will have a direct bearing on our overall revenues. For example, our Golden Eagle Ranch property is currently responsible for 38.7% of our 2014 contractual rent received to date, not including certain rent to be paid under participating leases that has not yet been recognized, and 48.2% of our first quarter 2015 contractual rent, which represents rent received for the three months ended March 31, 2015 and includes certain rent from participating leases for 2015 that was not recognized in 2014, but does not include certain rent to be paid under participating leases for 2015 that has not yet been paid or recognized.
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Development Farms
Six of our farms are either completely or in majority under development and one farm is partially, but less than a majority, under development at present. The six farms that are completely (or in majority) under development include Roadrunner Ranch, Condor Ranch, Blue Cypress Farm, Hawk Creek Ranch, Pintail Vineyards and Grassy Island Groves. In addition, our Quail Run Vineyard is partially, but less than a majority, under development. Portions of our other farms may contain young non-mature acres that are not yet commercially productive, but are not included in the development segment as such farms do not require the continued capital expenditures associated with development. Rental revenues will not be generated on these farms until they become commercially productive, and for farms that are in partial development, any revenues may be offset to a varying degree from development capital expenditures. We expect our current farms under development to become commercially productive and leased to tenants between 2016 and 2019, depending on each property's current stage of development and the crop type for which it is being developed, with one pistachio farm expected to be commercially productive and leased to a tenant in 2021. While development farms represent one of the four main sub-categories of crop types, our current intent is to use the net proceeds from this offering for acquisitions of income producing farms in order to ensure adequate income generation; therefore, our level of capital expenditures as a percentage of total asset value is expected to decline going forward. In addition, we expect rental revenues and funds available for dividend distribution to increase over the long-term. Once we determine that enough of our development or redevelopment farms are commercially productive, we will reassess our portfolio and implement an opportunistic and disciplined acquisition strategy with respect to development farms.
Capital Expenditures
In connection with our development and redevelopment farms, as well as due to regular operating maintenance costs, 2015 planned capital expenditures are projected to be approximately $8.0 million before revenue offsets. Additionally, going forward, we expect capital expenditures to generally remain the same in total over the short term with major expenditures over the next couple of years going to projects on our Roadrunner Ranch, Condor Ranch, Golden Eagle Ranch, Quail Run Vineyard, Grassy Island Groves, Blue Cypress Farm, Hawk Creek Ranch, Blue Heron Farm, Pintail Vineyards and Falcon Farms properties. We currently estimate approximately $13.3 million in remaining capital expenditures to complete our existing development projects, which include cultural costs incurred for crops that are producing, but not at commercially productive or leaseable levels. Thereafter, we would expect our capital expenditures related to our development and redevelopment farms to remain relatively stable as we plan to acquire additional development farms as our current development and redevelopment farms become commercially productive.
Expenses
All of our leases provide that we are responsible for major maintenance and insurance costs, while the tenant is responsible for minor maintenance, water usage and all of the additional input costs related to the farming operations on the farms, such as seed, fertilizer, labor and fuel. Generally, real estate taxes are capitalized for acres under development and are expensed for leased acreage. For all of our farms, we will generally bear costs related to major capital improvements, such as irrigation systems or drainage tile. We also will incur the costs associated with maintaining liability and casualty insurance in addition to any insurance provided by the tenant for which we are a named insured. Additionally, we will be responsible for the fees paid to our Agricultural Sub-Adviser and any other third parties, in connection with property acquisition and management, and sales, general and administrative expenses. However, because we believe that our platform is scalable, we do not expect the expenses associated with managing our farms to increase disproportionally as we grow our portfolio. Rather, we expect that
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the growth of our portfolio will allow us to achieve economies of scale, which will enable us to reduce our operating costs per acre.
We expect to incur costs associated with the Internalization and running a public company, including, among others, costs associated with employing our personnel and compliance costs.
Crop Prices
Crop prices are impacted by a variety of factors, including, among others, global production and demand estimates, adverse weather conditions, crop disease in important global farming regions, changes in government regulations and policy, fluctuations in global wealth, changes in foreign trade and export markets, and military conflicts. Any of these factors may result in crop price volatility, which may either positively or negatively impact the value of our tenants' crop yields. Prices for many commodity row crops, particularly corn, experienced significant declines in 2013 and 2014, but we do not believe that such declines represent a trend that will continue over the long term. Rather, we believe that those declines in prices for commodity row crops represented a correction to historical norms (adjusted for inflation) after a period of heightened prices stemming in part from the drought that impacted the Midwest in 2012, and we believe that long-term growth trends in global population will result in increased prices for commodity row crops over time. Additionally, these declines in commodity row crop pricing have been offset by record crop production and strong permanent crop prices in other regions. With respect to permanent crop prices, almonds, pistachios, citrus and walnuts are trading above historical averages or at record high prices. For example, certain almond varieties are up 40-60% year over year from 2012 to 2013. In addition, prices for other permanent crops have also been increasing, with avocados experiencing price increases of approximately 30% in the 2013-2014 crop season as compared to the 2012-2013 crop season. Despite drought conditions in California, weather conditions proved quite favorable for wine grapes, with 2014's crop the third largest on record. Annualized total returns over the five year period ended March 31, 2015 for mature permanent crop farmland were 20.0%, based on NCREIF data. While we anticipate prices for crops will generally increase over the long-term due to overarching global trends in population growth and declining supply of arable land, there may be future price variability for the reasons discussed above.
Seasonality
Our revenues are also impacted by the seasonality of crop harvests and the timing of when revenue is recognized in connection with such harvests, as the leases for our permanent crops have both fixed and participating components, with the participating or flexible component tied to a percentage of gross revenue generated by a crop yield or a share of the crop yield. As of the date of this prospectus, we currently have six farms that are subject to participating leases, and we expect to use similar leasing structures in the future. Payments under such leases are made two to four times annually, with some payments being made in the year subsequent to the relevant harvest, which causes revenue to be concentrated unevenly in the fourth, first and second quarters of each year, varying in amount and timing from year to year.
Overall for 2014, the seasonal distribution of our revenue from participating leases was in majority recognized in the fourth quarter 2014 for our Kimberly Vineyard, Quail Run Vineyard and Blue Heron Farms (although additional revenues for Blue Heron Farms relating to the 2014 crop season may be recognized over the first two quarters of 2015). A higher portion of revenue was recognized in the fourth quarter 2014 for Blue Heron Farms than during the same period in 2013 due to the existence of a participating lease for the 2014 crop season, as the property was purchased in November 2013 after the crop season for that year was complete. For 2015, we expect that seasonality will continue to impact our results of operations and revenues and that, on average, the fourth calendar quarter of the current year and the first and second calendar quarters of the following year should be expected to receive a disproportionate revenue share, although the timing may vary.
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Reportable Segments
We operate our business in four reportable segments: Permanent Crop, Specialty/Vegetable Row Crop, Commodity Row Crop and Development.
Permanent Crop Segment
As of March 31, 2015, our Permanent Crop segment consisted of our Kimberly Vineyard, Golden Eagle Ranch, Quail Run Vineyard, Blue Heron Farms and Falcon Farms properties, with an aggregate of 3,069 tillable acres and 3,882 gross acres. However, 77 acres of Quail Run Vineyard are currently subject to development. The leases for these farms terminate between 2016 and 2019. Farms in our Permanent Crop segment are generally subject to participating leases, under which a part or all of the rent is derived from participation in crop revenues or a share of the final crop, often with a fixed base rental amount, and which tend to have longer lease terms of three to five years.
Specialty/Vegetable Row Crop Segment
As of March 31, 2015, our Specialty/Vegetable Row Crop segment consisted of our Sandpiper Ranch and Sweetwater Farm properties, with an aggregate of 1,608 tillable acres and 1,808 gross acres. The leases for these farms terminate in 2015 and 2016. Farms in our Specialty/Vegetable Row Crop segment are generally subject to fixed leases, with maturities of one to three years that typically include built-in annual escalators at a fixed dollar or percentage amount.
Commodity Row Crop Segment
As of March 31, 2015, our Commodity Row Crop segment consisted of our Pleasant Plains, Macomb Farm, Kane County Farms and Tillar Farm, with an aggregate of 4,446 tillable acres and 4,726 gross acres. The leases for these farms terminate between 2015 and 2016. Farms in our Commodity Row Crop segment are generally subject to fixed leases, with maturities of one to three years that may include built-in annual escalators at a fixed dollar or percentage amount.
Development Segment
As of March 31, 2015, our Development segment consisted of our Blue Cypress Farm, Roadrunner Ranch, Condor Ranch (of which a minority 56 mature acres are subject to participating leases), Grassy Island Groves, Pintail Vineyards and Hawk Creek Ranch properties, with an aggregate of 3,487 tillable acres and 4,962 gross acres. Development farms for permanent crops generally will not generate lease income for periods of between four and seven years, depending on the crop, with certain permanent crop types, like pistachios, taking up to nine years, and conversions of an orchard to a vegetable farm taking one to three years, and will generally be considered to be development farms until commercially productive. As of the date of this prospectus, five of these farms are expected to become mature and productive in the next three years, including 77 acres of Quail Run Vineyard that are currently subject to development, but which is not included in this segment as the majority of the farm is mature and crop producing.
Critical Accounting Policies and Estimates
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the use of management's estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
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Investments in Real Estate
Investments in real estate consist of farmland and improvements made to the farmland, consisting of buildings; wells, irrigation and drain systems; and trees and vines acquired in connection with the land purchase. Investments in real estate are recorded at cost. Improvements, replacements and costs of development for new trees and vines, or the repurposing of raw land, are capitalized when they extend the useful life or improve the efficiency of the asset. Costs of repairs and maintenance are expensed as such costs are incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets. The estimated useful lives range from ten to fifteen years for land improvements, twenty-five years for buildings, one to thirty years for trees and vines, and five and eight years for fixtures and equipment, respectively.
Impairment
We account for the impairment of real estate, including intangible assets, in accordance with ASC 360-10-35, "Property, Plant, and Equipment," which requires us to periodically review the carrying value of each property to determine whether circumstances indicate impairment of the carrying value of the investment exists or if depreciation periods should be modified. If circumstances support the possibility of impairment, we prepare a projection of the undiscounted future cash flows, without interest charges, of the specific property and determine whether the carrying value of the investment in such property is recoverable. In performing the analysis, we consider such factors as agricultural and business conditions in the regions in which our farms are located, and the development period (if applicable), and whether there are indications that the fair value of the real estate has decreased. If the carrying amount is more than the aggregate undiscounted future cash flows, we would recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the property.
We evaluate our entire property portfolio each quarter for any impairment indicators and perform an impairment analysis. We concluded that none of our properties were impaired as of March 31, 2015 or 2014 or as of December 31, 2014 or 2013, and we will continue to monitor our portfolio for any indicators of impairment. There have been no impairments recognized on real estate assets since our inception. This evaluation is subjective and is based in part on management's judgment and assumptions, which could differ materially from actual results.
Revenue Recognition
All leases on farms are classified as operating leases and the related base or fixed rental income from the farms is recognized on a straight-line basis commencing from the effective date of the lease or the acquisition date of the property in the case of in-place leases on properties acquired. Differences between rental income earned and amounts due per the respective lease agreements are capitalized or charged, as applicable, to accrued rent receivable. Participating rent is recorded when all contingencies have been resolved such that the tenant is entitled to gross revenues from a packing house, wine producer, shipper, huller processor or other marketing, processing or distributing entity which enables us to estimate and/or measure our share of such gross revenues. As a result, depending on the circumstances described above for a particular lease, in certain instances, participating rent will be recognized by us in the year the crop was harvested, and in other instances, participating rent will be recognized partially in the year of the harvest and the balance in the year following the harvest.
Purchase Price Allocation
In some cases, we acquire farmland without a lease in place with newly-originated leases where the seller or related party is not the tenant or in sale-leaseback transactions with newly-originated leases. These transactions are accounted for as asset acquisitions under Accounting Standards Codification ("ASC") 360, "Property, Plant and Equipment." In the case of an asset acquisition, the transaction costs incurred are capitalized as part of the purchase price of the asset.
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Other acquisitions involve the acquisition of farmland that is already being operated as rental property and has a lease in place that is assumed at the time of acquisition, which are considered to be business combinations under ASC 805 "Business Combinations." ASC 805 requires that all transaction costs related to the acquisition be expensed as incurred, rather than capitalized.
Whether an acquisition is treated as an asset acquisition under ASC 360 or business combination under ASC 805, the purchase price must be allocated to the tangible assets acquired and liabilities assumed (if any) consisting of land, buildings, improvements, trees and vines, long-term debt (if any), and identifiable intangible assets and liabilities, typically the value of any in-place leases, as well as above-market and below-market leases, based in each case on their fair values.
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 an income capitalization approach (utilizing a 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 and the commodity prices for the crops grown and productivity on such properties, where the lease will include a participation in the gross revenues earned by the tenant. Management also considers information obtained about each property as a result of our pre-acquisition due diligence, 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 real estate taxes, insurance and other operating expenses and estimates of lost rental income at market rates during the hypothetical, expected lease-up periods, which primarily range from 3 to 12 months, depending on specific local market conditions. Management also estimates costs to execute similar leases, including 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. Management allocates 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 trees and vines based on management's determination of the fair values of these assets.
Above-market and below-market in-place lease values for acquired properties are recorded based on the present value (using an interest 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 leases 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, fixed-rate renewal options, if any, are evaluated to see if they should be included. Prior to 2013, all acquired leases were determined to be at market. In connection with one of our 2013 acquisitions, we allocated $125,000 of the purchase price to a below-market lease, which terminated December 31, 2014. The fair value of capitalized below-market lease intangibles, included in the accompanying our Consolidated Balance Sheets as part of other liabilities, is amortized into rental income over the remaining, non-cancelable term of the lease.
Income Taxes
For taxable years ended December 31, 2009 through December 31, 2011, the Company was taxed as a regular "C" corporation. However, it did not incur any federal income tax during those periods. The Company elected to be treated as a REIT for U.S. federal income tax purposes, commencing with and in connection with the filing of its federal income tax return for the taxable year ended December 31, 2012. The Operating Partnership qualifies as a partnership for U.S. federal income tax purposes.
We operate in a manner intended to enable us to qualify as a REIT under Sections 856-860 of the Code. Under these sections, in general, a REIT, which distributes at least 90% of its REIT taxable income (determined without regard to the deduction for dividends paid and excluding net capital gains)
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to its stockholders each year and which meets certain other conditions, will not be taxed on that portion of its taxable income which is distributed to its stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates. We pay certain state taxes, which were not significant in 2014.
The GAAP authoritative guidance for uncertainty in income taxes requires us to determine whether a tax position of ours is more likely than not to be sustained upon examination by the applicable taxing authority, including the resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement, which could result in us recording a tax liability that would reduce net assets. We review and evaluate positions in our major jurisdictions and determine whether or not there are uncertain tax positions that require financial statement recognition. Based on management's analysis, we have not recorded any income tax liabilities for uncertain tax positions as of March 31, 2015.
Management does not believe that we have any tax positions for which it is reasonably possible that the Company will be required to record significant amounts of unrecognized tax benefits within the next twelve months.
New or Revised Accounting Standards Not Yet Effective
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) ("ASU 2014-08"). ASU 2014-08 changes the criteria for a disposal to qualify as a discontinued operation and requires additional disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. ASU 2014-08 became effective for us on January 1, 2015 and has no significant impact on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). ASU 2014-09 provides additional guidance for management to reassess revenue recognition as it relates to (1) transfer of control, (2) variable consideration, (3) allocation of transaction price based on relative standalone selling price, (4) licenses, (5) time value of money and (6) contract costs. Further disclosures will be required to provide a better understanding of revenue that has been recognized and revenue that is expected to be recognized in the future from existing contracts. ASU 2014-09 is effective for us on January 1, 2017, with no early adoption permitted. We are currently evaluating the impact ASU 2014-09 will have on our consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40) ("ASU 2014-15"). ASU 2014-15 requires management to assess an entity's ability to continue as a going concern by incorporating and expanding upon certain principles of current U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term "substantial doubt," (2) require an evaluation every reporting period, including interim periods, (3) provide principles for considering the mitigating effect of management's plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans, (5) require an express statement and other disclosures when substantial doubt is still present and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 is effective for us on January 1, 2017, with early adoption permitted. We do not believe that this pronouncement will have an impact on our consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis ("ASU 2015-02"). ASU 2015-02 significantly changes the consolidation analysis required under U.S. GAAP. ASU 2015-02 is effective for us on January 1, 2016, with early
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adoption permitted. We do not believe that this pronouncement will have a significant impact on our consolidated financial statements.
Emerging Growth Company Status
We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies," including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We have not yet made a decision as to whether we will take advantage of any or all of these exemptions. If we do take advantage of any of these exemptions, we do not know if some investors will find our common stock less attractive as a result. The result may be a less active trading market for our common stock and our stock price may be more volatile.
We may take advantage of these provisions until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenue equals or exceeds $1.0 billion (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of this offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt or (iv) the date on which we are deemed to be a "large accelerated filer" under the Securities Exchange Act of 1934, as amended, or the Exchange Act.
In addition, the JOBS Act also provides that an "emerging growth company" can take advantage of the extended transition period provided in the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to take advantage of this extended transition period to comply with new or revised financial accounting standards.
Results of Operations
Comparison of Three Months Ended March 31, 2015 to Three Months Ended March 31, 2014
Consolidated Results
Our operating revenues for the periods presented were impacted by acquisitions made during the fourth quarter of 2014. To highlight the effect of changes due to acquisitions, we have separately discussed the components of operating revenues and property-specific operating expenses for our same-property portfolio, which includes only farms owned by us for the entirety of both periods presented, and which consists of the first parcel of our Kimberly Vineyard, Golden Eagle Ranch, Quail Run Vineyard, Blue Heron Farm, Sweetwater Farm, Sandpiper Ranch, Pleasant Plains, Macomb Farm,
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Tillar Farm, Kane County Farm, Condor Ranch, Roadrunner Ranch and Grassy Island Groves properties.
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For the Three Months
Ended March 31, |
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2015 | 2014 | $ Change | % Change | |||||||||
OPERATING REVENUES: |
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Fixed rent |
$ | 1,370,894 | $ | 814,737 | $ | 556,157 | 68.26 | % | |||||
Same-property portfolio |
1,239,579 | 814,737 | 424,842 | 52.14 | % | ||||||||
Participating rent |
822,061 | 586,420 | 235,641 | 40.18 | % | ||||||||
Same-property portfolio |
822,061 | 586,420 | 235,641 | 40.18 | % | ||||||||
Recovery of expenses |
116,391 | 81,019 | 35,372 | 43.66 | % | ||||||||
Same-property portfolio |
85,106 | 81,019 | 4,087 | 5.04 | % | ||||||||
Other income |
18,050 | 6,079 | 11,971 | 196.92 | % | ||||||||
Same-property portfolio |
18,050 | 6,079 | 11,971 | 196.92 | % | ||||||||
| | | | | | | | | | | | | |
Total operating revenues |
2,327,396 | 1,488,255 | 839,141 | 56.38 | % | ||||||||
Same-property portfolio |
2,164,796 | 1,488,255 | 676,541 | 45.46 | % | ||||||||
OPERATING EXPENSES: |
|||||||||||||
Depreciation |
443,980 | 391,024 | 52,956 | 13.54 | % | ||||||||
Same-property portfolio |
396,065 | 391,024 | 5,041 | 1.29 | % | ||||||||
Management and performance fees-related party (1) |
689,145 | 456,727 | 232,418 | 50.89 | % | ||||||||
Property operating expenses |
440,242 | 363,340 | 76,902 | 21.17 | % | ||||||||
Same-property portfolio |
370,080 | 363,340 | 6,740 | 1.86 | % | ||||||||
Acquisition-related expenses |
| 56,997 | (56,997 | ) | (100.00 | )% | |||||||
Professional fees |
99,181 | 78,626 | 20,555 | 26.14 | % | ||||||||
General and administrative |
65,015 | 47,087 | 17,928 | 38.07 | % | ||||||||
| | | | | | | | | | | | | |
Total operating expenses |
1,737,563 | 1,393,801 | 343,762 | 24.66 | % | ||||||||
| | | | | | | | | | | | | |
OPERATING INCOME |
589,833 | 94,454 | 495,379 | 524.47 | % | ||||||||
| | | | | | | | | | | | | |
OTHER (INCOME) EXPENSE: |
|||||||||||||
Interest income |
(546 | ) | (826 | ) | 280 | 33.90 | % | ||||||
Interest expense and financing costs |
95,860 | 17,099 | 78,761 | 460.62 | % | ||||||||
| | | | | | | | | | | | | |
Total other expense |
95,314 | 16,273 | 79,041 | 485.72 | % | ||||||||
| | | | | | | | | | | | | |
INCOME BEFORE GAIN ON SALE OF LAND |
494,519 | 78,181 | 416,338 | 532.53 | % | ||||||||
Gain on sale of land |
| 55,662 | (55,662 | ) | (100.00 | )% | |||||||
| | | | | | | | | | | | | |
INCOME BEFORE INCOME TAXES |
494,519 | 133,843 | 360,676 | 269.48 | % | ||||||||
Income tax provision |
(79,832 | ) | | (79,832 | ) | | |||||||
| | | | | | | | | | | | | |
NET INCOME |
414,687 | 133,843 | 280,844 | 209.83 | % | ||||||||
Less net income attributable to non-controlling interests |
128,757 | 53,746 | 75,011 | 139.57 | % | ||||||||
| | | | | | | | | | | | | |
NET INCOME ATTRIBUTABLE TO THE COMPANY |
$ | 285,930 | $ | 80,097 | $ | 205,833 | 256.98 | % | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Total Operating Revenues
Total operating revenues increased $839,141, or 56.38%, during the three months ended March 31, 2015, as compared to the three months ended March 31, 2014, predominately due to new leases with
79
existing tenants that provide for higher fixed base rents (Golden Eagle Ranch and Blue Heron Farm), $111,562 in increased revenue received from our Grassy Island Groves property on the portion of the property not being redeveloped, rents from acquisitions made in the fourth quarter of 2014 (second tranche of Kimberly Vineyard and Falcon Farms) and increased participating rents (from Golden Eagle Ranch and Quail Run Vineyard). Total operating revenues for our same-property portfolio increased $676,541, or 45.46%, from $1,488,255 for the three months ended March 31, 2014 to $2,164,796 for the three months ended March 31, 2015, primarily due to new leases with existing tenants that provide for higher fixed base rents (Golden Eagle Ranch and Blue Heron Farm), $111,562 in increased revenue received from our Grassy Island Groves property on the portion of the property not being redeveloped and increased participating rents (from Golden Eagle Ranch and Quail Run Vineyard).
Fixed rent increased $556,157, or 68.26%, from $814,737 for the three months ended March 31, 2014 to $1,370,894 for the three months ended March 31, 2015. The increase was primarily the result of new leases with existing tenants that provide for higher fixed base rents (Golden Eagle Ranch and Blue Heron Farm), $111,562 in increased revenue received from our Grassy Island Groves property on the portion of the property not being redeveloped and rents from acquisitions made in the fourth quarter of 2014 (second tranche of Kimberly Vineyard and Falcon Farms). Fixed rent for our same-property portfolio increased by $424,842, or 52.14%, from $814,737 for the three months ended March 31, 2014 to $1,239,579 for the three months ended March 31, 2015, for the reasons discussed above, taking out the contribution from the acquisitions in the fourth quarter of 2014.
Participating rent increased $235,641, or 40.18%, from $586,420 for the three months ended March 31, 2014 to $822,061 for the three months ended March 31, 2015. This increase was primarily due to Golden Eagle Ranch relating to the increased portion of the crop sold in the first quarter of 2015 compared to the first quarter of 2014 and participating rent from Quail Run Vineyard.
Recovery of expenses increased $35,372, or 43.66%, from $81,019 for the three months ended March 31, 2014 to $116,391 for the three months ended March 31, 2015. This increase was primarily due to a recovery of taxes in the amount of $31,285 on the second tranche of the Kimberly Vineyard property acquired in the fourth quarter of 2014 and the tenant on Blue Heron Ranch commencing a payment of real estate taxes pursuant to the new lease in the amount of $10,967. Recovery of expenses for our same-property portfolio increased $4,087, or 5.04%, from $81,019 for the three months ended March 31, 2014 to $85,106 for the three months ended March 31, 2015. This increase was primarily due to the tenant on Blue Heron Ranch commencing a payment of real estate taxes pursuant to the new lease, offset by lower real estate taxes incurred on the Quail Run Vineyard property and consequently, a lower recovery from the tenant.
Other income was $18,050 for the three months ended March 31, 2015 as opposed to $6,079 for the three months ended March 31, 2014, an increase of $11,931. $13,996 was the result of increased income for water rights and excess usage of the well on our Sandpiper Ranch property.
Total Operating Expenses
Total operating expenses increased $343,762, or 24.66%, from $1,393,801 for the three months ended March 31, 2014 to $1,737,563 for the three months ended March 31, 2015. Operating expenses increased in part due to increased depreciation of $52,956. The increase in depreciation was primarily due to depreciation of $47,915 relating to our acquisitions made in the fourth quarter of 2014 (second tranche of Kimberly Vineyard and Falcon Farms). Management and performance fees-related party increased by $232,418 due to higher total assets for purposes of the management fees and increased performance fees due to the higher funds from operations and capital appreciation generated in 2015. Such costs are not expected to continue following the Internalization. Property operating expenses increased by $76,902. Of the $76,902 increase in property operating expenses, $70,162 related to our acquisitions made in the fourth quarter of 2014 ($20,728 in management fees, $47,743 in real estate taxes and $1,691 in insurance) and $17,154 related to increased management fees commensurate with
80
the increased revenues from our same-property portfolio. This was partially offset by property operating costs incurred in 2014 relating to the Hawk Creek Ranch and Pintail Vineyards properties from which we were entitled to participating revenues relating to leases assumed at the time the properties were purchased. As a result, our development properties incurred management fees and real estate taxes associated with this revenue in 2014, which ceased once the leases expired. These expenses are currently capitalized as these two properties are under development.
Total Other Expense
Total other expense increased $79,041, or 485.72%, from $16,273 for the three months ended March 31, 2014 to $95,314 for the three months ended March 31, 2015. The increase in total expense arises from interest paid on the original credit facility, which was drawn down in the fourth quarter of 2014, and the increased deferred financing costs incurred in establishing the additional credit facility in the first quarter of 2015.
Permanent Crop Segment
Our permanent crop segment operating revenues for the periods presented were impacted by acquisitions made during the last quarter of 2014. To highlight the effect of changes due to acquisitions, we have separately discussed the components of operating revenues and property-specific operating expenses for our same-property portfolio, which includes the first tranche for Kimberly Vineyard, Golden Eagle Ranch, Quail Run Vineyard and Blue Heron Farm, permanent crop farms owned by us for the entirety of both periods presented. In the fourth quarter of 2014, we closed two acquisitions of permanent crop properties, Falcon Farms and a second tranche for the Kimberly Vineyard property.
|
For the Three Months
ended March 31, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2015 | 2014 | $ Change | % Change | |||||||||
OPERATING REVENUES: |
|||||||||||||
Fixed rent |
$ | 558,615 | $ | 114,280 | $ | 444,335 | 388.81 | % | |||||
Same-property portfolio |
427,300 | 114,280 | 313,020 | 273.91 | % | ||||||||
Participating rent |
823,983 | 586,420 | 237,563 | 40.51 | % | ||||||||
Same-property portfolio |
823,983 | 586,420 | 237,563 | 40.51 | % | ||||||||
Recovery of expenses |
90,534 | 52,846 | 37,688 | 71.32 | % | ||||||||
Same-property portfolio |
59,249 | 52,846 | 6,403 | 12.12 | % | ||||||||
| | | | | | | | | | | | | |
Total operating revenues |
1,473,132 | 753,546 | 719,586 | 95.49 | % | ||||||||
Same-property portfolio |
1,310,532 | 753,546 | 556,986 | 73.92 | % | ||||||||
OPERATING EXPENSES: |
|||||||||||||
Depreciation |
364,134 | 316,748 | 47,386 | 14.96 | % | ||||||||
Same-property portfolio |
316,219 | 316,748 | (529 | ) | (0.17 | )% | |||||||
Property operating expenses |
189,127 | 100,949 | 88,178 | 87.35 | % | ||||||||
Same-property portfolio |
118,965 | 100,949 | 18,016 | 17.85 | % | ||||||||
Acquisition-related expenses |
| 60 | (60 | ) | (100.00 | )% | |||||||
Professional fees |
968 | 540 | 428 | 79.26 | % | ||||||||
| | | | | | | | | | | | | |
Total operating expenses |
554,229 | 418,297 | 135,932 | 32.50 | % | ||||||||
| | | | | | | | | | | | | |
OPERATING INCOME |
$ | 918,903 | $ | 335,249 | $ | 583,654 | 174.10 | % | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
81
Total Operating Revenues
Total operating revenues for our permanent crop segment increased $719,586, or 95.49%, from $753,546 for the three months ended March 31, 2014 to $1,473,132 for the three months ended March 31, 2015, which increase was primarily due to new leases with existing tenants that provide for higher fixed base rents (Golden Eagle Ranch and Blue Heron Farm), rents from acquisitions made in the fourth quarter of 2014 (second tranche of Kimberly Vineyard and Falcon Farms) and increased participating rents (from Golden Eagle Ranch and Quail Run Vineyard). Total operating revenues for our same-property permanent crop portfolio increased $556,986, or 73.92%, from $753,546 for the three months ended March 31, 2014 to $1,310,532 for the three months ended March 31, 2015, due to new leases with existing tenants that provide for higher fixed base rents (Golden Eagle Ranch and Blue Heron Farm) and increased participating rents (from Golden Eagle Ranch and Quail Run Vineyard).
Fixed rent for our permanent crop segment increased $444,335, or 388.81%, from $114,280 for the three months ended March 31, 2014 to $558,615 for the three months ended March 31, 2015. The increase was primarily due to new leases with existing tenants that provide for higher fixed base rents (Golden Eagle Ranch and Blue Heron Farm) and rents from acquisitions made in the fourth quarter of 2014 (second tranche of Kimberly Vineyard and Falcon Farms). Fixed rent for our same-property permanent crop portfolio increased $313,020, or 273.91%, from $114,280 for the three months ended March 31, 2014 to $427,300 for the three months ended March 31, 2015, most of which related to new leases with existing tenants that provide for higher fixed base rents (Golden Eagle Ranch and Blue Heron Farm).
Participating rent for our permanent crop segment (which is the same for our same-property portfolio) increased $237,563, or 40.51%, from $586,420 for the three months ended March 31, 2014 to $823,983 for the three months ended March 31, 2015. This increase was primarily due to Golden Eagle Ranch relating to the increased portion of the crop sold in the first quarter of 2015 compared to the first quarter of 2014 and participating rent from Quail Run Vineyard.
Recovery of expenses for our permanent crop segment increased $37,688, or 71.32%, from $52,846 for the three months ended March 31, 2014 to $90,534 for the three months ended March 31, 2015. This increase was primarily due to a recovery of taxes in the amount of $31,285 on the second tranche of the Kimberly Vineyard property acquired in the fourth quarter of 2014 and the tenant on Blue Heron Ranch commencing a payment of real estate taxes pursuant to the new lease in the amount of $10,967. Recovery of expenses for our same-property permanent crop portfolio increased $6,403, or 12.12%, from $52,846 for the three months ended March 31, 2014 to $59,249 for the three months ended March 31, 2015. This increase was primarily due to the tenant on Blue Heron Ranch commencing a payment of real estate taxes pursuant to the new lease, offset by lower real estate taxes incurred on the Quail Run Vineyard property and, consequently, a lower recovery from the tenant.
Total Operating Expenses
Total operating expenses for our permanent crop segment increased $135,932, or 32.50%, from $418,297 for the three months ended March 31, 2014 to $554,229 for the three months ended March 31, 2015. The increase in depreciation was primarily due to depreciation of $47,915 relating to our acquisitions made in the fourth quarter of 2014 (second tranche of Kimberly Vineyard and Falcon Farms). Of the $88,178 increase in property operating expenses, $70,162 related to our acquisitions made in the fourth quarter of 2014 ($20,728 in management fees, $47,743 in real estate taxes and $1,691 in insurance) and $17,154 related to increased management fees commensurate with the increased revenues from our same-property portfolio.
82
Specialty/Vegetable Row Crop Segment
We owned all of our specialty/vegetable row crop farms (Sweetwater Farm and Sandpiper Ranch) for the entirety of the three months ended March 31, 2015 and March 31, 2014.
|
For the Three Months
Ended March 31, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2015 | 2014 | $ Change | % Change | |||||||||
OPERATING REVENUES: |
|||||||||||||
Fixed rent |
$ | 192,725 | $ | 192,725 | | 0.00 | % | ||||||
Recovery of expenses |
23,109 | 25,088 | $ | (1,979 | ) | (7.89 | )% | ||||||
Other income |
17,750 | 3,754 | 13,996 | 372.83 | % | ||||||||
| | | | | | | | | | | | | |
Total operating revenues |
233,584 | 221,567 | 12,017 | 5.42 | % | ||||||||
OPERATING EXPENSES: |
|||||||||||||
Depreciation |
23,596 | 19,424 | 4,172 | 21.48 | % | ||||||||
Property operating expenses |
41,257 | 42,135 | (878 | ) | (2.08 | )% | |||||||
Professional fees |
620 | 1,930 | (1,310 | ) | (67.88 | )% | |||||||
| | | | | | | | | | | | | |
Total operating expenses |
65,473 | 63,489 | 1,984 | 3.12 | % | ||||||||
| | | | | | | | | | | | | |
OPERATING INCOME |
$ | 168,111 | $ | 158,078 | $ | 10,033 | 6.35 | % | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Total Operating Revenues
Total operating revenues for our specialty/vegetable row crop segment increased $12,017, or 5.42%, from $221,567 for the three months ended March 31, 2014 to $233,584 for the three months ended March 31, 2015, which increase was primarily the result of increased income for water rights and excess usage of the well on our Sandpiper Ranch property.
Fixed rent was $192,725 for the three months ended March 31, 2014 and the three months ended March 31, 2015.
Recovery of expenses decreased $1,979, or 7.89%, from $25,088 for the three months ended March 31, 2014 to $23,109 for the three months ended March 31, 2015. The decrease was attributable to the lower real estate taxes we were required to pay on our Sandpiper Ranch property and, hence, the lower amount our tenant was required to reimburse us for.
Other income increased $13,996, or 372.83%, from $3,754 for the three months ended March 31, 2014 to $17,750 for the three months ended March 31, 2015. This increase was the result of increased income for water rights and excess usage of the well on our Sandpiper Ranch property.
Total Operating Expenses
Total operating expenses for our specialty/vegetable row crop segment increased $1,984, or 3.12%, from $63,489 for the three months ended March 31, 2014 to $65,473 for the three months ended March 31, 2015. The increase in operating expenses was attributable to increased depreciation of $4,172 from our Sweetwater Farm property, offset by lower property operating expenses (principally due to real estate taxes) and lower professional fees.
83
Commodity Row Crop Segment
We owned all of our commodity row crop farms (Pleasant Plains, Macomb Farm, Tillar Farm and Kane County Farm) for the entirety of the three months March 31, 2015 and March 31, 2014.
|
For the Three Months
Ended March 31, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2015 | 2014 | $ Change | % Change | |||||||||
OPERATING REVENUES: |
|||||||||||||
Fixed rent |
$ | 398,694 | $ | 398,434 | $ | 260 | 0.07 | % | |||||
Other income |
300 | (2,675 | ) | 2,975 | 111.21 | % | |||||||
| | | | | | | | | | | | | |
Total operating revenues |
398,994 | 395,759 | 3,235 | 0.82 | % | ||||||||
OPERATING EXPENSES: |
|||||||||||||
Depreciation |
768 | 768 | | 0.00 | % | ||||||||
Property operating expenses |
76,880 | 59,030 | 17,850 | 30.24 | % | ||||||||
| | | | | | | | | | | | | |
Total operating expenses |
77,648 | 59,798 | 17,850 | 29.85 | % | ||||||||
| | | | | | | | | | | | | |
OPERATING INCOME |
$ | 321,346 | $ | 335,961 | $ | (14,615 | ) | (4.35 | )% | ||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Total Operating Revenues
Total operating revenues for our commodity row crop segment increased $3,235, or 0.82%, from $395,759 for the three months ended March 31, 2014 to $398,994 for the three months ended March 31, 2015, primarily attributable to greater other income we received from our Macomb Farm property.
Fixed rent increased $260, or 0.07%, from $398,434 for the three months ended March 31, 2014 to $398,694 for the three months ended March 31, 2015, all of which was attributable to our Kane County Farm.
Total Operating Expenses
Total operating expenses for our commodity row crop segment increased $17,850, or 29.85%, from $59,798 for the three months ended March 31, 2014 to $77,648 for the three months ended March 31, 2015. The increase in property operating expenses was the result of higher real estate taxes on our Kane County Farm and Pleasant Plains properties and $13,358 in repairs and maintenance incurred on our Pleasant Plains and Tillar Farm properties in 2015, whereas in 2014 we had no such expenses.
Development Segment
We owned all of our development segment farms for the entirety of the three months March 31, 2015 and March 31, 2014. Our development segment operating revenues are generated from Condor Ranch and Grassy Island Groves on the portion of the property that is not under development. We
84
derived no revenues from our other properties under development, Roadrunner Ranch, Blue Cypress, Hawk Creek Ranch and Pintail Vineyards.
|
For the Three Months
Ended March 31, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2015 | 2014 | $ Change | % Change | |||||||||
OPERATING REVENUES: |
|||||||||||||
Fixed rent |
$ | 220,860 | $ | 109,298 | $ | 111,562 | 102.07 | % | |||||
Participating rent |
(1,922 | ) | | (1,922 | ) | | |||||||
Recovery of expenses |
2,748 | 3,085 | (337 | ) | (10.92 | )% | |||||||
Other income |
| 5,000 | (5,000 | ) | N/A | ||||||||
| | | | | | | | | | | | | |
Total operating revenues |
221,686 | 117,383 | 104,303 | 88.86 | % | ||||||||
OPERATING EXPENSES: |
|||||||||||||
Depreciation |
55,482 | 54,084 | 1,398 | 2.58 | % | ||||||||
Property operating expenses |
132,978 | 161,226 | (28,248 | ) | (17.52 | )% | |||||||
Acquisition-related expenses |
| 56,937 | (56,937 | ) | N/A | ||||||||
Professional fees |
140 | | 140 | | |||||||||
| | | | | | | | | | | | | |
Total operating expenses |
188,600 | 272,247 | (83,647 | ) | (30.72 | )% | |||||||
| | | | | | | | | | | | | |
OPERATING INCOME (LOSS) |
$ | 33,086 | $ | (154,864 | ) | $ | 187,950 | 121.36 | % | ||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Total Operating Revenues
Total operating revenues for our development segment increased $104,303, or 88.86%, from $117,383 for the three months ended March 31, 2014 to $221,686 for the three months ended March 31, 2015, which increase was primarily attributable to $111,562 in increased revenue received from our Grassy Island Groves property on the portion of the property not being redeveloped.
Fixed rent for our development segment increased $111,562, or 102.07%, from $109,298 for the three months ended March 31, 2014 to $220,860 for the three months ended March 31, 2015, which increase was attributable to increased revenue received from our Grassy Island Groves property on the portion of the property not being redeveloped.
Recovery of expenses for our development segment decreased $337, or 10.92%, from $3,085 for the three months ended March 31, 2014 to $2,748 for the three months ended March 31, 2015. This decrease was directly related to lower real estate taxes we paid on the Condor Ranch property.
We received $5,000 in other income during the three months ended March 31, 2014 related to the sale of palm trees from our Blue Cypress Farm property and no such income during the three months ended March 31, 2015.
Total Operating Expenses
Total operating expenses for our development segment decreased $83,647, or 30.72%, from $272,247 for the three months ended March 31, 2014 to $188,600 for the three months ended March 31, 2015. Property operating expenses decreased by $28,248 in 2015. This is attributable to the fact that, in 2014, Hawk Creek Ranch and Pintail Vineyards were entitled to participating revenues relating to leases assumed at the time the properties were purchased. As a result, our development properties incurred management fees and real estate taxes associated with this revenue in 2014, which ceased once the leases expired. These expenses are currently capitalized as these two properties are under development.
85
Comparison of Year Ended December 31, 2014 to Year Ended December 31, 2013
Consolidated Results
Our operating revenues for the periods presented were significantly impacted by acquisitions made during the years ended December 31, 2014 and 2013. To highlight the effect of changes due to acquisitions, we have separately discussed the components of operating revenues and property-specific operating expenses for our same-property portfolio, which includes only farms owned by us for the entirety of both periods presented, and which consists of our Kimberly Vineyard, Golden Eagle Ranch, Quail Run Vineyard, Sweetwater Farm, Sandpiper Ranch, Pleasant Plains, Macomb Farm, Tillar Farm, Kane County Farm, Condor Ranch, Roadrunner Ranch and Grassy Island Groves properties.
|
For the Year Ended
December 31, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | $ Change | % Change | |||||||||
OPERATING REVENUES: |
|||||||||||||
Fixed rent |
$ | 3,289,130 | $ | 3,191,581 | $ | 97,549 | 3.06 | % | |||||
Same-property portfolio |
3,165,695 | 3,173,063 | (7,368 | ) | (0.23 | )% | |||||||
Participating rent |
3,608,309 | 2,070,989 | 1,537,320 | 74.23 | % | ||||||||
Same-property portfolio |
2,856,340 | 2,070,989 | 785,351 | 37.92 | % | ||||||||
Recovery of expenses |
310,643 | 317,561 | (6,918 | ) | (2.18 | )% | |||||||
Same-property portfolio |
307,744 | 317,561 | (9,817 | ) | (3.09 | )% | |||||||
Other income |
52,981 | 135,803 | (82,822 | ) | (60.99 | )% | |||||||
Same-property portfolio |
13,371 | 96,497 | (83,126 | ) | (86.14 | )% | |||||||
| | | | | | | | | | | | | |
Total operating revenues |
7,261,063 | 5,715,934 | 1,545,129 | 27.03 | % | ||||||||
Same-property portfolio |
6,343,150 | 5,658,110 | 685,040 | 12.11 | % | ||||||||
OPERATING EXPENSES: |
|||||||||||||
Depreciation |
1,530,911 | 1,265,275 | 265,636 | 20.99 | % | ||||||||
Same-property portfolio |
1,233,929 | 1,219,310 | 14,619 | 1.20 | % | ||||||||
Management and performance fees-related party (1) |
2,528,255 | 2,060,741 | 467,514 | 22.69 | % | ||||||||
Property operating expenses |
1,351,655 | 1,083,729 | 267,926 | 24.72 | % | ||||||||
Same-property portfolio |
1,190,146 | 1,063,394 | 126,752 | 11.22 | % | ||||||||
Acquisition-related expenses |
44,712 | 431,309 | (386,597 | ) | (89.63 | )% | |||||||
Professional fees |
406,008 | 342,291 | 63,717 | 18.61 | % | ||||||||
General and administrative |
273,321 | 175,491 | 97,830 | 55.75 | % | ||||||||
| | | | | | | | | | | | | |
Total operating expenses |
6,134,862 | 5,358,836 | 776,026 | 14.48 | % | ||||||||
| | | | | | | | | | | | | |
OPERATING INCOME |
1,126,201 | 357,098 | 769,103 | 215.38 | % | ||||||||
| | | | | | | | | | | | | |
OTHER (INCOME) EXPENSE: |
|||||||||||||
Interest income |
(1,980 | ) | (23,483 | ) | 21,503 | 91.57 | % | ||||||
Interest expense and financing costs |
119,094 | 10,382 | 108,712 | 1047.12 | % | ||||||||
| | | | | | | | | | | | | |
Total other expense |
117,114 | (13,101 | ) | 130,215 | 993.93 | % | |||||||
| | | | | | | | | | | | | |
INCOME BEFORE GAIN ON SALE OF LAND |
1,009,087 | 370,199 | 638,888 | 172.58 | % | ||||||||
Gain on sale of land |
47,701 | 463,478 | (415,777 | ) | (89.71 | )% | |||||||
| | | | | | | | | | | | | |
NET INCOME |
1,056,788 | 833,677 | 223,111 | 26.76 | % | ||||||||
Less net income attributable to non-controlling interests |
346,071 | 280,226 | 65,845 | 23.5 | % | ||||||||
| | | | | | | | | | | | | |
NET INCOME ATTRIBUTABLE TO THE COMPANY |
$ | 710,717 | $ | 553,451 | $ | 157,266 | 28.42 | % | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
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Total Operating Revenues
Total operating revenues increased $1,545,129, or 27.03%, during the year ended December 31, 2014, as compared to the year ended December 31, 2013, predominately due to an increase in participating rent as more fully described below. Total operating revenues for our same-property portfolio increased $685,040, or 12.11%, from $5,658,110 for the year ended December 31, 2013 to $6,343,150 for the year ended December 31, 2014, primarily due to increases in participating rents partially offset by lower other income.
Fixed rent increased $97,549, or 3.06%, from $3,191,581 for the year ended December 31, 2013 to $3,289,130 for the year ended December 31, 2014. The increase was primarily the result of a renewed lease on our Sweetwater Farm property, increased revenues from our Grassy Island Groves property and income from Blue Heron Farms, which was acquired in 2013, partially offset by decreases that were not a result of less favorable leases, but rather changes in lease structure (Quail Run Vineyard) and the duration of the lease (Kane County Farm). The lower fixed rent from our Quail Run Vineyard stemmed from the terms of the lease changing from a fixed lease prior to 2014 to a combination of a participating lease with a base rent component. In addition, there was a decline in leaseable acres as certain acreage was taken out of production to be redeveloped. While the rent per acre stayed the same under the renegotiated leases for our Kane County Farm, the term of the lease changed to 24 months from the previous 22 month term, which impacted the proportional straight lining of rental amounts. Fixed rent for our same-property portfolio declined by $7,368, or 0.23%, from $3,173,063 for the year ended December 31, 2013 to $3,165,695 for the year ended December 31, 2014, for the reasons discussed above, taking out the contribution Blue Heron made, which is not considered a part of the same-property portfolio.
Participating rent increased $1,537,320, or 74.23%, from $2,070,989 for the year ended December 31, 2013 to $3,608,309 for the year ended December 31, 2014. This increase was primarily due to (i) Golden Eagle Ranch relating to increased crop prices, (ii) participating rent from Quail Run Vineyard resulting from a new lease, (iii) contributions from Blue Heron Farm, Hawk Creek Ranch and Pintail Vineyard properties acquired in 2013 and (iv) Condor Ranch, which did not generate participating revenues in 2013. Participating rent for our same-property portfolio increased $785,351, or 37.92%, from $2,070,989 for the year ended December 31, 2013 to $2,856,340 for the year ended December 31, 2014, primarily due to increases from Golden Eagle Ranch of $606,864, Quail Run Vineyard of $165,379, whose prior lease did not require any participating payments, and Condor Ranch, which did not generate any participating revenues in 2013.
Recovery of expenses decreased $6,918, or 2.18%, from $317,561 for the year ended December 31, 2013 to $310,643 for the year ended December 31, 2014. This decrease was primarily due to lower real estate taxes charged to our properties that are subject to recovery by our tenants on an aggregate basis, partially offset by the tenant commencing a payment of real estate taxes on the Blue Heron Ranch property. Recovery of expenses for our same-property portfolio decreased $9,817, or 3.09%, from $317,561 for the year ended December 31, 2013 to $307,744 for the year ended December 31, 2014. This decrease was primarily due to lower real estate taxes charged to our properties that are subject to recovery by our tenants on an aggregate basis.
Other income was $52,981 for the year ended December 31, 2014 as opposed to $135,803 for the year ended December 31, 2013. The 2014 income was the result of $13,381 in additional income related to our Macomb Farm property for payments we received in connection with minor easements we granted to utilities associated with 79 expropriated acres in 2013 and sales of palm trees on our Blue Cypress property in the amount of $39,600. In 2013, we received income from the sale of equipment on our Roadrunner Ranch property as well as from our Macomb Farm property for payments in connection with minor easements we granted to the utilities.
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Total Operating Expenses
Total operating expenses increased $776,026, or 14.48%, from $5,358,836 for the year ended December 31, 2013 to $6,134,862 for the year ended December 31, 2014. Operating expenses increased in part due to increased depreciation of $265,636. $222,722 of this increase in depreciation is due to Blue Heron Ranch, which was acquired in November 2013. Management and performance fees-related party increased by $467,514 due to (i) higher total assets for purposes of the management fees and (ii) increased performance fees due to the higher funds from operations and capital appreciation generated in 2014. Such costs are not expected to continue following the Internalization. Property operating expenses increased by $267,926, attributable to an increase of $191,767 in costs to support the revenue we collected for Grassy Island Groves on the portion of that property that is not being redeveloped, increased management fees correlated to increased revenues and increased real estate taxes. Same property operating expenses increased $126,752, or 11.92%, from $1,063,394 for the year ended December 31, 2013 to $1,190,146 for the year ended December 31, 2014. This increase in same-property operating expenses was due to $200,419 in increased crop costs (most of which relates to Grassy Island Groves as described above), offset by $87,140 in less money spent on repairs and maintenance, the majority of which relates to Quail Run Vineyard, for which we spent $67,101 on repairs and maintenance in 2013. Acquisition related expenses declined in 2014 compared to 2013, as only one small acquisition in 2014 was classified as a business combination for which the acquisition costs were expensed, as opposed to the majority of the properties acquired in 2013.
Total Other Expense
Total other expense increased $130,215, or 993.93%, from $(13,101) for the year ended December 31, 2013 to $117,114 for the year ended December 31, 2014. The increase in total expense arises from interest paid on the original credit facility and the amortization of the deferred closing costs associated with our original revolving credit facility for the full year of 2014, less interest earned on cash balances as cash was used to acquire additional farms.
Permanent Crop Segment
Our permanent crop segment operating revenues for the periods presented were impacted by acquisitions made during the year ended December 31, 2013. To highlight the effect of changes due to acquisitions, we have separately discussed the components of operating revenues and property-specific operating expenses for our same-property portfolio, which includes Kimberly Vineyard, Golden Eagle Ranch and Quail Run Vineyard, permanent crop farms owned by us for the entirety of both periods presented. In the fourth quarter of 2013, we acquired Blue Heron Farm (for which the revenues we received in 2013 were not meaningful) and in the fourth quarter of 2014, we closed two acquisitions of permanent crop properties, Falcon Farms (for which we received no revenues in 2014) and a second tranche for the Kimberly Vineyards property (for which the revenues we received in 2014 were not meaningful).
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|
For the Year Ended
December 31, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | $ Change | % Change | |||||||||
OPERATING REVENUES: |
|||||||||||||
Fixed rent |
$ | 546,638 | $ | 700,499 | $ | (153,861 | ) | (21.96 | )% | ||||
Same-property portfolio |
423,203 | 681,981 | (258,778 | ) | (37.95 | )% | |||||||
Participating rent |
3,476,103 | 2,071,158 | 1,404,945 | 67.83 | % | ||||||||
Same-property portfolio |
2,824,759 | 2,071,158 | 753,601 | 36.39 | % | ||||||||
Recovery of expenses |
201,469 | 197,309 | 4,160 | 2.11 | % | ||||||||
Same-property portfolio |
198,570 | 197,309 | 1,261 | 0.64 | % | ||||||||
Other income |
10 | | 10 | | |||||||||
| | | | | | | | | | | | | |
Total operating revenues |
4,224,220 | 2,968,966 | 1,255,254 | 42.28 | % | ||||||||
Same-property portfolio |
3,446,532 | 2,950,448 | 496,084 | 16.81 | % | ||||||||
OPERATING EXPENSES: |
|||||||||||||
Depreciation |
1,217,095 | 1,053,829 | 163,266 | 15.49 | % | ||||||||
Same-property portfolio |
965,530 | 1,033,779 | (68,249 | ) | (6.60 | )% | |||||||
Property operating expenses |
457,886 | 429,373 | 28,513 | 6.64 | % | ||||||||
Same-property portfolio |
355,114 | 416,943 | (61,829 | ) | (14.83 | )% | |||||||
Acquisition-related expenses |
220 | 187,872 | (187,652 | ) | (99.88 | )% | |||||||
Professional fees |
14,182 | 3,039 | 11,143 | 366.67 | % | ||||||||
| | | | | | | | | | | | | |
Total operating expenses |
1,689,383 | 1,674,113 | 15,270 | 0.91 | % | ||||||||
| | | | | | | | | | | | | |
OPERATING INCOME |
$ | 2,534,837 | $ | 1,294,853 | $ | 1,239,984 | 95.76 | % | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Total Operating Revenues
Total operating revenues for our permanent crop segment increased $1,255,254, or 42.28%, from $2,968,966 for the year ended December 31, 2013 to $4,224,220 for the year ended December 31, 2014, which increase was primarily due to an increase in participating rent offset by a decline in fixed rents, as more fully described below. Total operating revenues for our same-property permanent crop portfolio increased $496,084, or 16.81%, from $2,950,448 for the year ended December 31, 2013 to $3,446,532 for the year ended December 31, 2014, also due to the increase in participating rent offsetting lower fixed rents.
Fixed rent for our permanent crop segment decreased $153,861, or 21.96%, from $700,499 for the year ended December 31, 2013 to $546,638 for the year ended December 31, 2014. Our Quail Run Vineyard property produced $339,029 less fixed rent in 2014 as the terms of the lease were negotiated from a fixed lease prior to 2014 to a combination of a fixed lease and participation lease with a base rent component, and certain acreage was taken out of production to be redeveloped. This reduction in fixed rent was partially offset by $123,435 we received from the Blue Heron Farms property we acquired during the fourth quarter of 2013. Fixed rent for our same-property permanent crop portfolio decreased $258,778, or 37.95%, from $681,981 for the year ended December 31, 2013 to $423,203 for the year ended December 31, 2014, most of which related to Quail Run Vineyard for the reasons stated above, offset by a base rent payable by the tenant of Golden Eagle Ranch whose new lease requires a small base rent.
Participating rent for our permanent crop segment increased $1,404,945, or 67.83%, from $2,071,158 for the year ended December 31, 2013 to $3,476,103 for the year ended December 31, 2014. This increase was primarily due to (i) Golden Eagle Ranch relating to increased crop prices and (ii) participating rent from Quail Run Vineyard resulting from a new lease and a contribution of $651,344 from Blue Heron Farm, neither of which generated participating revenues in 2013. Participating rent for our same-property permanent crop portfolio increased $753,601 or 36.39%, from $2,071,158 for the year ended December 31, 2013 to $2,824,759 for the year ended December 31, 2014,
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primarily due to increases from Golden Eagle Ranch of $606,864 and Quail Run Vineyard of $165,379, whose prior lease did not require any participating payments.
Recovery of expenses for our permanent crop segment increased $4,160, or 2.11%, from $197,309 for the year ended December 31, 2013 to $201,469 for the year ended December 31, 2014. This increase was primarily due to higher real estate taxes charged to our properties that are subject to recovery by our tenants for Kimberly Vineyard and Golden Eagle Ranch and the tenant on Blue Heron Ranch commencing a payment of real estate taxes, offset by a lower recovery from Quail Run Vineyard as acreage was removed from a lease in 2014 to be redeveloped. Recovery of expenses for our same-property permanent crop portfolio increased $1,261, or 0.64%, from $197,309 for the year ended December 31, 2013 to $198,570 for the year ended December 31, 2014. This increase was primarily due to higher real estate taxes charged to our properties that are subject to recovery by our tenants for Kimberly Vineyard and Golden Eagle Ranch, offset by a lower recovery from Quail Run Vineyard.
Total Operating Expenses
Total operating expenses for our permanent crop segment increased $15,270, or 0.91%, from $1,674,113 for the year ended December 31, 2013 to $1,689,383 for the year ended December 31, 2014. This increase was primarily due to increases in depreciation of $222,721 relating to our Blue Heron Farms property acquired in the fourth quarter of 2013, partially offset by lower depreciation of $72,072 relating to our Golden Eagle Ranch property. Depreciation for our permanent crop segment same-property portfolio decreased by $68,249, principally due to the fully depreciated trees at the end of 2013 and the transition between development and mature trees acreage. Property operating expenses were higher in 2014 due to increased real estate taxes, including $25,298 relating to our Blue Heron Farms property, management fees related to higher revenues received during the year ended December 31, 2014, which increase was partially offset by us not incurring any repairs and maintenance expenses on the Quail Run Vineyard property during the year ended December 31, 2014. Property operating expenses for our permanent crop segment same-property portfolio decreased by $61,829. $80,471 of this decrease related to repairs and maintenance for Golden Eagle Ranch and Quail Run Vineyard that were incurred in 2013, whereas no repairs and maintenance costs were incurred in 2014. This decrease was partially offset by management fees for the same-property portfolio, which increased by $22,430 commensurate with the increased operating revenue.
Specialty/Vegetable Row Crop Segment
We owned all of our specialty/vegetable row crop farms for the entirety of the years ended December 31, 2014 and December 31, 2013.
|
For the Year Ended
December 31, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | $ Change | % Change | |||||||||
OPERATING REVENUES: |
|||||||||||||
Fixed rent |
$ | 785,904 | $ | 681,860 | $ | 104,044 | 15.26 | % | |||||
Recovery of expenses |
96,394 | 100,625 | (4,231 | ) | (4.20 | )% | |||||||
| | | | | | | | | | | | | |
Total operating revenues |
882,298 | 782,485 | 99,813 | 12.76 | % | ||||||||
OPERATING EXPENSES: |
|||||||||||||
Depreciation |
90,213 | 77,695 | 12,518 | 16.11 | % | ||||||||
Property operating expenses |
164,877 | 165,804 | (927 | ) | (0.56 | )% | |||||||
Professional fees |
2,166 | 3,103 | (937 | ) | (30.20 | )% | |||||||
| | | | | | | | | | | | | |
Total operating expenses |
257,256 | 246,602 | 10,654 | 4.32 | % | ||||||||
| | | | | | | | | | | | | |
OPERATING INCOME |
$ | 625,042 | $ | 535,883 | $ | 89,159 | 16.64 | % | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
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Total Operating Revenues
Total operating revenues for our specialty/vegetable row crop segment increased $99,813, or 12.76%, from $782,485 for the year ended December 31, 2013 to $882,298 for the year ended December 31, 2014, which increase was primarily the result of higher fixed rents attributable to a renewed lease on our Sweetwater Farm property.
Fixed rent increased $104,044, or 15.26%, from $681,860 for the year ended December 31, 2013 to $785,904 for the year ended December 31, 2014. This increase was related to the increased rent from our Sweetwater Farm property as discussed above.
Recovery of expenses decreased $4,231, or 4.20%, from $100,625 for the year ended December 31, 2013 to $96,394 for the year ended December 31, 2014. The decrease was attributable to the lower real estate taxes we were required to pay on our Sandpiper Ranch property.
Total Operating Expenses
Total operating expenses for our specialty/vegetable row crop segment increased $10,654, or 4.32%, from $246,602 for the year ended December 31, 2013 to $257,256 for the year ended December 31, 2014. The increase in operating expenses was attributable to increased depreciation of $12,518 from our Sweetwater Farm property.
Commodity Row Crop Segment
We owned all of our commodity row crop farms for the entirety of the years ended December 31, 2014 and December 31, 2013. In 2013, the Illinois Department of Transportation expropriated 79 of the gross 518 acres of our Macomb Farm for purposes of building a new state road. The State of Illinois paid us a total of $1,723,800, of which $1,106,300 was attributable to the acreage expropriated and $617,500 was attributable to the diminished value of the remaining acreage. We disputed the overall consideration paid by the State of Illinois. A settlement for additional compensation was reached in February 2014 with the State of Illinois, whereby we received $245,350 in additional compensation, $61,700 of which related to the acreage expropriated and $183,650 of which related to the diminution in value of the remaining acreage.
|
For the Year Ended
December 31, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | $ Change | % Change | |||||||||
OPERATING REVENUES: |
|||||||||||||
Fixed rent |
$ | 1,593,738 | $ | 1,615,224 | $ | (21,486 | ) | (1.33 | )% | ||||
Other income |
13,371 | 96,497 | (83,126 | ) | (86.14 | )% | |||||||
| | | | | | | | | | | | | |
Total operating revenues |
1,607,109 | 1,711,721 | (104,612 | ) | (6.11 | )% | |||||||
OPERATING EXPENSES: |
|||||||||||||
Depreciation |
3,071 | 3,070 | 1 | 0.03 | % | ||||||||
Property operating expenses |
266,559 | 261,739 | 4,820 | 1.84 | % | ||||||||
| | | | | | | | | | | | | |
Total operating expenses |
269,630 | 264,809 | 4,821 | 1.82 | % | ||||||||
| | | | | | | | | | | | | |
OPERATING INCOME |
$ | 1,337,479 | $ | 1,446,912 | $ | (109,433 | ) | (7.56 | )% | ||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Total Operating Revenues
Total operating revenues for our commodity row crop segment decreased $104,612, or 6.11%, from $1,711,721 for the year ended December 31, 2013 to $1,607,109 for the year ended December 31, 2014, primarily attributable to lower other income we received in connection with minor easements we
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granted to utilities associated with the 79 expropriated acres of our Macomb Farm property discussed above.
Fixed rent decreased $21,486, or 1.33%, from $1,615,224 for the year ended December 31, 2013 to $1,593,738 for the year ended December 31, 2014. Most of this decrease was attributable to renegotiated leases for our Kane County Farm property, under which fixed rent declined by $63,101 compared to 2013, offset by increased rents from our Macomb Farm and Tillar Farm properties from renewed leases at higher rates. During 2013, our Kane County Farm property earned proportional rent for a 22-month lease with the same aggregate rent amount as the 24-month lease for that property that commenced January 1, 2014. As a consequence, the monthly straight-lined rent for our Kane County Farm property was higher during 2013 than during 2014.
Total Operating Expenses
Total operating expenses for our commodity row crop segment increased $4,821, or 1.82%, from $264,809 for the year ended December 31, 2013 to $269,630 for the year ended December 31, 2014. The increase in property operating expenses was the result of slightly higher real estate taxes, offset by lower management fees, which was correlated to decreased rental income.
Development Segment
Our development segment operating revenues for the periods presented were significantly impacted by acquisitions made during the year ended December 31, 2013. To highlight the effect of changes due to acquisitions, we have separately discussed the components of operating revenues and property-specific operating expenses for our same-property portfolio, which includes Condor Ranch and Grassy Island Groves as well as Roadrunner Ranch (for which we received no revenues in either 2013 or 2014), which generated revenues on the portion of the property that is not under development.
|
For the Year Ended
December 31, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | $ Change | % Change | |||||||||
OPERATING REVENUES: |
|||||||||||||
Fixed rent |
$ | 362,850 | $ | 193,998 | $ | 168,852 | 87.04 | % | |||||
Same-property portfolio |
362,850 | 193,998 | 168,852 | 87.04 | % | ||||||||
Participating rent |
132,206 | (169 | ) | 132,375 | N/M | ||||||||
Same-property portfolio |
31,581 | (169 | ) | 31,750 | N/M | ||||||||
Recovery of expenses |
12,780 | 19,627 | (6,847 | ) | (34.89 | )% | |||||||
Same-property portfolio |
12,780 | 19,627 | (6,847 | ) | (34.89 | )% | |||||||
Other income |
39,600 | 39,306 | 294 | 0.75 | % | ||||||||
| | | | | | | | | | | | | |
Total operating revenues |
547,436 | 252,762 | 294,674 | 116.58 | % | ||||||||
Same-property portfolio |
407,211 | 213,456 | 193,755 | 90.77 | % | ||||||||
OPERATING EXPENSES: |
|||||||||||||
Depreciation |
220,532 | 130,681 | 89,851 | 68.76 | % | ||||||||
Same-property portfolio |
175,115 | 104,765 | 70,350 | 67.15 | % | ||||||||
Property operating expenses |
462,333 | 226,813 | 235,520 | 103.84 | % | ||||||||
Same-property portfolio |
403,596 | 218,906 | 184,690 | 84.37 | % | ||||||||
Acquisition-related expenses |
44,492 | 243,437 | (198,945 | ) | (81.72 | )% | |||||||
Professional fees |
3,424 | 1,290 | 2,134 | 165.43 | % | ||||||||
| | | | | | | | | | | | | |
Total operating expenses |
730,781 | 602,221 | 128,560 | 21.35 | % | ||||||||
| | | | | | | | | | | | | |
OPERATING LOSS |
$ | (183,345 | ) | $ | (349,459 | ) | $ | 166,114 | 47.53 | % | |||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
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Total Operating Revenues
Total operating revenues for our development segment increased $294,674, or 116.58%, from $252,762 for the year ended December 31, 2013 to $547,436 for the year ended December 31, 2014, which increase was primarily attributable to increased revenue received from our Grassy Island Groves property in 2014 on the portion of the property not being redeveloped and participating rents from Hawk Creek Ranch and Pintail Vineyard properties, which were acquired at the end of 2013. Total operating revenues for our same-property development portfolio increased $193,755, or 90.77%, from $213,456, for the year ended December 31, 2013 to $407,211 for the year ended December 31, 2014, primarily due to increased revenue received from our Grassy Island Groves property and participating rent being received from our Condor Ranch property.
Fixed rent for our development segment (including our same-property development portfolio) increased $168,852, or 87.04%, from $193,998 for the year ended December 31, 2013 to $362,850 for the year ended December 31, 2014. This increase was the result of increased revenue received from our Grassy Island Groves property in 2014 on the portion of the property not being redeveloped.
Participating rent for our development segment increased $132,375 from $(169) for the year ended December 31, 2013 to $132,206 for the year ended December 31, 2014, which increase was primarily attributable to participating rents from Hawk Creek Ranch and Pintail Vineyard properties, which were acquired at the end of 2013, and Condor Ranch, which was acquired in 2011. The Hawk Creek Ranch and Pintail Vineyard revenues arose from leases in place when the properties were acquired and have ceased as both properties are currently in the process of being redeveloped for better use. Participating rent for our same-property development portfolio increased $31,750 from $(169) for the year ended December 31, 2013 to $31,581, for the year ended December 31, 2014, due to income received from our Condor Ranch property from a minor portion of the property that has mature lemons and avocados covered by a participating lease. We received no participating rent from the Condor Ranch property in 2013, as we pruned the trees on that property as per customary practice to improve long term viability of the orchards, which resulted in crop revenue not reaching the threshold in 2013 that would have allowed us to participate in such revenue.
Recovery of expenses for our development segment (including our same-property development portfolio) decreased $6,847, or 34.89%, from $19,627 for the year ended December 31, 2013 to $12,780 for the year ended December 31, 2014. This decrease was directly related to lower real estate taxes we paid on the Condor Ranch property.
We received $39,600 in other income during the year ended December 31, 2014 related to the sale of palm trees from our Blue Cypress Farm property, and in 2013, other income was primarily comprised of sales of equipment on our Roadrunner Ranch property.
Total Operating Expenses
Total operating expenses for our development segment increased $128,560, or 21.35%, from $602,221 for the year ended December 31, 2013 to $730,781 for the year ended December 31, 2014. Property operating expenses increased by $235,520 in 2014, driven by an increase of $191,767 in costs to support the revenue we collected in Grassy Island Groves on the portion of that property that is not being redeveloped, increased management fees correlating to increased revenues and increased real estate taxes relating to our Hawk Creek Ranch property acquired in two stages in October 2013 and February 2014. Property operating expenses for our development segment same-property portfolio increased by $184,690, which was primarily due to an increase of $191,767 related to additional crop costs for Grassy Island Groves, partially offset by a decrease of $7,754 in real estate taxes for Condor Ranch. Depreciation was primarily higher due to $68,928 attributable to our Roadrunner Ranch property, our Blue Cypress Farm property acquired in February 2013 and our Hawk Creek Ranch and Pintail Vineyards properties that were acquired in November 2013. Depreciation for our development
93
segment same-property portfolio increased by $70,350, principally due to an increase of $68,928 related to Roadrunner Ranch.
Liquidity and Capital Resources
We measure liquidity in terms of our ability to meet requests for capital, whether for acquisitions of new farms, to fund capital expenditures, including planned redevelopment expenses and unplanned repairs, for the repayment of existing borrowing arrangements, for distributions to our stockholders and holders of Common Units or other cash demands that may arise in the course of our ordinary business operations. Upon completion of this offering and after the expected application of the net proceeds from this offering, we expect to have no outstanding indebtedness. We believe that the receipt of the net proceeds from this offering will greatly strengthen our ability to meet our liquidity needs by providing us with access to capital.
Our sources of funds to meet our liquidity needs will primarily be, to the extent applicable, existing cash balances, cash flow from operations, available borrowings under our revolving credit facilities and the net proceeds from this offering. We plan to use our sources of cash, including the net proceeds of this offering, primarily to acquire farms consistent with our investment strategy, to repay principal amounts, including interest on any outstanding borrowings, finance capital expenditures on development farms, fund our operations and pay expenses accrued during this offering and make distributions to our stockholders and the holders of Common Units.
Our long-term liquidity needs will mainly be for funds necessary to acquire additional farms, to make certain long-term capital expenditures and to make principal and interest payments on any debt that we may incur. We expect to meet our long-term liquidity requirements through various sources of capital, including future equity issuances (including Common Units), cash flow from operations, and other secured and unsecured borrowings.
Credit Facilities
As of the date of this prospectus, we have two revolving credit facilities in place with an aggregate principal amount of $50 million, of which approximately $20.4 million has been drawn to date. The key terms of the revolving credit facilities, which were arranged by Rutledge Investment Company, are outlined below.
Maturity and Interest
The original revolving credit facility of $25 million (i) has a maturity date of January 1, 2019, (ii) bears interest at a rate per annum equal to the 90 days LIBOR, plus 130 basis points, and (iii) requires us to make quarterly interest payments on April 1, July 1, October 1 and January 1 of each calendar quarter. Additionally, the original revolving credit facility requires us to pay a quarterly non-usage fee equal to (x) 0.25%, on an annualized basis, multiplied by (y) an amount equal to the total funds drawn under the facility subtracted from the aggregate principal amount of $25 million.
The second revolving credit facility of $25 million (i) has a maturity date of January 1, 2020, (ii) bears interest at a rate per annum equal to the 90 days LIBOR, plus 130 basis points, and (iii) requires us to make quarterly interest payments on April 1, July 1, October 1 and January 1 of each calendar quarter. Additionally, the second revolving credit facility requires us to pay a quarterly non-usage fee equal to (x) 0.25%, on an annualized basis, multiplied by (y) an amount equal to the total funds drawn under the facility subtracted from the aggregate principal amount of $25 million.
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Events of Default
The revolving credit facilities contain customary events of default, including defaults in the payment of principal or interest, defaults in compliance in all material respects with the terms and conditions of the agreement and other documents evidencing the credit facilities, defaults in payments relating to any other indebtedness owed to the lender, and bankruptcy or other insolvency events. As of March 31, 2015, we were in compliance with all covenants contained in the credit facility agreement.
Security
The original revolving credit facility is secured by first lien mortgages on our Pleasant Plains, Macomb Farm, Sweetwater Farm, Tillar Farm and Kane County Farms properties, with the loan commitment amount not to exceed 50% of the current appraised value of the farms pledged as collateral.
The second revolving credit facility is secured by first lien mortgages on our Sandpiper Ranch, Quail Run Vineyard, Golden Eagle Ranch and Blue Heron Farms properties, with the loan commitment amount not to exceed 50% of the current appraised value of the farms pledged as collateral.
Distributions and Equity Transactions
In order to qualify as a REIT, we generally are required to distribute to our stockholders, on an annual basis, at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. We expect to make quarterly distributions to our stockholders in a manner intended to satisfy this requirement. Prior to making any distributions for U.S. federal tax purposes or otherwise, we must first satisfy our operating and debt service obligations. It is possible that it would be necessary to utilize cash reserves, liquidate assets at unfavorable prices or incur additional indebtedness in order to make required distributions. It is also possible that our Board of Directors could decide to make required distributions in part by using shares of our stock.
We maintain a distribution reinvestment program, or DRP, which allows our stockholders who have purchased shares in our private placements to automatically reinvest dividends by purchasing additional shares from us. Such purchases under our DRP are not subject to brokerage commission fees or service charges. As of March 31, 2015, we had issued approximately 82,412 shares pursuant to the DRP for aggregate proceeds of $911,867. During the three months ended March 31, 2015 and year ended December 31, 2014, we received $0 and $351,198, respectively, in investor proceeds through our DRP. The Board of Directors temporarily suspended the DRP at its February 2015 meeting.
Additionally, we believe that, as a publicly traded REIT, we will have access to capital markets, including the increased ability for offerings of additional equity securities and the incurrence of additional debt that will help fund our long-term liquidity requirements.
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Contractual Obligations
The following table sets forth our contractual obligations and commitments as of December 31, 2014:
|
Payments Due by Period | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Less than
1 Year |
1 - 3 Years | 3 - 5 Years |
More than
5 Years |
Total | |||||||||||
Principal payments of long-term debt obligations |
$ | | $ | | $ | 20,400,000 | $ | | $ | 20,400,000 | ||||||
Purchase of permanent crops and equipment on development properties |
557,812 | 108,112 | | | 684,340 | |||||||||||
Interest payments on variable-rate long-term indebtedness based on rates at December 31, 2014 |
11,702 | | | | 11,702 | |||||||||||
| | | | | | | | | | | | | | | | |
Total |
$ | 587,930 | $ | 108,112 | $ | 20,400,000 | $ | | $ | 21,096,042 | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
We intend to use a portion of the net proceeds from this offering to repay outstanding indebtedness. After the intended application of the net proceeds, we expect to have no outstanding indebtedness.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
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Cash Flows
Comparison of Three Months Ended March 31, 2015 to Three Months Ended March 31, 2014
|
For the Three Months
Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2015 | 2014 | |||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|||||||
Net income |
$ | 414,687 | $ | 133,843 | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
|||||||
Depreciation |
443,980 | 391,024 | |||||
Gain on sale of land |
| (55,662 | ) | ||||
Changes in operating assets and liabilities: |
|||||||
Increase (decrease) in deferred financing costs, net |
(93,674 | ) | 5,179 | ||||
Increase in other assets |
(132,844 | ) | (198,254 | ) | |||
Decrease (increase) in rent receivable |
741,552 | (55,014 | ) | ||||
Increase in unearned rent |
844,318 | 792,530 | |||||
(Decrease) increase in accrued expenses and other liabilities |
(555,523 | ) | 202,095 | ||||
Decrease in performance fee payable to AFA |
(954,540 | ) | (707,070 | ) | |||
Increase in management fee payable to AFA |
81,144 | 4,316 | |||||
| | | | | | | |
Net cash provided by operating activities |
789,100 | 512,987 | |||||
| | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: |
|||||||
Acquisition of real estate investments |
| (1,721,929 | ) | ||||
Capital expenditures on real estate investments |
(1,386,471 | ) | (1,581,904 | ) | |||
Proceeds from sale of land |
| 55,662 | |||||
| | | | | | | |
Net cash used in investing activities |
(1,386,471 | ) | (3,248,171 | ) | |||
| | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|||||||
Proceeds from issuance of stocksecurities sales |
| 4,100,000 | |||||
Capital contributions received in advance |
| 60,000 | |||||
Offering costs |
(1,360,214 | ) | (40,594 | ) | |||
Dividends paid to shareholders |
(176,263 | ) | (197,457 | ) | |||
Distributions paid to non-controlling interests |
(150,147 | ) | (143,875 | ) | |||
| | | | | | | |
Net cash (used in) provided by financing activities |
(1,686,624 | ) | 3,778,074 | ||||
| | | | | | | |
Net (decrease) increase in cash and cash equivalents |
(2,283,995 | ) | 1,042,890 | ||||
Cash and cash equivalents at beginning of period |
7,466,642 | 4,213,056 | |||||
| | | | | | | |
Cash and cash equivalents at end of period |
$ | 5,182,647 | $ | 5,255,946 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net cash provided by operating activities increased $276,113 during the three months ended March 31, 2015, as compared to the three months ended March 31, 2014. A majority of the cash provided by operating activities is generated from the rental payments we receive from our tenants, which we utilize to pay for the property-level operating expenses, management, performance fees to AFA, professional fees and other corporate level general and administrative expenses. This amount increased in 2015 due to the growth in our operating revenues as more fully described in "Results of Operations."
Net cash used in investing activities decreased $1,861,700, or 57.32%, during the three months ended March 31, 2015, as compared to the three months ended March 31, 2014, as we acquired the second tranche for Hawk Creek Ranch in 2014 and there were no acquisitions in 2015.
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Net cash used in financing activities increased $4,105,016 during the three months ended March 31, 2015, as compared to the three months ended March 31, 2014, as a result of no receipt of capital in 2015.
Comparison of Year Ended December 31, 2014 to Year Ended December 31, 2013
|
For the Year Ended December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2014 | 2013 | |||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|||||||
Net income |
$ | 1,056,788 | $ | 833,677 | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
|||||||
Depreciation |
1,530,911 | 1,265,275 | |||||
Gain on sale of land |
(47,701 | ) | (463,478 | ) | |||
Changes in operating assets and liabilities: |
|||||||
Increase in other assets |
(1,205,892 | ) | (735,452 | ) | |||
(Increase) decrease in rent receivable |
(1,132,731 | ) | 59,224 | ||||
Increase in unearned rent |
583,518 | 165,040 | |||||
Increase in accrued expenses and other liabilities |
1,604,395 | 568,981 | |||||
Increase in performance fees payable to AFA |
382,047 | 536,697 | |||||
Increase in management fee payable to AFA |
21,013 | 9,228 | |||||
| | | | | | | |
Net cash provided by operating activities |
2,792,348 | 2,239,192 | |||||
| | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: |
|||||||
Acquisition of real estate investments |
(19,820,569 | ) | (25,256,859 | ) | |||
Capital expenditures on real estate investments |
(7,172,459 | ) | (4,481,159 | ) | |||
Proceeds from sale of land |
257,675 | 1,682,598 | |||||
Deposits for acquisition of real estate investments |
| (50,000 | ) | ||||
| | | | | | | |
Net cash used in investing activities |
(26,735,353 | ) | (28,105,420 | ) | |||
| | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|||||||
Proceeds from issuance of stocksecurities sales |
4,160,000 | 1,549,813 | |||||
Proceeds from borrowings |
20,400,000 | | |||||
Subscriptions received in advance |
5,250,000 | | |||||
Repurchases of stock |
| (4,362,265 | ) | ||||
Offering costs |
(60,938 | ) | (51,709 | ) | |||
Dividends paid to shareholders |
(2,252,148 | ) | (2,043,912 | ) | |||
Distributions paid to non-controlling interests |
(300,323 | ) | (314,000 | ) | |||
| | | | | | | |
Net cash provided by (used in) financing activities |
27,196,591 | (5,222,073 | ) | ||||
| | | | | | | |
Net increase (decrease) in cash and cash equivalents |
3,253,586 | (31,088,301 | ) | ||||
Cash and cash equivalents at beginning of year |
4,213,056 | 35,301,357 | |||||
| | | | | | | |
Cash and cash equivalents at end of at end of year |
$ | 7,466,642 | $ | 4,213,056 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net cash provided by operating activities increased $553,156, or 24.70%, during the year ended December 31, 2014, as compared to the year ended December 31, 2013. A majority of the cash provided by operating activities is generated from the rental payments we receive from our tenants, which we utilize to pay for the property-level operating expenses, management, performance fees to AFA, professional fees and other corporate level general and administrative expenses. This amount increased in 2014 due to the growth in our operating revenues as more fully described in "Results of Operations." Part of the remaining cash was used to pay $301,413 in expenses, which are included in our deferred offering costs balance at December 31, 2014.
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Net cash used in investing activities decreased $1,370,067, or 4.87%, during the year ended December 31, 2014, as compared to the year ended December 31, 2013, as a result of less funds spent on acquisition of farms, though we incurred more development costs than acquisition expenses, offset by fewer proceeds received from the expropriated 79 acres of our Macomb Farm property.
Net cash provided by financing activities increased $32,418,664, or 620.80%, during the year ended December 31, 2014, as compared to the year ended December 31, 2013, as a result of the drawdown of the original credit facility, no buyback of stock in 2014 and more capital raised in 2014 compared to 2013.
Non-GAAP Financial Measures
Funds from Operations attributable to the Company and Funds from OperationsCore attributable to the Company
We calculate FFO attributable to the Company in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT. NAREIT defines FFO attributable to the Company as net income (loss) (calculated in accordance with GAAP), excluding gains (or losses) from sales of depreciated real estate assets, real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures. We calculate Core FFO attributable to the Company by adding back performance fees payable to related parties (which will cease following the Internalization) and acquisition-related expenses to FFO attributable to the Company. We believe that net income attributable to the Company is the most directly comparable GAAP measure to FFO attributable to the Company and Core FFO attributable to the Company.
FFO attributable to the Company and Core FFO attributable to the Company are supplemental non-GAAP financial measures. Management presents FFO attributable to the Company as a supplemental performance measure because it believes that FFO attributable to the Company is beneficial to investors as a starting point in measuring our operational performance. Specifically, in excluding real estate related depreciation and amortization and gains and losses from sales of depreciable operating farms, which do not relate to or are not indicative of operating performance, FFO attributable to the Company provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs. We also believe that, as a widely recognized measure of the performance of REITs, FFO attributable to the Company will be used by investors as a basis to compare our operating performance with that of other REITs. Management believes Core FFO attributable to the Company is an important supplemental measure of operating performance because it is a measure of residual cash flow available for stockholders and a measure that can be analyzed in conjunction with our ability to pay dividends. In addition, as we prepare to invest our proceeds in acquiring farms, we are required in certain instances to expense costs for U.S. GAAP purposes related to acquiring the farms, such as the acquisition fee paid to our Agricultural Sub-Adviser, and legal, professional and other fees (including transfer taxes in some cases) associated with closing the purchase of each property.
However, because both FFO attributable to the Company and Core FFO attributable to the Company exclude depreciation and amortization and capture neither the changes in the value of our farms that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our farms, all of which have real economic effects and could materially impact our results from operations, the utility of FFO attributable to the Company and Core FFO attributable to the Company as measures of our performance is limited. In addition, other equity REITs may not calculate FFO attributable to the Company in accordance with the NAREIT definition as we do and may not calculate Core FFO attributable to the Company as we do, and, accordingly, our FFO attributable to the Company and
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Core FFO attributable to the Company may not be comparable to such other REITs' FFO attributable to the Company and Core FFO attributable to the Company. Accordingly, FFO attributable to the Company and Core FFO attributable to the Company should be considered only as a supplement to net income as a measure of our performance. FFO attributable to the Company and Core FFO attributable to the Company should not be used as a measure of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to pay dividends or service indebtedness. FFO attributable to the Company and Core FFO attributable to the Company also should not be used as a supplement to or substitute for net income or cash flow from operating activities computed in accordance with GAAP.
The following table sets forth a reconciliation of historical and FFO attributable to the Company and Core FFO attributable to the Company to net income before allocation to AFA, the most directly comparable GAAP equivalent, for the periods indicated below:
|
For the
Three Months Ended March 31, |
Consolidated
As of and for the Years Ended December 31, |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2015 | 2014 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Net income (loss) attributable to the Company |
$ | 285,930 | $ | 80,097 | $ | 710,717 | $ | 553,451 | $ | (710,936 | ) | $ | (419,356 | ) | |||||
Gain on sale of land |
| (55,662 | ) | (47,701 | ) | (463,478 | ) | | | ||||||||||
Depreciation |
443,980 | 391,024 | 1,530,911 | 1,265,275 | 631,151 | 98,741 | |||||||||||||
Non-controlling interests' share of above adjustments |
(76,243 | ) | (58,784 | ) | (261,213 | ) | (142,729 | ) | (112,981 | ) | (23,267 | ) | |||||||
| | | | | | | | | | | | | | | | | | | |
FFO attributable to the Company |
653,667 | 356,675 | 1,932,714 | 1,212,519 | (192,766 | ) | (343,882 | ) | |||||||||||
Performance feesrelated party (1) |
276,858 | 142,281 | 1,231,398 | 849,351 | 747,654 | | |||||||||||||
Acquisition-related expenses |
| 56,997 | 44,712 | 431,309 | 507,945 | 624,421 | |||||||||||||
Non-controlling interests' share of above adjustments |
(36,416 | ) | (29,962 | ) | (169,859 | ) | (192,554 | ) | (265,372 | ) | (144,346 | ) | |||||||
| | | | | | | | | | | | | | | | | | | |
Core FFO attributable to the Company |
$ | 894,109 | $ | 525,991 | $ | 3,038,965 | $ | 2,300,625 | $ | 797,461 | $ | 136,193 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
FFO attributable to the Company per share |
$ | 0.06 | $ | 0.03 | $ | 0.19 | $ | 0.12 | $ | (0.02 | ) | $ | (0.05 | ) | |||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Core FFO attributable to the Company per share |
$ | 0.08 | $ | 0.05 | $ | 0.29 | $ | 0.23 | $ | 0.09 | $ | 0.02 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
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Net asset value per share calculated on the basis of appraised value
The unaudited net asset value per share ("NAV") calculated on the basis of appraised value is a supplemental non-GAAP financial measure. Management presents NAV as a supplemental measure because it believes that NAV is beneficial to investors in measuring whether the investments in real estate have appreciated in value, in aggregate, since their respective dates of acquisition. In determining the fair value of the investments in real estate, we have relied on independent third party appraisers who (except as noted below) performed their formal appraisals as of December 31 in each calendar year for each property. See "Experts" for a list of our third-party appraisers. Properties that were purchased in the fourth quarter of any calendar year were not appraised until December 31 of the calendar year end following the year of acquisition. In the year of acquisition, those properties were valued at cost. For purposes of determining the adjustment between the investment in real estate on a GAAP basis and on a fair market value basis, all of the costs associated with the acquisition of all properties were added to the cost thereof (irrespective of whether the acquisition as treated as a business combination or not), and no effect was given to straight-lining rental income.
Net asset value per share is based on appraisals of our properties as discussed above and may differ from the price per share of common stock in this offering. Prior to this offering, there has been no public market for shares of our common stock. Consequently, the initial public offering price of our common stock will be determined by negotiation among us and the representatives of the underwriters, and is not intended to reflect, and may be greater or less than, our net asset value per share. Among the primary factors that will be considered in determining the public offering price are: (i) prevailing market conditions; (ii) our results of operations in recent periods; (iii) the present stage of our development farms; (iv) the market capitalization and stages of development of other companies that we and the representatives of the underwriters believe to be comparable to our business; (v) estimates of our business potential; and (vi) the net asset value of our operating partnership as of .
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Quantitative and Qualitative Disclosures About Market Risk
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market-sensitive instruments. In pursuing our business strategies, the primary market risk to which we are exposed is interest rate risk. Our primary interest rate exposure will be the daily LIBOR. We may use fixed interest rate financing to manage our exposure to fluctuations in interest rates. On a limited basis, we also may use derivative financial instruments to manage interest rate risk. We will not use such derivatives for trading or other speculative purposes.
At March 31, 2015, all of our outstanding debt, approximately $20.4 million, had variable interest rates. Assuming no increase in the level of our variable rate debt, if interest rates increased by 1.0%, or 100 basis points, our cash flow would decrease by approximately $204,000 per year. At March 31, 2015, LIBOR was approximately 27.4 basis points. Assuming no increase in the level of our variable rate debt, if LIBOR were reduced to 0 basis points, our cash flow would not be impacted.
Inflation and Interest Rates
All of the leases for the farms in our portfolio have one- to five-year terms, pursuant to which each tenant is responsible for substantially all of the operating expenses related to the property, including taxes, maintenance, water usage and insurance. As a result, we believe that the effect on us of inflationary increases in operating expenses may be offset in part by the operating expenses that are passed through to our tenants and by contractual rent increases since our leases will be renegotiated every one to five years.
Inflation may impact the value of our farms over the long term. To the extent that interest rates increase, costs associated with our borrowing arrangements may also increase. Interest rate increases or decreases may also have an effect on farmland values because farmland cash returns and capitalization rates tend to increase as real interest rate increases. However, historical observation of farmland value changes versus interest rate changes show an inconsistent relationship which cannot be relied upon. It appears that interest rates are only one factor among many which may impact farmland value. As may be expected, farmland prices tend to follow crop prices over the long run. In a deflationary environment, where the cost of goods and services are declining, farmland tends to hold its real value. The non-discretionary nature of food generally keeps the demand for agricultural crops stable and therefore, farmland typically maintains its value even when other goods and services experience economic declines.
Seasonality
Our revenues are also impacted by the seasonality of crop harvests and the timing of when revenue is recognized in connection with such harvests, as the leases for our permanent crops have both fixed and flexible components, with the flexible component tied to a percentage of gross revenue generated by a crop yield or a share of the crop yield. We currently have six farms that are subject to participating leases and expect to use similar leasing structures in the future. Payments under such leases are made two to four times annually, with some payments being made in the year subsequent to the relevant harvest, which causes revenue to be concentrated unevenly in the fourth, first and second quarters of each year, varying in amount and timing from year to year. See "Factors That May Affect Our Operating Results and Asset ValueSeasonality" above.
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Overview
While we will be internally managed upon completion of this offering, we have previously been an externally managed real estate company. We own a diversified portfolio of high-quality farmland, consisting of mature permanent, specialty/vegetable row and commodity row crop farms, including farmland in development projects, which is located in select major agricultural regions in the United States. We seek to provide our stockholders with a combination of (i) current income from renting our stable portfolio of mature farms and (ii) capital appreciation, partially driven by our ability to develop properties to maximize their value. We lease our farms to professional farmer tenants under a variety of lease structures with staggered durations, including fixed and participating leases, which typically consist of fixed base rent and participating revenue components. Approximately 45.6% of our 2014 contractual rent and 62.5% of our contractual rent for the first quarter of 2015 was comprised of fixed and base rent. In addition, our participating leases typically require our professional farmer tenants to obtain crop insurance, which seeks to protect the stability of our cash flow. We are a Maryland corporation and aim to be the leading farmland REIT to be traded on a U.S. stock exchange with a highly diversified portfolio, scalable platform and a unique investment focus on permanent, specialty/vegetable, development and commodity row crop farmland throughout the U.S.
Our business strategy is to generate stable and growing cash flow and capital appreciation for our stockholders. To implement our business strategy, we adhere to four core principles: (i) diversification, (ii) high-quality standards, (iii) a value-added approach and (iv) risk management. As of the date of this prospectus, our portfolio is comprised of 17 farms with an appraised value of $171.1 million as of March 31, 2015, and approximately 15,378 gross acres with more than 21 crop varieties, some of which are planted in rotation, in Alabama, Arkansas, California, Florida, Georgia and Illinois. The total cost of our portfolio as of December 31, 2014 was $145.6 million, the appraised value of the 17 farms we owned as of December 31, 2014 was $168.8 million. Each farm was appraised by an independent appraisal firm employing a state certified appraiser with local expertise and who is certified as either an A.R.A. (Accredited Rural Appraiser) or M.A.I. (Member of the Appraisal Institute), or state certified as a Certified General Real Estate Appraiser. See "Appraisals" and "Experts."
Management
Our management team is responsible for all investment and business strategy decisions, including making formal property decisions prior to each acquisition, disposition or other key property or portfolio related matters, and our Agricultural Sub-Adviser is predominantly responsible for property sourcing, recommendations and ongoing due diligence. Our management and our Agricultural Sub-Adviser work closely together with respect to all phases of an acquisition, including due diligence and ongoing monitoring, and have formal and informal processes of communication in place that ensure a continual flow of information.
Executive Management
We were founded in October 2009 by D. Dixon Boardman, our Chairman, Harrison LeFrak, our Vice Chairman, and Thomas S.T. Gimbel, our Chief Executive Officer, among other significant founders, to execute upon a plan to acquire a diversified portfolio of high-quality farmland that can generate stable and growing cash flow. Our executive management team has expertise in areas critical to acquiring, owning and managing farmland real estate. Mr. Gimbel, as Chief Executive Officer, Robert L. Cowan, as President and Chief Investment Officer, Geoffrey M. Lewis, as Chief Financial Officer and Treasurer, and Lindsey B. Sichel, as Chief Administrative Officer and Chief Marketing Officer, comprise our executive management team. Mr. Cowan has 30 years of experience in farmland investment, acquisition and management having served as the Agriculture and Timber Director for the
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Utah Retirement System, and prior to that having worked in various roles at Farmland Reserve, Inc., a large private agricultural investment entity. Mr. Cowan obtained a Master of Science, specializing in Agricultural Economics, from Brigham Young University in 1977. Messrs. Gimbel, Lewis, Boardman and LeFrak and Ms. Sichel have worked with us since our founding and on average have more than 20 years' experience in investments and/or real estate.
Agricultural Sub-Adviser
Furthermore, we have a contractual relationship with our Agricultural Sub-Adviser, Prudential Mortgage Capital Company, LLC, which includes Prudential Agricultural Investments, a unit of Prudential Mortgage Capital Company, LLC to provide us with various investment, acquisition and property management services. Our Agricultural Sub-Adviser is a business unit of Prudential Investment Management, Inc., the primary asset management business of Prudential Financial, Inc. (NYSE: PRU), which is the ultimate parent of our Agricultural Sub-Adviser. See "Our Business and PropertiesInvestment Focus and ProcessUnderwriting Criteria and Due Diligence ProcessAgricultural Sub-Adviser." Our Agricultural Sub-Adviser or its affiliates have been investing in farmland on behalf of institutional clients since 1989 and managed approximately 149,800 acres of farmland with a market value in excess of $959 million as of March 31, 2015. As a mortgage lender, our Agricultural Sub-Adviser and its affiliates have an agricultural debt portfolio that, as of March 31, 2015, exceeded $3.4 billion, with 590 customer relationships and with investments in 34 states. Our Agricultural Sub-Adviser and its affiliate, CAPS, have a staff of 29 professionals in five regional offices located in prime U.S. agricultural regions. CAPS provides property management and brokerage services to both our Agricultural Sub-Adviser and external clients. Since 1986, CAPS has brokered approximately $2.4 billion of transactions representing approximately 1.2 million acres of farmland as of March 31, 2015.
Competitive Strengths
We believe the following characteristics differentiate us from our competitors:
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105
collectively profitable farms. After the completion of this offering, our management team and directors are expected to own a significant amount, %, of our common stock and Common Units, which aligns their interests with those of our stockholders and aligns their incentives to maximize returns for our stockholders.
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Business and Growth Strategies
Our key strategies to drive our business and growth include the following:
Farm
|
Tillable Acres
Subject to Development |
Crop Being Developed |
Total
Capital Expenditures To Date |
Estimated
Remaining Capital Expenditures |
Estimated
Remaining Capital Expenditures Less Revenue Offset |
Expected
Completion Date |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Blue Cypress Farm |
2,036 | Specialty/ Vegetable Row Crops | $ | 3,110,024 | $ | 226,683 | $ | 226,683 | 2016 | ||||||||||
Condor Ranch |
202 | Avocados and Lemons | 4,341,144 | 1,001,963 | (290,127 | ) | 2016 | ||||||||||||
Roadrunner Ranch |
227 | Seedless organic mandarins | 4,444,660 | 1,392,442 | 20,717 | 2016 | |||||||||||||
Quail Run Vineyard (partial) |
77 | Wine grapes | 1,758,142 | 500,212 | 73,612 | 2017 | |||||||||||||
Grassy Island Groves |
451 | Citrus | 1,689,222 | 2,903,339 | 2,017,019 | 2019 | |||||||||||||
Pintail Vineyards |
87 | Wine grapes | 234,139 | 1,459,138 | 1,098,138 | 2019 | |||||||||||||
Hawk Creek Ranch |
425 | Pistachios | 827,282 | 5,789,947 | 3,652,987 | 2021 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total |
3,505 | $ | 16,404,613 | $ | 13,273,724 | $ | 6,799,029 |
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Our ability to effectively implement our business and growth strategies is subject to numerous risks and uncertainties, including those set forth under "Risk FactorsRisks Related to Our Business and Farms."
Investment Focus and Process
Diversification
We seek to invest in high-quality cropland in proven production regions of the U.S. that enjoy competitive advantages in production costs, productivity and/or output quality. We manage risk through investment in a number of different geographic locations and crop types. We believe that diversification across geographic areas and crop types reduces volatility and exposure to major risk factors such as weather, fluctuating commodity prices and crop demand/supply cycles.
Further, to achieve farm type diversification, we will own both mature permanent farms, such as orchards and vineyards, and row crop farms. Additionally, we seek diversification by making investments in different geographic areas and crop types. We also consider investments that involve the development of permanent crops, such as orchards and vineyards. These development investments not only provide an opportunity for us to create asset value but also allow for state-of-the-art planting with optimal varieties, orchard/vineyard layout, and irrigation systems. We will also endeavor to find farms with alternative future uses, as this may enhance value and liquidity.
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Target ranges for allocation levels by farm type, based on the current appraised value of our portfolio as of March 31, 2015, are indicated below:
Farm Type
|
No. of
Farms |
Total Cost
($) (1) |
Tillable
Acres |
Gross
Acres |
Current
Appraised Value (2) |
Allocation
as a % of Current Appraised Value (3) |
Target
Allocation Range |
|
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mature permanent crop |
5 | $ | 62,490,587 | 3,069 | 3,882 | $ | 69,660,637 | 41 | % | 35 - 55 | % | ||||||||||||
Specialty/vegetable row crop |
2 | $ | 13,361,564 | 1,608 | 1,808 | $ | 15,200,000 | 9 | % | 15 - 35 | % | ||||||||||||
Commodity row crop |
4 | $ | 33,019,316 | 4,446 | 4,726 | $ | 46,975,000 | 27 | % | 10 - 30 | % | ||||||||||||
Farmland development (4) |
6 | $ | 38,115,947 | 3,487 | 4,962 | $ | 39,249,000 | 23 | % | 10 - 30 | % | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
Total: |
17 | $ | 146,987,414 | 12,610 | 15,378 | $ | 171,084,637 |
Permanent Crops
Permanent crops have plant, vine or tree structures that produce yearly crops without being replanted, including fruits and nuts grown on trees and vines such as almonds, walnuts, pistachios, grapes, lemons, avocados, other citrus fruits, cranberries, apples, cherries, figs, peaches, pears, plums and prunes. While the U.S. is a net fruit importer, exports have exhibited strong growth, according to the USDA. Tree nuts are of growing global importance, as approximately 50% of domestic tree nuts produced are exported to Asia, Canada, Mexico and the European Union, with the U.S. second only to China in terms of tree nut production, per the USDA. Key varieties include almonds, walnuts and pistachios. Annualized total returns over the five year period ended on March 31, 2015 for permanent crop farmland were 20.0%, based on NCREIF data.
Specialty/Vegetable Row Crops
Specialty/vegetable row crops are generally planted annually, but also include certain crops with longer lifespans of up to several years after planting, and are harvested annually or more frequently and include certain non-tree fruits ( e.g., strawberries), vegetables ( e.g., onions and peppers) and melons and peanuts, among others. The U.S. is a dominant producer of certain of these specialty/vegetable row crops with top export nations including Canada, Mexico, Japan, Taiwan and South Korea, with potatoes, tomatoes, lettuce, onions and sweet corn dominant in terms of export value, according to the USDA.
Commodity Row Crops
Commodity row crops are planted and harvested annually or more frequently and include corn, wheat, soybean, rice, cotton, oats, rye, barley, sorghum, potatoes and hay, among others. The U.S. is the leading producer and exporter of corn and soybeans and is a top producer of cotton according to the USDA.
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Annualized total returns over the five year period ended March 31, 2015 for row crops, which include specialty/vegetable and commodity row crops, were 12.5%, according to NCREIF.
As of the date of this prospectus, our portfolio was diversified by crop type and region as shown by the charts below:
Appraised Value Diversification (in millions USD) by Crop Type |
Appraised Value Diversification (in millions USD) by State and Region |
|
|
|
|
Total appraised value: $171.1 |
Note: Portfolio diversification based on appraised value as of March 31, 2015 for all farms excluding any farms acquired after the third quarter of 2014, which are based on investment cost as of March 31, 2015. Some crop type categories contain multiple crops (i.e. Wine grapes consists of Merlot, Chardonnay, etc. and Winter Vegetables refers to melons, peanuts and other mixed vegetables), which aggregates to more than 21 crop varieties, some planted in rotation.
Development farms generally will not generate lease income during the development period, which for permanent crops is between four and nine years, depending on the crop, and will generally be considered to be development farms until commercially productive. Due to the time necessary for development farms to become commercially productive, the relative contribution of such farms to the total value of our portfolio may be subject to greater variability than that of our other property types. Furthermore, as a result of our opportunistic acquisition strategy, we may elect to pursue acquisitions that, because of size or other characteristics, will result in one or more property types exceeding the target ranges shown above.
Most of the agricultural land in the Midwest (including the Corn Belt) and Delta regions is used to produce corn, soybeans, cotton and rice. In the Pacific (including California and the Pacific Northwest) and Southeast, land can be used to grow a wider variety of crops, but our focus is expected to be on irrigated vegetable land and land used to grow specialty/vegetable row crops, such as melons, berries, peanuts and varied vegetables that have the potential to generate higher returns to the land owner.
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With respect to permanent plantings, farms will generally be located in the Pacific (including California and the Pacific Northwest) and Southeast Regions. Our focus will be on identifying and acquiring farms that exhibit long-run competitive advantages with respect to productivity and costs; are used to produce crops that are well suited to the site and are in demand by consumers; have ample supplies of high-quality water; and have the potential for alternative use in the future. We also expect to focus more heavily on farms and commodity types for which beneficial long-term commodity contracts are available. For example, in the Pacific region, we expect to focus on nut crops like almonds, pistachios and walnuts, as well as fruit crops such as citrus, avocados, and wine grapes. In the Pacific Northwest, we expect to focus on apples, pears and cherries, and in the Southeast, we expect to focus on citrus.
Property Holding Periods
Generally, we expect to own our farms for an average of ten to fifteen years. However, shorter or longer periods may be warranted depending on the particular circumstances of a property. We anticipate that development farms, and those farms with alternative use potential, will tend to have longer holding periods. In all cases, we will try to take advantage of property cycles and both buy and sell farms at opportune times.
U.S. Farmland Property
The U.S. farmland investment industry represents more than $2.7 trillion of farmland property. The U.S. is the top producer, or is among the top producers, of many key agricultural crops and has consistently been a net exporter of agricultural crops for more than fifty years. Over the past decade, agricultural exports from the U.S. have generally been increasing and at an increasing rate, according to USDA estimates. We believe that the U.S. has strong agricultural advantages in its topography and geographic position. Its varied climatic regions allow for the production of a wide variety of agricultural crops, and its central position between industrial centers in Asia, Europe, Canada and South America may make it a favorable location for trading. Additionally, unlike many developing nations, the U.S. has a well-developed infrastructure and financial resources to sustain the agriculture industry.
Leased Farms
Farming land for crops carries significant operating risk, which we believe is substantially mitigated through leasing our mature cropland to tenants. For example, if a crop fails or the land is not as productive as anticipated, the farm operator may experience an economic loss. Our current farmland leases typically range from one to five years in length. Six of the leases in our portfolio, including three leases associated with our Kane County Farms property, provide that 100% of the annual rent is due and payable in advance of each spring planting season, and we expect that most of the fixed leases we enter into in the future will have a similar requirement, which reduces our credit-risk exposure in the event of operational issues with the farm-operator tenant. However, we currently have nine leases in our portfolio that do not require advance payment of 100% of the annual rent, which may subject us to tenant credit risk and risks associated with declines in the profitability of tenants' farming operations. Additionally, we use flexible leases for five of our permanent crop farms, which depend in part on revenue per acre and, at one property, crop yields and prices, in regions where such arrangements are prevalent or when we expect that such arrangements will be more profitable to us on a risk-adjusted basis. The use of flexible leases subjects us to higher levels of risk as there is more variability around fluctuating crop prices and harvest cycles, and we are subject to seasonality, the timing of crop harvests or when revenues are recognized or received. In the future, we also may utilize hybrid lease arrangements that require a modest rent payment at lease inception and an additional rent payment based on a percentage of the revenue from the tenant's harvest for that year. Revenue from leased farms with specialty/vegetable and commodity row crops will tend to be lower, but more stable, than
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the revenue from leased farms with permanent plantings, which are typically leased pursuant to participating leases. For information regarding the income generated by our farms, see "Historical Occupancy and Average Rent Per Acre."
Our tenants spend considerable time and capital to maintain farms. Accordingly, we believe they will renew their leases at the time of expiration. We offer our tenants renewal terms that we believe are in line with market conditions, and as a result, to date, we have not had a tenant vacate any of our farms. If a tenant chooses not to renew a lease in the future, we believe that we will be able to locate other farmers who would be willing to lease the property at attractive rates, but no assurances can be given that we will be able to do so. The rental payments we receive from the farm operators will be the primary source of any distributions that we make to our stockholders.
Tenants
We believe the areas where we own and intend to acquire farms are characterized by competitive tenant and/or farm operator environments, with multiple experienced tenants or farm operators seeking to expand their land holdings or scale of their operations by leasing additional cropland. Accordingly, our cropland is generally leased and farmed each year, with leases often having multi-year durations. While the mature permanent cropland tenant base is still developing, we expect a competitive tenant environment to develop, as we believe there is already a strong market in place for direct farm operations as well as associated services, including harvesting, processing (hulling, shelling and packaging), warehousing, marketing and shipping.
Our tenant type varies by property and region and will range from family operations of varying scale as well as both small and large corporations and other entities. Since our inception in 2009, we have not experienced any tenant defaults at our farms and have only experienced intentional vacancies at our farms in connection with development or redevelopment activities. In most cases, we seek to renew leases with the initial tenants to whom we choose to lease the property. As part of certain property acquisitions, we have assumed part of an existing lease term, after which we have decided to pursue a lease with another tenant. For leases that provide that rental payments for a crop year are generally due in advance of the spring planting season, in the event of a tenant's failure to pay rent when due, we will seek to terminate the lease and rent the property to another tenant that could then plant and harvest a crop that year. As a result, we believe there is a reduced risk of vacancy on our farms when compared to most other types of commercial farms, such as office buildings or retail farms.
Family-Owned Farms
Nearly 98% of all U.S. farms are family owned, and family farm operations are responsible for 85% of U.S. farm production according to the USDA. Based on USDA data, the average age of a farmer continues to increase and is currently nearing 60 years old, a continuation of a 30-year trend in which the older age groups (55-64 years, 64-75 year and 75 years or older) are increasing. Given that, we believe that many farm-owning families have estate planning needs and may find the opportunity to defer capital gains taxes from the sale of their farm by exchanging it for Common Units attractive. Our ability to offer Common Units in exchange for farmland provides us with an advantage over other potential buyers as it will potentially allow us to grow our portfolio without utilizing cash and still have immediate access to income being generated by the property.
As an alternative to selling their farmland to us in an all-cash transaction, we believe that many farm owners may be interested in selling their farmland to us in exchange for Common Units in order to have an equity interest in our company and participate in any appreciation in value of our farms. By making such an exchange, these farm owners would become investors in a more diversified portfolio of agricultural real estate. Under certain circumstances, the exchange of real estate for Common Units is a tax-deferred exchange under U.S. federal income tax laws. In addition, because we intend to make
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cash distributions each quarter, Common Unitholders would receive regular quarterly cash distributions. Finally, Common Unitholders would have the flexibility to redeem their Common Units in the future for cash, or, at our election, shares of our common stock that they could then sell in the public market, thereby allowing these sellers to determine the timing of recognizing taxable gain. Because we expect the issuance of Common Units in exchange for farmland generally will be driven by the desires of prospective sellers, we do not know how frequently we will issue Common Units in exchange for farmland farms. However, we believe that using Common Units as acquisition consideration can be a significant part of our property acquisition strategy.
Underwriting Criteria and Due Diligence Process
Agricultural Sub-Adviser
Our Agricultural Sub-Adviser provides us with certain agricultural investment, acquisition and property management services. Pursuant to the terms of the Amended and Restated Sub-Advisory Agreement that will become effective upon the consummation of this offering, our Agricultural Sub-Adviser will continue to provide services to us, including identifying, analyzing and recommending potential property acquisitions, preparing a detailed acquisition package for each proposed investment and providing other services relating to asset acquisitions, portfolio management and asset management. Other than those items described above, our Agricultural Sub-Adviser does not have responsibility for the management of our company, including, without limitation, for maintaining our status as a REIT, complying with public reporting requirements and producing our financial statements. Our Agricultural Sub-Adviser's services under the Amended and Restated Sub-Advisory Agreement are not exclusive, and neither are we required to use them exclusively, and it and its directors, officers and employees are free to earn fees and provide similar investment advisory and asset management services to a variety of other entities, although the Amended and Restated Sub-Advisory Agreement requires our Agricultural Sub-Adviser to comply with certain allocation procedures relating to the method by which investment opportunities must be allocated between us and its other clients so that potential acquisitions are fairly allocated in an orderly fashion. The allocation procedures require the Agricultural Sub-Adviser to evaluate all investments identified for possible acquisition to determine certain objective characteristics, including, without limitation, transaction size, equity purchase price requirements, property type, due diligence process and closing timeline, geographic location, physical characteristics and return hurdles. The Agricultural Sub-Adviser then undertakes a screening process to determine the suitability of the investment for each account using objective criteria supplied to the Agricultural Sub-Adviser by each respective account, of which we are one. If an investment is suitable for only one account based on the investment's characteristics and the objective criteria of each account, the Agricultural Sub-Adviser will allocate the investment to that account. If a potential investment is determined to be suitable for more than one account, the investment will be allocated to the account holding the highest priority position in its queue (there may be multiple queues based on crop type or other factors). After accepting an investment opportunity from the Agricultural Sub-Adviser, that account moves to the bottom of the respective queue(s). As of the date of this prospectus, we are one of three accounts for which our Agricultural Sub-Advisor sources potential farmland properties, and only one of the other two accounts is actively in the market; however, our Agricultural Sub-Adviser may add additional accounts for which it may source potential farmland properties in the future. To date, we have not nor do we foresee having limited access to properties as a result of the queuing system, though we can give no assurances that this allocation procedure will not cause us to lose any given opportunity. Additionally, our Agricultural Sub-Adviser is not a fiduciary to AFA, our company or our operating partnership. We retain full authority and discretion for making decisions on all recommendations of our Agricultural Sub-Adviser.
Our Agricultural Sub-Adviser is compensated in connection with providing services to us and will receive, following the consummation of this offering, a quarterly management fee equal to one-quarter
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of 1% of the appraised value of our properties, or in the absence of an appraisal, the cost of such properties. In connection with asset acquisitions, our Agricultural Sub-Adviser will receive an acquisition fee of 2% of the gross purchase price or 2% of the appraised market value if the property is contributed to our operating partnership. If CAPS does not act as our selling broker upon disposition of an investment, our Agricultural Sub-Adviser will receive a disposition fee of 1% of the gross sales price. Our Agricultural Sub-Adviser will also receive an initial public offering capital compensation fee in the event less than $90 million gross of expenses is raised in our initial public offering and all performance fees due under the previous Sub-Advisory Agreement, which will no longer accrue under the Amended and Restated Sub-Advisory Agreement. Should the initial public offering raise less than $90 million, there are additional make-whole payments calculated, (i) for the acquisition fee based on 2% of the difference between $90 million and the gross proceeds raised and (ii) for the management fee based on 1% of the difference between $90 million and the gross proceeds raised. Any acquisition fee make-whole payments will be paid as acquisitions occur and any management fee make-whole payments will be paid quarterly in arrears until such time that the difference in capital has been raised by the Company (whether by additional equity issuance or through debt sources). The Amended and Restated Sub-Advisory Agreement has a term of four years commencing on the date of the consummation of this offering, but may be terminated by AFA or the Agricultural Sub-Adviser without cause as of December 31 of any calendar year, by providing notice to the other party on or before June 30 of such year. In the event AFA terminates the Amended and Restated Sub-Advisory Agreement without cause, we must pay a termination fee based on the present value of the quarterly management fee for the remainder of the term of the Amended and Restated Sub-Advisory Agreement, plus acquisition fees relating to any transactions sourced by our Agricultural Sub-Adviser that close following the date of termination.
Acquisition Strategy, Asset Selection and Management
In the normal course of our business, our management team is responsible for all investment and business strategy decisions, including making formal property decisions prior to each acquisition, disposition or other key property or portfolio related matters, and our Agricultural Sub-Adviser is predominantly responsible for property sourcing, recommendations and ongoing due diligence. Our management and our Agricultural Sub-Adviser work closely with respect to all phases of an acquisition, including due diligence and ongoing monitoring, and have formal and informal processes of communication in place that ensure a continual flow of information to and from management and our Agricultural Sub-Adviser with respect to any potential acquisitions.
The acquisition process begins with the market selection and investment criteria for potential acquisitions. Property standards criteria are established and disseminated to our Agricultural Sub-Adviser's regional asset managers. These individuals notify our Agricultural Sub-Adviser of changes in market conditions that may impact the approved strategy.
Potential investment opportunities are sourced through both internal and external resources. These resources include:
Potential investment farms are identified, pre-screened and analyzed with respect to the following characteristics of each proposed investment:
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The regional asset manager evaluates all of this information, and a decision is made to reject or recommend the property for acquisition. Once a property is recommended for acquisition, the property is subject to the target ranges described above. See "Diversification." If the investment is presented to us, our Agricultural Sub-Adviser will prepare and submit to our management and Board of Directors a recommendation presentation that contains relevant information and data obtained during the acquisition process, along with the economic analysis and pricing strategy. The recommendation presentation also contains the proposed lessee of the property, the proposed lease agreement and a proposed property manager for the property. Additional due diligence is completed under the terms of the purchase contract, which typically provides for the cancellation of the transaction if our Agricultural Sub-Adviser is not satisfied with any aspect of the property. We also conduct an independent analysis of the property prior to making an acquisition decision with respect to such property.
As part of our review, we consider how the property fits our overall investment portfolio as well as the relative investment potential of the property. After receiving approval from our Board of Directors, or appropriate sub-committee thereof, our Agricultural Sub-Adviser oversees the efforts to negotiate and close the transaction, including the engagement of legal counsel to review documentation, such as title reports, purchase and sale agreements, commodity marketing agreements and water rights documentation. Consultants may also be engaged to evaluate and advise us on property and water issues.
We believe proactive asset management is crucial to successful value creation. Our philosophy to maximize investment returns through active portfolio management, with the assistance of our Agricultural Sub-Adviser, and judicious capital expenditure is consistent with our goals. Within our Agricultural Sub-Adviser, regional asset managers begin their involvement with an individual property during the acquisition process, so a preliminary asset management plan for the property is already in place when it is acquired. Once a property is acquired, the asset manager establishes an asset management oversight plan that addresses the overall goal of value creation.
Other asset management responsibilities provided by our Agricultural Sub-Adviser include:
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Regional asset managers are also responsible for ensuring that our asset management plans are accomplished at the property level by establishing high standards for evaluation of the property tenants and on-site management firms that were previously approved by us as part of the acquisition process. Whenever possible, if an on-site third-party property management firm is employed, it will be compensated on an incentive basis in order to align its interest with our objective of maximizing the investment's performance.
Selecting Professional Farmer Tenants
Our professional farmer tenant selection process focuses on the reputation, scale, expertise and financial strength of potential professional farmer tenants. In evaluating potential professional farmer tenants, our management and our Agricultural Sub-Adviser review numerous factors including, but not limited to, the following:
Our professional farmer tenant selection process involves a financial evaluation of the potential professional farmer tenant to ensure that it will be able to comply with the terms of the lease. Additionally, once selected, we continue to monitor tenant credit quality throughout the term of the lease. Depending on the specific facts and circumstances of the lease terms, the property and the professional farmer tenant, the evaluation steps will vary. For example, a one year lease with all cash paid at the beginning of the year prior to planting, growing and harvest minimizes credit risk. For a multi-year cash lease, the credit quality review is significantly more important in determining tenant
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quality. However, regardless of type of lease, crop yield at the time of a scheduled lease payment may be used to offset a tenant default. Our Amended and Restated Sub-Advisory Agreement provides for the Agricultural Sub-Adviser's analysis of the credit worthiness of the proposed lessee, if any, as one of the required due diligence items prior to leasing. Separately, the proposed professional farmer tenant's financial statements or balance sheet may be requested and, in certain cases, a third party provided credit report may be obtained. The professional farmer tenant's farming reputation, expertise, track record and quality of operations are a priority particularly for properties with crop share leases or properties from which we will receive a share of revenue from the crop produced. See "Investment Focus and ProcessUnderwriting Criteria and Due Diligence ProcessSelecting Tenants" and "Risk FactorsWe may be subject to risks associated with our tenants' financial condition and liquidity position".
In general, farmland differs from other real property (e.g., office buildings, apartment buildings, retail shopping centers) where a vacancy translates into a lack of revenue and increased expenses because farmland can generate economic returns, if necessary, without being leased, including through direct operation or contract farming (which activities may be required to be structured through a TRS) or may be farmed through share farming agreements, where the landowner provides the land, the farmer provides the labor and the profit is shared (which activities also may be required to be structured through a TRS). Farms with certain characteristics of high quality soil, pure fresh water availability and location in prime weather regions typically attract top tier professional farmer tenants of higher quality, and all of our mature farms, to the extent not under development, are currently 100% leased. In light of the strong rental market for farmland and our current and historical 100% lease rates for mature permanent farms, we have no current plans to pursue any of these arrangements for our mature permanent farms and have never done so in the past; however, we may determine that an alternative arrangement is appropriate for certain of our development properties before they become commercially productive and reliable.
In addition, we hire property managers, which in all instances to date has been CAPS, to provide ongoing property management services. As part of these services, the on-site property manager will make sure the tenant is adhering to terms of leases, will conduct onsite visits and will utilize any suggested improvement techniques ( e.g., new fertilizer regimen). To the extent a problem in the manner in which the tenant is operating the property is not discovered by the applicable property manager, the tenant could damage the property.
Property Management
In the acquisition proposals that our Agricultural Sub-Adviser provides to us, it includes a recommendation proposing a third party to provide on-site property management services. In most cases, our Agricultural Sub-Adviser will recommend CAPS, its affiliate, to serve as the on-site property management firm, and we retain the decision making authority for each property manager selection. We believe the use of CAPS provides us and our Agricultural Sub-Adviser the ability to:
Furthermore, CAPS has extensive experience in almost every major crop and has ongoing relationships with managers and farmers in most growing areas. In those cases when CAPS is not the recommended manager, the recommendation will be based on, among other factors, (i) the firm's familiarity with the proposed investment, (ii) the firm's experience with the applicable property type, (iii) the firm's reputation in the subject market, (iv) the firm's experience in optimizing property performance, (v) consideration of the past and present farms managed by the firm, (vi) the firm's form of operating and financial reports for farms, (vii) recommendations from existing clients (if available), (viii) an analysis of the firm's financial condition, including a review of its financial statements, and (ix) a review of a sample management plan from the firm for a similar property type. Our Agricultural Sub-Adviser shall attempt to identify existing or potential conflicts of interest the property management firm might have which would or could affect our interests in the proposed investment. See "Certain Relationships and Related Party TransactionsProperty Management."
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Appraisals
Appraised values referred to herein reflect the March 31, 2015 appraised market value from independent appraisal firms employing a state certified appraiser with local knowledge and expertise and who is certified as either an A.R.A. (Accredited Rural Appraiser) or M.A.I. (Member of the Appraisal Institute) appraiser or state certified as a Certified General Real Estate Appraiser. See "Experts". Each full appraisal was prepared in conformity with the Uniform Standards of Professional Appraisal Practice ("USPAP") and typically utilized three approaches to value: the cost approach, the income capitalization approach and the comparable sales approach, leading to a final opinion of the appraised value of the subject property by the appraiser. Each property in our portfolio was appraised as of March 31, 2015 other than Falcon Farms and the second parcel of Kimberly Vineyard, which were acquired in the fourth quarter 2014 and are held at cost.
Our Portfolio
As of the date of this prospectus, we, through our wholly-owned subsidiaries, own 100% fee simple interest in 17 farms located in Alabama, Arkansas, California, Florida, Illinois and Georgia, consisting of a total of approximately 15,378 gross acres of farmland. As a public company, we intend to continue to commission regular third-party appraisals, which will typically be on an annual basis, and which are intended to be aligned with common practices in the REIT sector. Third-party appraisals provide an independent indication of any capital appreciation and are therefore important to the growth component of our investment strategy. The most recent appraisals on our farms were conducted as of March 31, 2015 for all farms acquired prior to the fourth quarter of 2014. Appraisals are estimates of market value as of a certain date and time based on available market and property information, all of which can change, and although we believe that the appraisals are reasonable, they should not be relied upon as a certain indication of value if we were to sell the property today.
Our Property Locations by USDA Farmland Economic Regions
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Portfolio Summary
The following table provides an overview of the 17 farms in our portfolio as of the date of this prospectus. As of March 31, 2015 the appraised value of our portfolio was $171.1 million reflecting an increase in value of 14.1% over total cost. (1)
Property Name
|
Crops | County, State |
Date
Acquired (1) |
Total
Cost (2) |
Current
Appraised Value (3) |
Tillable
Acres |
Gross
Acres |
2014
Contractual Rent (Fixed & Participating) (4) |
2015 Q1
Contractual Rent (Fixed & Participating) (5) |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Permanent Crop: |
|||||||||||||||||||||||||
Kimberly Vineyard 1 |
Wine grapes | Monterey, CA | Aug-10 | $ | 3,123,614 | $ | 4,000,000 | 81 | 85 | $ | 295,320 | $ | 28,782 | ||||||||||||
Kimberly Vineyard 2 |
Wine grapes | Monterey, CA | Dec-14 (6) | 9,953,943 | (7) | 9,953,943 | 164 | 175 | 20,679 | (8) | 76,393 | (8) | |||||||||||||
Golden Eagle Ranch |
Almonds | Stanislaus, CA | Mar-12 & Aug-12 | 17,274,256 | 22,250,000 | 1,056 | 1,112 | 2,562,472 | (9) | 961,203 | (9) | ||||||||||||||
Quail Run Vineyard |
Wine grapes | Monterey, CA | Nov-12 | 9,744,219 | 9,300,000 | (10) | 223 | 240 | 369,491 | (11) | 138,965 | (11) | |||||||||||||
Blue Heron Farms |
Walnuts | Kings, CA | Nov-13 | 14,237,861 | 16,000,000 | 380 | 430 | 774,779 | (9) | 120,906 | (9) | ||||||||||||||
Falcon Farms |
Pecans | Dougherty, GA; Lowndes, AL | Nov-14 | 8,156,694 | (7) | 8,156,694 | 1,165 | 1,840 | | (12) | 56,350 | (12) | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total Permanent Crop: |
62,490,587 | 69,660,637 | 3,069 | 3,882 | 4,022,741 | 1,382,599 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Specialty/Vegetable Row: |
|||||||||||||||||||||||||
Sweetwater Farm |
Varied | Jackson, FL | Dec-10 | 5,404,534 | 6,200,000 | 1,450 | 1,624 | 380,300 | (13) | 95,075 | (13) | ||||||||||||||
Sandpiper Ranch |
Strawberries/ Vegetables | Santa Cruz, CA | Dec-11 & Apr-12 | 7,957,030 | 9,000,000 | 158 | 184 | 405,604 | (14) | 97,650 | (14) | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total Specialty/ Vegetable Row: |
13,361,564 | 15,200,000 | 1,608 | 1,808 | 785,904 | 192,725 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Commodity Row: |
|||||||||||||||||||||||||
Pleasant Plains |
Corn/Soybeans | Douglas, McLean, Cass, Morgan & Sangamon, IL | Jul-10 | 8,872,020 | 14,928,000 | 1,159 | 1,196 | 503,730 | (13) | 125,933 | (13) | ||||||||||||||
Macomb Farm (15) |
Corn/Soybeans | McDonough, IL | Dec-10 | 2,596,385 | 5,349,000 | 422 | 434 | 180,200 | (14) | 45,050 | (14) | ||||||||||||||
Tillar Farm |
Cotton/ Rice/ Corn/Soybeans | Drew, AR | May-11 | 4,172,034 | 6,290,000 | 1,248 | 1,444 | 208,500 | (14) | 52,125 | (14) | ||||||||||||||
Kane County Farms |
Corn/Soybeans | Kane, IL | Jun-11 | 17,378,877 | 20,408,000 | 1,617 | 1,652 | 701,308 | (14) | 175,587 | (14) | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total Commodity Row: |
33,019,316 | 46,975,000 | 4,446 | 4,726 | 1,593,738 | 398,695 | |||||||||||||||||||
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Development (16) : |
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Roadrunner Ranch |
Citrus | Tulare, CA | Apr-11 & Sep-11 | 6,953,275 | 7,074,000 | 227 | 244 | | (17) | (17) | |||||||||||||||
Condor Ranch |
Avocados/ Lemons | Ventura, CA | Nov-11 & Dec-11 | 9,361,633 | 9,700,000 | 261 | 786 | 125,931 | (18) | 23,600 | (18) | ||||||||||||||
Grassy Island Groves |
Citrus | Okeechobee, FL | Dec-12 | 4,111,289 | 3,900,000 | 451 | 623 | | (19) (20) | | (19) (20) | ||||||||||||||
Blue Cypress Farm |
Varied | Brevard, FL | Feb-13 | 10,442,223 | 11,500,000 | 2,036 | 2,694 | | (17) | | (17) | ||||||||||||||
Hawk Creek Ranch |
Pistachios | Yolo, CA | Oct-13 & Feb-14 | 5,922,340 | 5,950,000 | 425 | 524 | 89,833 | (17) (22) | | (17) | ||||||||||||||
Pintail Vineyard |
Wine grapes | Yolo, CA | Nov-13 | 1,325,187 | 1,125,000 | 87 | 91 | 10,791 | (17) (22) | | (17) | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total Development: |
38,115,947 | 39,249,000 | 3,487 | 4,962 | 226,555 | 21,678 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
TOTAL: |
$ | 146,987,414 | (21) | $ | 171,084,637 | 12,610 | 15,378 | $ | 6,628,938 | $ | 1,995,697 | ||||||||||||||
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Portfolio Performance
Our long-term objective is to own and acquire a diversified portfolio of high-quality cropland that includes farmland development. To date, we have acquired 17 farms through 23 transactions, totaling approximately 15,378 gross acres. As of March 31, 2015, we have received updated appraisals from third parties for 16 of the 17 farms we held as of that date, all of which were acquired prior to the fourth quarter of 2014. Based on these appraisals, the annualized total return, on a gross basis, for the ten mature farms that we have held for 12 months or more was 11.0% through March 31, 2015, and the cumulative gross total return for these farms was approximately 55.2% since their respective inceptions through March 31, 2015, with an average holding period of 3.9 years. These returns currently exclude farms that were held for less than 12 months as of March 31, 2015 and development farmland that is not yet commercially productive.
Our quarterly and annualized total returns include both income and capital appreciation and are calculated using the appraised market values of our farms. The returns we may realize upon the actual sale of a farm may be more or less than the appraised value for a variety of reasons. Therefore, total annualized return should not be considered in place of our net income (loss) and our cash flow from operations calculated in accordance with GAAP. In addition to the below summary of property-by-property annualized total returns, please find more detailed information on each property, including more detailed charts relating to our annual appreciation returns and annualized income returns, in the section entitled "Our PortfolioDescription of Our Farms."
The tables below summarize the annualized total return, annualized income return and annualized total return for our farms (excluding development farms) on a quarterly basis.
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Quarterly Capital Appreciation Return |
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Three Months Ended | Three Months Ended | Three Months Ended |
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Mar. 31 | June 30 | Sept. 30 | Dec. 31 | Mar. 31 | June 30 | Sept. 30 | Dec. 31 | Mar. 31 | June 30 | Sept. 30 | Dec. 31 | Mar. 31 |
Annualized
Capital Appreciation Return (1) (2) |
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|
2012 | 2013 | 2014 | 2015 | |||||||||||||||||||||||||||||||||||||||
Pleasant Plains |
0.37 | % | 0.00 | % | (2.86 | )% | 14.31 | % | 0.28 | % | 2.27 | % | 0.00 | % | 5.90 | % | (5.04 | )% | 5.31 | % | 0.00 | % | (2.47 | )% | 0.00 | % | 12.31 | % | |||||||||||||||
Kimberly Vineyard (3) |
6.02 | % | 5.37 | % | 0.30 | % | (4.99 | )% | 0.00 | % | 0.00 | % | 0.00 | % | 4.84 | % | 0.00 | % | 0.00 | % | 2.25 | % | 0.30% | (4) | 4.12 | % | 3.03 | % | |||||||||||||||
Macomb Farm |
4.94 | % | 3.90 | % | 2.39 | % | 7.91 | % | 2.59 | % | 4.93 | % | 8.25 | % | 0.88 | % | 8.50 | % | (0.02 | )% | 0.09 | % | 0.15 | % | 0.00 | % | 16.49 | % | |||||||||||||||
Sweetwater Farm |
0.00 | % | 0.00 | % | 0.00 | % | 3.48 | % | (0.16 | )% | 0.00 | % | 0.00 | % | 1.68 | % | 1.71 | % | 0.00 | % | (0.61 | )% | (1.60 | )% | 0.00 | % | 3.42 | % | |||||||||||||||
Tillar Farm |
0.00 | % | 6.08 | % | 3.35 | % | 4.32 | % | 2.69 | % | 0.00 | % | 5.85 | % | 8.39 | % | 0.00 | % | 5.01 | % | 1.19 | % | 3.05 | % | 0.64 | % | 11.63 | % | |||||||||||||||
Kane County Farms |
0.00 | % | 0.00 | % | 0.00 | % | 4.45 | % | 4.68 | % | 2.85 | % | 0.00 | % | 4.74 | % | 0.00 | % | 0.00 | % | 0.00 | % | (5.66 | )% | (1.60 | )% | 4.40 | % | |||||||||||||||
Sandpiper Ranch |
0.01 | % | 0.00 | % | 0.00 | % | (1.98 | )% | 0.64 | % | 0.00 | % | 0.00 | % | 0.64 | % | 1.27 | % | 8.80 | % | 0.00 | % | 3.47 | % | 0.00 | % | 3.89 | % | |||||||||||||||
Golden Eagle Ranch |
0.00 | % | 0.00 | % | 0.41 | % | (0.08 | )% | 3.22 | % | (0.02 | )% | 3.10 | % | 6.09 | % | 5.66 | % | 2.66 | % | 0.00 | % | 5.32 | % | 8.96 | % | |||||||||||||||||
Quail Run Vineyard (5) |
0.00 | % | 0.00 | % | 0.00 | % | (5.66 | )% | (1.10 | )% | (4.21 | )% | (7.77 | )% | 11.21 | % | 2.40 | % | (2.77 | )% | |||||||||||||||||||||||
Blue Heron Farms |
0.00 | % | 0.00 | % | 0.00 | % | 12.89 | % | (0.27 | )% | 9.95 | % | |||||||||||||||||||||||||||||||
Falcon Farms |
0.00 | % | 0.00 | % | 0.00 | % |
|
Quarterly Income Return |
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Three Months Ended | Three Months Ended | Three Months Ended |
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Mar. 31 | June 30 | Sept. 30 | Dec. 31 | Mar. 31 | June 30 | Sept. 30 | Dec. 31 | Mar. 31 | June 30 | Sept. 30 | Dec. 31 | Mar. 31 |
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|
Annualized
Income Return (1) (2) |
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|
2012 | 2013 | 2014 | 2015 | |||||||||||||||||||||||||||||||||||||||
Pleasant Plains |
0.68 | % | 0.67 | % | 0.66 | % | 0.68 | % | 0.75 | % | 0.75 | % | 0.73 | % | 0.74 | % | 0.70 | % | 0.74 | % | 0.70 | % | 0.63 | % | 0.68 | % | 3.01 | % | |||||||||||||||
Kimberly Vineyard (3) |
0.78 | % | 0.93 | % | 0.86 | % | 9.79 | % | 0.91 | % | 1.13 | % | 0.88 | % | 6.68 | % | 0.86 | % | 0.85 | % | 0.85 | % | 2.66% | (4) | 0.79 | % | 9.66 | % | |||||||||||||||
Macomb Farm |
0.76 | % | 0.71 | % | 0.70 | % | 0.67 | % | 0.53 | % | 0.94 | % | 1.69 | % | 1.14 | % | 0.71 | % | 1.01 | % | 0.72 | % | 0.72 | % | 0.73 | % | 3.42 | % | |||||||||||||||
Sweetwater Farm |
1.06 | % | 1.06 | % | 1.04 | % | 1.04 | % | 1.02 | % | 1.02 | % | 1.02 | % | 1.01 | % | 1.35 | % | 1.32 | % | 1.31 | % | 1.31 | % | 1.37 | % | 4.55 | % | |||||||||||||||
Tillar Farm |
1.04 | % | 0.90 | % | 0.97 | % | 0.94 | % | 0.94 | % | 0.92 | % | 0.84 | % | 0.86 | % | 0.83 | % | 0.60 | % | 0.79 | % | 0.78 | % | 0.65 | % | 3.81 | % | |||||||||||||||
Kane County Farms |
0.69 | % | 0.77 | % | 0.90 | % | 0.88 | % | 0.85 | % | 0.74 | % | 0.79 | % | 0.70 | % | 0.67 | % | 0.65 | % | 0.67 | % | 0.66 | % | 0.70 | % | 2.95 | % | |||||||||||||||
Sandpiper Ranch |
1.09 | % | 1.11 | % | 1.25 | % | 1.04 | % | 1.13 | % | 1.17 | % | 1.19 | % | 1.24 | % | 1.18 | % | 1.19 | % | 1.09 | % | 1.09 | % | 1.22 | % | 4.70 | % | |||||||||||||||
Golden Eagle Ranch |
(0.16 | )% | (0.19 | )% | 1.03 | % | 2.10 | % | 2.31 | % | 4.86 | % | 1.09 | % | 3.10 | % | 6.85 | % | 1.97 | % | 0.82 | % | 4.40 | % | 9.64 | % | |||||||||||||||||
Quail Run Vineyard (5) |
1.13 | % | 1.67 | % | 1.65 | % | 0.90 | % | 0.68 | % | 0.53 | % | 0.58 | % | 2.63 | % | 1.50 | % | 5.10 | % | |||||||||||||||||||||||
Blue Heron Farms |
0.07 | % | 0.06 | % | 0.09 | % | 4.83 | % | 0.68 | % | 4.59 | % | |||||||||||||||||||||||||||||||
Falcon Farms |
0.00 | % | 0.26 | % | 0.52 | % |
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|
Quarterly Total Return |
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Three Months Ended | Three Months Ended | Three Months Ended |
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Mar.31 | June 30 | Sept.30 | Dec.31 | Mar.31 | June 30 | Sept.30 | Dec.31 | Mar.31 | June 30 | Sept.30 | Dec.31 | Mar. 31 |
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Annualized
Total Return (1) (2) |
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2012 | 2013 | 2014 | 2015 | |||||||||||||||||||||||||||||||||||||||
Pleasant Plains |
1.05 | % | 0.67 | % | (2.20 | )% | 14.99 | % | 1.03 | % | 3.03 | % | 0.73 | % | 6.64 | % | (4.34 | )% | 6.05 | % | 0.70 | % | (1.84 | )% | 0.68 | % | 15.58 | % | |||||||||||||||
Kimberly Vineyard (3) |
6.80 | % | 6.30 | % | 1.16 | % | 4.80 | % | 0.91 | % | 1.13 | % | 0.88 | % | 11.52 | % | 0.86 | % | 0.85 | % | 3.10 | % | 2.96% | (4) | 4.90 | % | 13.05 | % | |||||||||||||||
Macomb Farm |
5.70 | % | 4.61 | % | 3.08 | % | 8.58 | % | 3.12 | % | 5.86 | % | 9.94 | % | 2.01 | % | 9.21 | % | 0.99 | % | 0.81 | % | 0.87 | % | 0.72 | % | 20.31 | % | |||||||||||||||
Sweetwater Farm |
1.06 | % | 1.06 | % | 1.04 | % | 4.52 | % | 0.86 | % | 1.02 | % | 1.02 | % | 2.69 | % | 3.06 | % | 1.32 | % | 0.70 | % | (0.29 | )% | 1.37 | % | 8.09 | % | |||||||||||||||
Tillar Farm |
1.04 | % | 6.98 | % | 4.31 | % | 5.26 | % | 3.63 | % | 0.92 | % | 6.68 | % | 9.25 | % | 0.83 | % | 5.61 | % | 1.98 | % | 3.83 | % | 1.30 | % | 15.77 | % | |||||||||||||||
Kane County Farms |
0.69 | % | 0.77 | % | 0.90 | % | 5.33 | % | 5.53 | % | 3.59 | % | 0.79 | % | 5.44 | % | 0.67 | % | 0.65 | % | 0.67 | % | (4.99 | )% | (0.90 | )% | 7.44 | % | |||||||||||||||
Sandpiper Ranch |
1.10 | % | 1.11 | % | 1.25 | % | (0.94 | )% | 1.78 | % | 1.17 | % | 1.19 | % | 1.88 | % | 2.45 | % | 9.99 | % | 1.09 | % | 4.56 | % | 1.22 | % | 8.72 | % | |||||||||||||||
Golden Eagle Ranch |
(0.16 | )% | (0.19 | )% | 1.44 | % | 2.01 | % | 5.53 | % | 4.84 | % | 4.19 | % | 9.18 | % | 12.50 | % | 4.63 | % | 0.82 | % | 9.72 | % | 19.11 | % | |||||||||||||||||
Quail Run Vineyard (5) |
1.12 | % | 1.67 | % | 1.65 | % | (4.76 | )% | (0.42 | )% | (3.68 | )% | (7.19 | )% | 13.84 | % | 3.89 | % | 2.10 | % | |||||||||||||||||||||||
Blue Heron Farms |
0.07 | % | 0.06 | % | 0.09 | % | 17.72 | % | 0.41 | % | 14.51 | % | |||||||||||||||||||||||||||||||
Falcon Farms |
0.00 | % | 0.26 | % | 0.52 | % |
Description of Our Farms
We have a well-diversified portfolio of high-quality cropland across the U.S., comprised of approximately 15,378 gross acres of cropland in Alabama, Arkansas, California, Florida, Georgia and Illinois, of which approximately 12,610 acres are farmable. The aggregate current appraised value of these farms is approximately $171.1 million as of March 31, 2015, with farms acquired during the fourth quarter of 2014 held at cost. The aggregate total cost, including capital expenditures, of these farms is $147.0 million as of March 31, 2015. Both the aggregate current appraised value and the aggregate total cost of these farms include approximately $7.2 million of capital expenditures on farmland development for 2014 and an additional $1.4 million of capital expenditures through March 31, 2015. See "Our Business and PropertiesOur Portfolio" for information regarding our current appraisal process.
Based on current appraised value as of March 31, 2015, California accounted for approximately 54.8% of the land assets followed by Illinois, 23.8%, Florida, 12.6%, Alabama and Georgia, 4.8%, and Arkansas, 3.7%. While there is a relatively high concentration of farms in California, the farms are located in seven different counties along the central valley and coastal regions and produce a wide variety of agricultural products. From a property standpoint, mature permanent crop farms accounted for 40.7% of the current total appraised value of our portfolio as of March 31, 2015, with specialty/vegetable row crop farms, commodity row crop farms and permanent development farms accounting for 8.9%, 27.5% and 22.9%, respectively. We expect the portfolio distribution to change over time as development farms enter the mature stage and appreciate in value. From a crop basis, there are over 21 different crop types currently growing on our farms and in rotation.
Cropland Acquisitions under Evaluation
As of the date of this prospectus, we have identified and are in various stages of reviewing prospective farmland acquisitions, which we refer to as our acquisition pipeline, representing various crop types and geographic regions throughout the U.S., though there can be no assurances we will
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complete any of these potential acquisitions. We believe each of the farms being evaluated by us for potential acquisition meets our investment guidelines. In determining which farmland properties to pursue, we evaluate a number of qualitative and quantitative factors including, but not limited to, the following: (i) overall analysis of the property's quality and its physical attributes such as soil types and quality, water availability and quality, and appropriateness of the location for the crop type produced; (ii) projected income, appreciation and risk performance relative to our objectives; (iii) analysis of historical crop production of the property; (iv) an analysis of the specific crop type and the current local and broader market dynamics; (v) analysis of purchase price compared to current and historical market values; (vi) comprehensive environmental assessment performed by independent, professional consultants; (vii) evaluation of exit strategies; and (viii) assessment of the quality of prospective professional farmer tenants.
Properties in our acquisition pipeline are sourced in a number of ways, both internally from our management team as well as through our Agricultural Sub-Adviser, and while we solely determine whether to acquire a potential farmland property, we rely on and work closely with our Agricultural Sub-Adviser throughout all stages of due diligence and negotiation up until a potential farmland property is acquired. Initially, very little information other than the crop planted and its potential for sale, may be known about a property. As the due diligence process continues a property may move towards a more serious stage of review or negotiation or may be removed from the pipeline altogether; the ultimate goal in maintaining an active pipeline of properties for potential acquisition that are in various stages of review is to determine which potential properties meet our high quality standards and investment criteria. We have engaged in preliminary discussions with some of the owners and commenced the initial due diligence process on certain of the farms in our acquisition pipeline. Other than as noted below, we have not agreed upon price or terms relating to, and, prior to completion of this offering, do not expect to agree upon price and terms or enter into binding commitments with respect to the acquisition of any property, and therefore we do not believe any potential property acquisition other than as noted below is probable at this time (although we believe we can acquire a substantial number of farms using the net proceeds from this offering in the first few calendar quarters after the offering).
The process for acquiring farmland varies in certain ways from the process for acquiring other types of commercial real estate such as office buildings, shopping centers and apartments. The due diligence for farmland property acquisitions may include analysis of factors like soil attributes that are less relevant or possibly irrelevant in evaluating other types of real estate. Further, the process also varies depending on the crop type. For example, farmland for commodity row crops, which may be purchased from an auction and close in a very rapid amount of time, typically takes less time to acquire (typically 60-90 days) than permanent crop farmland, which is a more fragmented, less publicized market that may require a longer period of time to negotiate and close (typically 90-120 days). In acquiring the 17 properties in our portfolio, we have reviewed an additional 280 properties through March 31, 2015 that we elected not to pursue based on diligence, an inability to agree on acceptable terms, another bidder or other reasons, yielding an acquisition rate of approximately 6%. The historical duration from preliminary discussions through closed acquisition for our properties has varied from several weeks to almost one year, and we estimate the duration is most often within a range of 60 to 120 days.
Farms Under Evaluation
We have executed a purchase and sale agreement with the seller of a California mature permanent crop farm for an agreed upon sale price of $19.4 million. The farm consists of approximately 619 gross acres, with approximately 510 tillable acres planted with pistachios, and has two on-site wells, which are the farm's primary water source. This farm was an off-market property and was sourced by our Agricultural Sub-Adviser using its local presence and deep relationships. Due diligence on this property
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is continuing, with closing to occur within 75 days assuming the satisfaction of all closing conditions. The farm is currently owner-operated, with no leasing history. We are in the process of negotiating a lease with the seller for this farm, though no assurances can be given that we will be successful.
We have also executed a purchase and sale agreement with the seller of a California mature permanent crop farm for an agreed upon sale price of $5.3 million. The farm consists of approximately 135 gross acres, with approximately 132 tillable acres planted with almonds, and has one on-site well, which is the farm's primary water source. This farm was an off-market property and was sourced by our Agricultural Sub-Adviser using its local presence and deep relationships. Due diligence on this property is continuing, with 60 days to complete and with closing to take place the earlier of September 30, 2015 or 7 days following the 2015 almond harvest, assuming the satisfaction of all closing conditions. The farm is currently owner-operated, with no leasing history. While due diligence is ongoing, given this farm's proximity in location, it may be aggregated with our existing Golden Eagle Ranch, though no assurances can be given.
While we anticipate leasing the California pistachio farm back to the seller upon closing, we expect a competitive tenant environment to develop for both property types and believe there is a strong market in place for direct operations as well as associated services, including harvesting, processing (hulling, shelling and packaging), warehousing, marketing and shipping. We believe that increased production of pistachios and almonds and the quality of the crops will generate increased leasing demand for these farms. These non-binding letters of interest are subject to significant contingencies and conditions and no assurances can be provided as to whether or when definitive documentation for such acquisitions may be executed.
The seller of our Blue Heron Farm owns approximately 264 acres of young pistachio trees and approximately 164 acres of young walnut trees in California for which we have obtained a right of first offer and right of first refusal and is valued at approximately $21.0 million based on our internal estimates. We do not intend to purchase the property at this time and therefore do not consider this property as a probable acquisition. There can be no assurance that we will complete the acquisition of any property that we are currently evaluating, including the acquisition discussed above, or that the purchase prices of the acquisitions under evaluation will be in the amounts we currently anticipate.
Historical Occupancy and Average Rent Per Acre
The following table sets forth, for the three months ended March 31, 2015 and for each of the years ended December 31, 2014, 2013, 2012 and 2011, the occupancy and average rent per acre, as well
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as the total annual rent and total acreage, for the mature crop producing farms included in our portfolio.
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Three
Months Ended March 31, 2015 |
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|
|
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|
Year Ended December 31, | |||||||||||||||
|
2014 | 2013 | 2012 | 2011 | ||||||||||||
Permanent crops (1) : |
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Occupancy (2) |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Total leased acreage |
2,883 | 1,561 | (3) | 1,561 | (3) | 1,369 | 80 | |||||||||
Total rent |
$ | 1,382,599 | $ | 4,022,741 | (4) | $ | 2,771,657 | (4) | $ | 699,958 | $ | 257,330 | ||||
Average rent per leased acre |
$ | 480 | $ | 2,577 | $ | 1,776 | $ | 511 | $ | 3,217 | ||||||
Specialty/vegetable row crops: |
||||||||||||||||
Occupancy (2) |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Total leased acreage |
1,377 | 1,377 | 1,377 | 1,377 | 1,377 | |||||||||||
Total rent |
$ | 192,725 | $ | 785,904 | $ | 681,860 | $ | 643,691 | $ | 272,616 | (5) | |||||
Average rent per leased acre |
$ | 140 | $ | 571 | $ | 495 | $ | 467 | $ | 198 | ||||||
Commodity row crops: |
||||||||||||||||
Occupancy (2) |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Total leased acreage |
4,441 | 4,441 | 4,441 | (6) | 4,520 | 4,520 | ||||||||||
Total rent |
$ | 398,695 | $ | 1,593,738 | $ | 1,615,224 | $ | 1,485,837 | $ | 1,012,198 | ||||||
Average rent per leased acre |
$ | 90 | $ | 359 | $ | 364 | $ | 329 | $ | 224 | ||||||
Total mature crop portfolio (7) : |
||||||||||||||||
Occupancy (2) |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Total leased acreage |
8,701 | 7,379 | 7,379 | 7,266 | 5,977 | |||||||||||
Total annual rent |
$ | 1,994,019 | $ | 6,402,384 | $ | 5,068,743 | $ | 2,829,486 | $ | 1,542,144 | ||||||
Average annual rent per leased acre |
$ | 227 | $ | 868 | $ | 687 | $ | 389 | $ | 258 |
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and $99,599 in 2013 from a mature portion of our Grassy Island Groves development property, which is not reflected in this table. In addition, in acquiring our Pintail Vineyard property in November 2013 and our Hawk Creek Ranch property in October 2013 and February 2014, we assumed crop share leases for one crop season after which the properties have commenced redevelopment and are no longer subject to leases. Total occupancy rates inclusive of development properties were 75.0% in the first quarter of 2015, 72.4% in 2014, 71.0% in 2013, 94.5% in 2012 and 95.6% in 2011.
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Description of Our Leases
The following table provides information regarding the leases in place for each property as of the date of this prospectus.
Leases by Property
(1)
|
Leased Acreage | Term | Expiration | Renewal Rights | Lease Type | Timing of Rental Payment | |||||||
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Permanent crops |
|||||||||||||
Kimberly Vineyard: |
80 | 5 years | Later of 10/31/16 or one week after the last day of the 2016 harvest. (2) | Option to extend the lease term for an additional five years (3) | Flexible (4) | (i) Fixed rent component due in four equal installments on February 1, May 1, August 1 and December 15 of each calendar year and (ii) flexible rent component due no later than February 1 of each year. | |||||||
|
175 |
5 years |
Later of 10/31/19 or one week after the last day of the 2019 harvest. (2) |
Option to extend the lease term for an additional five years(5) |
Flexible (4) |
(i) Fixed rent component due in four equal installments on March 15, June 15, September 15 and December 15 of each calendar year (first payment due February 1, 2015) and (ii) flexible rent component due no later than February 1following the harvest for each crop year. |
|||||||
Golden Eagle Ranch: |
1,065 |
5 years |
The first to occur of 11/30/19 or one week after the last day of the 2019 almond harvest. |
Option to extend the lease term for an additional five years (6) |
Flexible (7) |
(i) Fixed rent component for certain structural improvements on the property due on a monthly basis, (ii) fixed rent component per tillable acre due in four equal installments on March 1, June 1, September 1 and December 1 of each calendar year, and (iii) flexible rent component due in four installments on December 31, March 31, October 31 and July 31 of each calendar year. |
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Leases by Property
(1)
|
Leased Acreage | Term | Expiration | Renewal Rights | Lease Type | Timing of Rental Payment | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Quail Run Vineyard: |
145 | 2 years | 10/31/16 | Option to extend the lease term for an additional five years (8) | Flexible (9) | (i) Fixed rent due in equal quarterly installments on March 15, June 15, September 15 and December 15 of each year and (ii) crop share rent due no later than February 1 following the harvest for each crop year. | |||||||
Blue Heron Farm: |
271 |
(10) |
3 years |
11/30/17 |
Option to extend the lease term for an additional five years (11) |
Flexible (12) |
(i) Fixed rent component due in four equal installments on December 1, March 1, June 1 and August 1 of each crop year and (ii) flexible rent component due no later than December 31 following each crop year and after the crop is 100% sold, but in event later than April 30 of the year following harvest. |
||||||
Falcon Farms: |
1,165 |
(20) |
2 years |
Earlier of 11/30/16 or one week after the last day of the 2016 harvest. |
N/A |
Flexible (13) |
(i) Fixed base rent component due on January 1 of each calendar year and (ii) flexible rent component due in three installments on February 15, May 15, and September 15 of each year. |
||||||
Specialty/vegetable row crops |
|||||||||||||
Sweetwater Farm: |
1,220 | 3 years | 12/31/16 | May be extended upon the mutual written consent of the parties. | Fixed (14) | Due on January 1 of each calendar year | |||||||
Sandpiper Ranch: |
157 |
3 years |
Earlier of 12/31/15 or the completion of the 2015 harvest |
Option to extend the lease term for an additional three years (15) |
Fixed (16) |
Due in semi-annual installments on January 1 and July of each calendar year. |
|||||||
Commodity row crops |
|||||||||||||
Pleasant Plains: |
1,158 | 3 years | 12/31/15 | May be extended upon the mutual written consent of the parties. | Fixed (14) | Due on March 1 of each calendar year. |
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Leases by Property
(1)
|
Leased Acreage | Term | Expiration | Renewal Rights | Lease Type | Timing of Rental Payment | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Macomb Farm: |
424 |
3 years |
12/31/16 |
May be extended upon the mutual written consent of the parties. |
Fixed |
Due on March 1 of each calendar year. |
|||||||
Tillar Farm: |
156.5 |
1 year |
12/31/15 |
May be extended upon the mutual written consent of the parties. |
Fixed |
Due semi-annually on April 1 and November 1 of 2015 |
|||||||
|
1,091.5 |
1 year |
12/31/15 |
May be extended upon the mutual written consent of the parties. |
Fixed |
Due semi-annually on April 1 and November 1 of 2015 |
|||||||
Kane County Farms: |
948.7 |
2 years |
12/31/15 |
May be extended upon the mutual written consent of the parties. |
Fixed |
Cash Rent due on March 1 of each calendar year. Building rent payable on the first of each month. |
|||||||
|
366.1 |
2 years |
12/31/15 |
May be extended upon the mutual written consent of the parties. |
Fixed |
Due in two equal installments on March 1 of each calendar year. |
|||||||
|
296 |
2 years |
12/31/15 |
May be extended upon the mutual written consent of the parties. |
Fixed |
Due in two equal installments on March 1 of each calendar year. |
|||||||
Development |
|||||||||||||
Condor Ranch: |
44 | (17) | 4 years | Later of 11/1/15 or one week after the last day of the 2015 avocado harvest. (4) | N/A | Flexible (18) | (i) Fixed rent components due in four equal installments on January 1, April 1, July 1 and October 1 of each calendar year and (ii)flexible rent component due no later than November 1 of each year. | ||||||
|
12 |
(19) |
4 years |
Later of 11/1/15 or one week after the last day of the 2015 avocado harvest. (4) |
N/A |
Flexible (18) |
(i) Fixed rent components due in four equal installments on January 1, April 1, July 1 and October 1 of each calendar year and (ii)flexible rent component due no later than November 1 of each year. |
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Mature Permanent Crop Farms
Expenses. All of our mature permanent crop farm leases provide that we are responsible for major capital expenditures, with our Golden Eagle Ranch and Blue Heron Farms leases specifying that we are responsible for capital expenditures only in excess of certain amounts. Additionally, under each of our permanent crop leases, tenants are responsible for routine maintenance and repairs associated with the leased property, all utilities, including sewer, gas, electricity, telephone, irrigation of water and all other costs in any way relating to its farming activities on or occupation of the leased acres, such as seed, fertilizer, labor and fuel costs, with the exception of our Quail Run Vineyard property where the tenant is only responsible for its pro rata share of such costs.
Under leases in connection with our Kimberly Vineyard, Golden Eagle Ranch and, with respect to leased acres only, Condor Ranch, Quail Run Vineyard and Blue Heron Farms properties, our tenants are responsible for all related real and personal property taxes and assessments on the property.
Security Interests and Guaranty. With respect to the leases on our Kimberly Vineyard, Golden Eagle Ranch, Quail Run Vineyard and Blue Heron Farms properties, in order to secure the tenant's performance under the lease, we have a lien on, and security interest in, all crops grown or growing on the applicable property.
Additionally, the tenant on our Blue Heron Farms property has caused its parent company to guarantee its payment of rent and performance of all its obligations under the Blue Heron Farms lease and to maintain such guaranty in force during the term of the lease.
Right to Obtain Crop Financing. With respect to the leases on our Kimberly Vineyard, Golden Eagle Ranch and Blue Heron Farms properties, each tenant has the right to obtain financing for the growing and production of any and all crops on the applicable property, and we may in some instances consent to the subordination of our security interest in the crops to the security interest of any lender. However, in no instance will we allow there to be a lien on the property to secure any crop financing. With respect to Kimberly Vineyard, we have executed a Subordination and Intercreditor Agreement with the tenant's current lender, American AgCredit, PCA.
Specialty/Vegetable Row Crop Farms
Expenses. All of our specialty/vegetable row crop farm leases provide that we are responsible for major capital expenditures. Additionally, under each of our specialty/vegetable row crop leases, tenants are responsible for routine and preventative maintenance and repairs associated with the leased property, all utilities, including sewer, gas, electricity and telephone, irrigation of water and all other costs in any way relating to its farming activities on or occupation of the leased acres, such as seed, fertilizer, labor and fuel costs.
With the exception of Sweetwater Farm, under our specialty/vegetable row crop farm leases, our tenants are responsible for all related real and personal property taxes and assessments on the property.
Security Interests. With respect to the lease on our Sandpiper Ranch farm, in order to secure the tenant's performance under the lease, we have a lien on, and security interest in, all crops grown or growing on the applicable farm.
Commodity Row Crop Farms
Expenses. All of our commodity row crop farm leases provide that we are responsible for major capital expenditures. Additionally, under each of our commodity row crop leases, tenants are responsible for routine and preventative maintenance and repairs associated with the leased property, all utilities, including sewer, gas, electricity and telephone, irrigation of water and all other costs in any
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way relating to its farming activities on or occupation of the leased acres, such as seed, fertilizer, labor and fuel costs. Further, under the lease for our Pleasant Plains property, the tenant is responsible for the cost of a new tile drainage system.
Security Interests. With respect to the lease on Macomb Farm, in order to secure the tenant's performance under the lease, we have a lien on, and security interest in, all crops grown or growing on the applicable farm.
For all of our leases, any assignment or sublease by a tenant will require our prior consent. Additionally, under each of our leases the tenant is responsible for procuring liability insurance on the applicable leased acres and as of the date of this prospectus, we believe each of our farms is adequately insured.
Lease Expirations
The following table sets forth a summary of the lease expirations for each of the leases for the farms in our portfolio, excluding farms currently under development, as of the date of this prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of OperationsFactors That May Affect Our Operating Results and Asset ValueRental Revenues from Fixed and Participating Leases" for an additional discussion of our 2015 lease expirations.
Lease Expiration Year
|
Number of
Expiring Leases by Property (1) |
Number of
Expiring Leases (1) |
Expiring
Leased Acreage |
Expiring
Guaranteed Annual Rent (2) |
% of Total
Annual Rent (3) |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2015 (4) |
5 | 9 | 4,230 | $ | 1,970,025 | 29.72 | % | |||||||||
2016 (5) |
5 | 5 | 3,034 | $ | 983,207 | 14.83 | % | |||||||||
2017 |
1 | 1 | 271 | $ | 377,943 | 5.70 | % | |||||||||
2018 |
| | | | | |||||||||||
2019 (5) |
2 | 2 | 1,229 | $ | 1,048,771 | 15.82 | % | |||||||||
| | | | | | | | | | | | | | | | |
TOTAL (6) |
13 | 17 | 8,764 | $ | 4,379,946 | 66.07 | % | |||||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
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Development Farms
The following table summarizes the current progress of our farms that are undergoing substantial or total development.
Property
|
Tillable
Acres Subject to Development |
Crop Being
Developed |
Purchase
Price Plus Closing Costs |
Total
Capital Expenditures to Date |
Estimated
Remaining Capital Expenditures |
Estimated
Remaining Capital Expenditures Less Revenue Offset |
Expected
Completion Date |
Description of Development | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Blue Cypress Farm |
2,036 | Specialty/ Vegetable Row Crops | $7,332,199 | $ | 3,110,448 | $ | 226,683 | $ | 226,683 | 2016 | The land is being converted from an abandoned citrus grove to a specialty/vegetable row crop property. Development on the property is expected to be completed in 2016, and includes leveling of the land, disking, reservoir work and ditch maintenance and drainage and irrigation pumps are being installed, and may include soil amendments. | ||||||||||
Condor Ranch |
202 |
Avocados and Lemons |
5,020,489 |
4,341,144 |
1,001,963 (1) |
(290,127 |
) |
2016 |
The development phase has been completed, including land preparation and irrigation installation, and the entire development property has been planted to lemons and avocados. Property is still considered to be in the process of development, as the young trees, while planted, are not yet commercially productive and, as such, there is no tenant, except for a minority 56 mature acres that are subject to participating leases. (2) |
||||||||||||
Roadrunner Ranch |
227 |
Seedless organic mandarins |
2,508,615 |
4,444,660 |
1,392,442 (1) |
20,717 |
2016 |
The development phase has been completed, including land preparation, irrigation installation, planting and frost protection installation. Property is still considered to be in the process of development as the majority of the young trees have been planted, but are not yet commercially productive and, as such, there is no tenant in place. (3) |
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Property
|
Tillable
Acres Subject to Development |
Crop Being
Developed |
Purchase
Price Plus Closing Costs |
Total
Capital Expenditures to Date |
Estimated
Remaining Capital Expenditures |
Estimated
Remaining Capital Expenditures Less Revenue Offset |
Expected
Completion Date |
Description of Development | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Grassy Island Groves |
451 |
Citrus |
2,422,067 |
1,689,222 | 2,903,339 | 2,017,019 | 2019 |
With respect to the north half of the property, new trees have been planted. Irrigation installation has also been completed, with the
exception of pump stations that are expected to accompany the remainder of the plantings in spring 2015.
|
|||||||||||||
Quail Run Vineyard |
77 |
Wine grapes |
7,986,077 |
1,758,142 |
500,212 (1) |
73,612 |
2017 |
Development of 77 acres or three of the eight blocks to pinot noir grape vines has been completed, including the installation of trellises and drip hoses. The farm is still considered to be in the process of development as the vines are not yet commercially productive. |
|||||||||||||
Pintail Vineyards |
87 |
Wine grapes |
1,091,048 |
234,139 |
1,459,138 |
1,098,138 |
2019 |
Ground preparation and the irrigation system implementation have been completed. Planting of Pinot Grigio and Petite Syrah wine grapes is anticipated to occur in the second quarter of 2015. |
|||||||||||||
Hawk Creek Ranch |
425 |
Pistachios |
5,095,058 |
827,282 |
5,789,947 |
3,652,987 |
2021 |
Land preparation has been 90% completed on a portion of the ranch. One well has been drilled and a second well is scheduled to be drilled during the third quarter of 2015. Planting of pistachio trees is scheduled for the second quarter of 2015. |
|||||||||||||
| | | | | | | | | | | | | | | | | | | | | |
Total: |
3,505 |
$31,455,553 |
$ |
16,404,613 |
$ |
13,273,724 |
$ |
6,799,029 |
|||||||||||||
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Water Access and Rights
The following table summarizes the primary water sources for each of our farms as well as the current condition of those sources. See "Risk Factors If our farms do not have access to adequate water supplies or proper drainage, it could harm our ability to lease the farms for farming on favorable terms or at all, which could have a material adverse impact on the value of our farms and our results of operations and ability to make distributions to our stockholders" and "Risk Factors Our farms are subject to adverse weather conditions, seasonal variability or alternate bearing, crop disease and other
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contaminants, which may affect our tenants' ability to pay rent and thereby have a material adverse effect on our results of operations, financial condition and our ability to make distributions to stockholders" for further discussion regarding the risks of access to adequate supplies of water to the value of our farms and our financial condition.
Property Name
|
Location | Water Source/Drainage | Current Condition | |||
---|---|---|---|---|---|---|
Permanent Crop: | ||||||
Kimberly Vineyard | Monterey, CA | Two shared wells located on an adjacent landowner's property over which we have majority pro-rata control | No issues reported. | |||
Golden Eagle Ranch | Stanislaus, CA | Six wells located on the property that are integrated into one comprehensive distribution system. There is no surface water available. | There have been no major issues to report regarding well conditions in connection with 2015 crop productions. To increase redundancy, one well was refurbished in 2014, and the remaining five wells are scheduled to be refurbished in 2015. | |||
Quail Run Vineyard | Monterey, CA | One well located on the property. | No issues reported. | |||
Blue Heron Farms | Kings, CA | On-site well system plus supplemental surface water provided by the local water district. | No issues reported. | |||
Falcon Farms | Dougherty, GA; Lowndes, AL | 8 separate wells located on the Georgia parcel and two pump systems drawing from a slough on the Alabama River on the Alabama parcel. | No issues reported. | |||
Specialty/Vegetable Row: |
|
|
|
|
|
|
Sandpiper Ranch | Santa Cruz, CA | Primary source of water is from the Pajaro Valley Water Management Agency recycling plant that is delivered to area farms through an integrated water delivery system. There are also two wells on the property. | No issues reported. | |||
Sweetwater Farm | Jackson, FL | Eight wells located on the property and one off-site well. (1) | No issues reported. | |||
Commodity Row: |
|
|
|
|
|
|
Pleasant Plains | Douglas, McLean, Cass, Morgan & Sangamon, IL | Rain water. (2) Drainage occurs naturally. | No issues reported | |||
Macomb Farm | McDonough, IL | Rain water. (2) (3) Drainage occurs naturally and through a system of underground tiles. | No issues reported. | |||
Kane County Farms | Kane, IL | Rain water. (2) (3) Drainage occurs naturally and through a system of underground tiles. | No issues reported. | |||
Tillar Farm | Drew, AR | Surface and rain water as well as ten irrigation wells that irrigate 95% of the tillable acres. Drainage occurs naturally and is enhanced by the proximity of Bayou Bartholomew. | No issues reported. |
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Property Name
|
Location | Water Source/Drainage | Current Condition | |||
---|---|---|---|---|---|---|
Development: |
|
|
|
|
|
|
Roadrunner Ranch | Tulare, CA | Seven primary on-site pump and well systems and surface water supplied by two irrigation districts. | There is currently sufficient groundwater capacity at this property to irrigate the trees during peak demand months. Surface water allocations were reduced for 2014 and may be reduced again in 2015. | |||
Condor Ranch | Ventura, CA | Two off-site well and pump systems and a reservoir. | No issues reported. | |||
Blue Cypress Farm | Brevard, FL | Canals and reservoirs surrounding the property, and the property is irrigated via surface water. (4) There are no wells on the property. | No issues reported. | |||
Grassy Island Groves | Okeechobee, FL | Canals and reservoirs surrounding the property, and the property is irrigated via surface water for sourcing and drainage. (4) There are no wells on the property. | Major improvements have been completed and the final irrigation system for the new plantings will be completed during the first half of 2015. | |||
Pintail Vineyards | Yolo, CA | Riparian rights and sources water from the Sacramento River via a pump lift. | No issues to report. | |||
Hawk Creek Ranch | Yolo, CA | Underground aquifer and surface water from the Yolo County Flood Control and Water Conservation District. There are also four wells located on the property, though they are in poor to average condition. Ground and surface water. | No issues reported. As part of this development, one well has been drilled and a second well is scheduled to be drilled during the first quarter of 2015. |
Description of Material Farms
Golden Eagle Ranch
The Property. We acquired separate parcels of Golden Eagle Ranch, a mature permanent crop farm, in Stanislaus County, California, in March 2012 and August 2012 for a combined purchase price of approximately $16.8 million. Golden Eagle Ranch consists of 1,112 gross acres, with 1,056 tillable acres, planted with young and mature almonds. We hold Golden Eagle Ranch in fee simple through our wholly owned subsidiary Arnold (CA) LLC. On March 31, 2015, American AgAppraisal, an independent certified general real estate appraiser, concluded that the market value of the property was $22.3 million. Golden Eagle Ranch was planted over a period of time to create a sustainable almond orchard, with replanting originally scheduled to begin after the 2013 harvest. However, due to a nutrient program utilized by the current tenant and high almond prices, we have delayed replanting until after the 2015 harvest.
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Demand Generators and Competition. While the mature permanent crop farmland tenant base for nut crops in the region is still developing, we expect a competitive tenant environment to develop for this property type and believe there is a strong market already in place for direct operations as well as associated services, including harvesting, processing (hulling, shelling and packaging), warehousing, marketing and shipping. Additionally, since June 2013, more than 8.33 million almond trees were sold by California nurseries, a 25% increase on amount of trees sold from the prior year. Of the sold trees, roughly 24% were used to replant an orchard, 4% were used to replace trees in existing orchards, and the remaining 72% were sold for new plantings. The increased trees and acreage demonstrates grower confidence in the long-term growth of the almond industry, especially as growers shift more acreage into almond production, which we believe will generate increased leasing demand for this farm. Currently, California produces 80% of the world's almond supply.
Operating and Occupancy Information .
|
Three Months
Ended March 31, 2015 |
Year Ended December 31, | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | 2012 | 2011 (1) | ||||||||||||
Occupancy (2) |
100 | % | 100 | % | 100 | % | 100 | % | N/A | |||||||
Rental revenue (3) |
$ | 961,203 | $ | 2,562,473 | $ | 1,896,036 | $ | 198,575 | N/A | |||||||
Total leased acreage |
1,056 | 1,056 | 1,056 | 1,056 | N/A | |||||||||||
Rent per leased acre |
$ | 910 | $ | 2,427 | $ | 1,795 | $ | 188 | N/A |
Blue Heron Farms
The Property. We acquired Blue Heron Farms, a mature permanent crop farm, in Kings County, California, in November 2013 for a purchase price of approximately $14.0 million. On March 31, 2015, Correia-Xavier Incorporated, an independent certified general real estate appraiser, concluded that the market value of the property was $16 million. Blue Heron Farms consists of 430 gross acres, with 380 tillable acres, of young (19%) and mature (81%) walnut trees. We hold Blue Heron Farms in fee simple through our wholly owned subsidiary Leland (CA) LLC.
Demand Generators and Competition. While the mature permanent crop farmland tenant base for nut crops in the region is still developing, we expect a competitive tenant environment to develop for this property type and believe there is a strong market already in place for direct operations as well as associated services, including harvesting, processing (hulling, shelling and packaging) warehousing, marketing and shipping. Additionally, current USDA estimates for 2014 California walnut production represent a record level of growth as mild weather during the growing season benefitted production and allowed for an early harvest and a higher quality crop. Walnut shipments for the new 2014/2015 crop season are weaker than the prior season due to a decrease in exports to Asia, slightly offset by an increase in exports to Europe; however, domestic shipments have increased. We believe that increased production of walnuts and the quality of the crops will generate increased leasing demand for this farm.
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Operating and Occupancy Information .
|
Three Months
Ended March 31, 2015 |
Year Ended December 31, | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | 2012 (1) | 2011 (1) | ||||||||||||
Occupancy (2) |
100 | % | 100 | % | 100 | % | N/A | N/A | ||||||||
Rental revenue (3) |
$ | 120,906 | $ | 774,779 | $ | 18,519 | N/A | N/A | ||||||||
Total leased acreage |
309 | 271 | 271 | N/A | N/A | |||||||||||
Rent per leased acre |
$ | 391 | $ | 2,859 | $ | 68 | N/A | N/A |
Kane County Farms
The Property. We acquired Kane County Farms, a commodity row crop farm in the premier corn producing area of North-Central Illinois, in June 2011 for a purchase price of approximately $17.2 million. Kane County Farms consists of 1,652 gross acres, with 1,617 tillable acres, currently planted with corn in rotation with soybeans on four separate parcels. We hold Kane County Farms in fee simple through our wholly owned subsidiary Abraham (IL) LLC. On March 31, 2015, Cochran Ag Services, Inc., an independent Illinois certified general real estate appraiser, concluded that the market value of the property was $20.4 million. We have no immediate plans to improve the property. We believe that there may be some potential for residential development upon disposition in the future as one parcel abuts the 56 th ranked modern golf course, as per Golfweek's 2014 ratings, and with suburban sprawl of the greater Chicago/Aurora metropolitan area.
Demand Generators and Competition. Kane County Farms is a commodity row crop farm located in a premier corn-producing area of Illinois for which there is an established and highly competitive tenant market. Continued global growth in population and consumer income and the demand for biofuels ( e.g. , ethanol from corn) and the increasing need for feed for livestock, as well as the location and high-quality soils (90% Class I) of this property, should, in our opinion, continue to drive leasing demand for this farm.
Operating and Occupancy Information .
|
Three Months
Ended March 31, 2015 |
Year Ended December 31, | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | 2012 | 2011 (1) | ||||||||||||
Occupancy (2) |
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||
Rental revenue (3) |
$ | 175,387 | $ | 701,308 | $ | 764,409 | $ | 721,770 | $ | 257,931 | ||||||
Total leased acreage (4) |
1,611 | 1,611 | 1,611 | 1,611 | 1,611 | |||||||||||
Rent per leased acre |
$ | 109 | $ | 435 | $ | 474 | $ | 448 | $ | 160 |
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Description of Tenants
Our farms are leased to 14 separate third-party tenants, of which the tenant at our Golden Eagle Ranch farm represented approximately 38.7% of our 2014 contractual rent. Additionally, our tenants at Blue Heron Farms, Kane County Farms, Pleasant Plains, Sandpiper Ranch, Sweetwater Farm and Quail Run Vineyard represented approximately 11.7%, 10.6%, 7.6%, 6.1%, 5.7% and 5.6%, respectively, of our 2014 contractual rent received through December 31, 2014, which does not include certain rent to be paid under 2014 participating leases that was not recognized in 2014. No other tenant represents greater than 5.0% of our 2014 contractual rent.
The tenant at our Golden Eagle Ranch farm represents approximately 48.2% of our 2015 contractual rent received through March 31, 2015, due in large part to the timing of the sale of the 2014 harvest in 2015. Our tenants at Kane County Farms, Quail Run Vineyard, Pleasant Plains, Blue Heron Farms and Kimberly Vineyard represented approximately 8.8%, 7.0%, 6.3%, 6.1% and 5.3%, respectively, of our 2015 contractual rent received through March 31, 2015, which does not include certain rent to be paid under participating leases that has not yet been recognized. No other tenant represents greater than 5.0% of our 2015 contractual rent received through the first quarter, but some tenants may do so in the future.
Government Regulation
Farming Regulation
The farms that we own and intend to acquire are subject to the laws, ordinances and regulations of state, local and federal governments, including laws, ordinances and regulations involving land use and usage, water rights, treatment methods, disturbance, the environment and eminent domain.
Farmland is principally subject to environmental laws, ordinances and regulations. Each governmental jurisdiction has its own distinct environmental laws, ordinances and regulations governing the use of farmland. These laws, ordinances and regulations primarily seek to regulate water usage and water runoff due to the limited supply in certain areas, including California, Florida and Illinois, where the majority of the farms in our portfolio are located. In addition, runoff from rain or from irrigation is also governed by state, county and federal governments. Further, if any of the water used on or running off of our farms flows to any rivers, ponds, the ocean or other water sources, then there may be specific laws, ordinances and/or regulations governing the amount of pollutants, including sediments, nutrients and pesticides, that such water may contain.
All of the farms in our portfolio have sources of water, including wells and/or surface water that currently provide sufficient amounts of water necessary for the current farming operations at each location. However, should the need arise for additional water from wells and/or surface water sources, we may be required to obtain additional permits or approvals or to make other required notices prior to developing or using such water sources. Permits for drilling water wells or withdrawing surface water may be required by federal, state and local governmental entities pursuant to laws, ordinances, regulations or other requirements, and such permits may be difficult to obtain due to drought, the limited supply of available water within the farming districts of the states in which our farms are located or other reasons. We believe that our farms are currently in compliance with applicable state, county and federal environmental and agricultural regulations.
In addition to the regulation of water usage and water runoff, state, county and federal governments also seek to regulate the type, quantity and method of use of chemicals for growing crops, including fertilizers, pesticides and nutrient rich materials. Such regulations could include restricting or
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preventing the use of such chemicals and materials near residential housing or near water sources. For example, when farmland is located near residential housing, the spraying of crops on the farmland may only occur on windless days and the spray may not be used on plants that are specific distances from homes. Further, some regulations have strictly forbidden or significantly limit the use of certain chemicals and materials. Licenses, permits and approvals must be obtained from governmental authorities before most chemicals and materials can be used on farmland and crops, and reports on the usage of such chemicals and materials must be submitted in accordance with the terms of the specific licenses, permits and approvals. Failure to obtain such permits or comply with the terms of such permits could result in fines and imprisonment.
The use of farmland in California, Florida and other jurisdictions is also subject to regulations governing the protection of endangered species. When farmland borders, or is in close proximity to, national parks, protected natural habitats or wetlands, the farming operations on such farms must comply with the laws, ordinances and regulations related to the use of chemicals in a manner to avoid disturbing the habitats, wetlands or other protected areas.
In addition to environmental regulations, state, county and federal governments also have various regulations governing labor practices used in connection with farming operations. For example, these regulations seek to provide for minimum wages and minimum and maximum work hours, as well as to restrict the hiring of illegal immigrants.
As an owner of farmland, we may be liable or responsible for the actions or inactions of our tenants with respect to these laws, regulations and ordinances.
Real Estate Industry Regulation
Generally, the ownership and operation of real farms is subject to various laws, ordinances and regulations, including regulations relating to zoning, land use, water rights, the handling of waste water, storm water and runoff and lien sale rights and procedures. Changes to any of these laws, ordinances or regulations, such as the Comprehensive Environmental Response and Compensation Liability Act, or CERCLA, could result in or increase the potential liability for environmental conditions or circumstances existing, or created by tenants or others, on our farms. Laws related to upkeep, safety and taxation requirements may result in significant unanticipated expenditures, loss of our farms or other impairments to operations, any of which would adversely affect our cash flows from operating activities.
Environmental Matters
As noted in "Farming Regulation," our farms and the operations thereon are subject to federal, state and local environmental laws, ordinances and regulations, including laws relating to water, air, solid wastes and hazardous substances. Our farms and the operations thereon are also subject to federal, state and local laws, ordinances, regulations and requirements related to the federal Occupational Safety and Health Act, as well as comparable state statutes relating to the health and safety of our employees and others working on our farms. Although we believe that we and our tenants are in material compliance with these requirements, there can be no assurance that we will not incur significant costs, civil and criminal penalties and liabilities, including those relating to claims for damages to persons, property or the environment resulting from operations at our farms. See "Risk FactorsRisks Related to Our Business and FarmsPotential liability for environmental matters could adversely affect our financial condition."
Insurance
Under the terms and conditions of the leases on our current farms, tenants are generally required, at their expense, to obtain and keep in full force liability insurance for the term of the lease, and are required to name us as an additional insured party. These policies include liability coverage for bodily
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injury and property damage arising out of the ownership, use, occupancy or maintenance of the farms and all of their appurtenant areas. In addition to our tenants' insurance policies under which we will be an additional insured party, we also maintain comprehensive liability and property insurance covering all of our farms, which would provide coverage to the extent there is insufficient coverage under our tenants' policies.
Our participating leases typically require our professional farmer tenants to obtain crop insurance, which seeks to protect the stability of our cash flow. On all of our current mature permanent farms our professional farmer tenants have obtained crop insurance.
Competition
The activity of identifying, completing and realizing attractive acquisitions of farmland is highly competitive, and we are competing for investment opportunities with many other real estate and farmland investors, including real estate and farmland funds, individual and institutional investors, public and private real estate companies and REITS, developers, municipalities and financial institutions. Other investment firms that we might compete directly against could include agricultural investment firms such as Hancock Agricultural Investment Group, UBS Agrivest LLC and Westchester Agricultural Asset Management. These firms engage in the acquisition, asset management, valuation and disposition of farms.
In our local markets, we believe that the locations of our farms, as well as the overall quality and attractiveness of our individual farms, including their access to adequate water supplies and superior soil quality and suitability for crop type, enable us to compete effectively for tenants. Because our revenue potential may be linked to the success of our tenants, depending on the particular lease structure in place, we may indirectly share exposure to the same competitive factors that our tenants experience in their respective markets when trying to sell their harvest. While our tenants do not typically compete with particular farms or farmers, oversupply of a particular crop or a decrease in exports for such crop, resulting from increased yields from other farmers both domestically and internationally, may affect the prices of our tenants' crops.
Employees
Robert L. Cowan, our President and Chief Investment Officer, is our only fully dedicated employee as of the date of this prospectus. Following the Internalization, we will retain certain members of the management of Optima who will either be directly employed by us or whose services will provided in connection with the Transitional Services Agreement. In connection with the completion of this offering, we expect to enter into employment agreements with each of our named executive officers. We have already entered into an employment agreement with Mr. Cowan. See "ManagementExecutive Officer and Director CompensationEmployment Agreements." As we continue to grow as an organization, we may opportunistically hire additional employees in a disciplined manner with specific and extensive industry expertise.
Legal Proceedings
As of the date of this prospectus, we are not a party to any legal proceedings. Under the leases in place for the farms in our portfolio, a tenant typically is obligated to indemnify us, as the property owner, from and against all liabilities, costs and expenses imposed upon or asserted against it as owner of the farms due to certain matters relating to the operation of the property by the tenant. We may be party from time to time to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. There can be no assurance that these matters that arise in the future, individually or in aggregate, will not have a material adverse effect on our financial condition or results of operations in any future period.
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INDUSTRY OVERVIEW AND MARKET OPPORTUNITY
We believe, over the long-term, U.S. farmland investments should provide investors with favorable risk-adjusted returns and diversification benefits when measured against other asset classes as the U.S. is a world leader in the agricultural industry and, unlike many other consumer-oriented products, consumer spending on food is non-discretionary. Continued global growth in population and consumer income and the demand for biofuels ( e.g. , ethanol from corn) should, in our opinion, provide long-term benefits to owners of productive, high-quality U.S. farmland. We believe continued expansion of metropolitan areas in the long-term is likely to result in the gradual conversion of farmland near metropolitan areas into other uses. This is expected to result in a decrease in the supply of arable farmland and we believe an increase in the value of farmland investments. Although it is possible that long-term trends could reverse, either due to conversion back to farmland from other uses, conversion from federal or state land or through improvements to land currently unsuitable for farming, we believe it is unlikely such factors could lead to any meaningful addition to the current supply of high-quality farmland in the U.S.
Industry Overview
Agriculture is one of the oldest and largest industries in the U.S.
According to information provided by the USDA, the total value of agricultural sector production grown in the U.S. in 2014 was estimated to be $465 billion. Total production for crops alone accounted for an estimated $205 billion in 2014. According to the USDA, U.S. farm real estate value (defined as a measurement of the value of all land and buildings on farms) averaged $2,950 per acre for 2014, up 8.1% from 2013 values. This equates to an approximate aggregate value for U.S. farmland of $2.7 trillion based on the approximately 913 million acres (or 1.4 million square miles) of land operated or owned as part of a farm as of the end of 2014.
The USDA divides total U.S. cropland production value into three major categories:
The USDA also utilizes a category for Horticulture, which consists solely of mushrooms, which we do not discuss since we do not own or intend to own any such farms at this time.
The average U.S. cropland production value from 2011 to 2013 under these categories was as follows:
Average Crop Production Value (2012 - 2014 est.)
|
$(in billions) | % of Total | |||||
---|---|---|---|---|---|---|---|
Permanent |
$ | 29.1 | 14 | % | |||
Specialty/Vegetable |
12.8 | 6 | % | ||||
Commodity Row |
167.0 | 80 | % | ||||
| | | | | | | |
Total |
$ | 208.9 | 100 | % |
Source: Data based on National Agricultural Statistics Service (NASS), USDA.
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U.S. farmland
The U.S. farmland investment industry represents more than $2.7 trillion of farmland property. We believe that the U.S. has strong agricultural advantages in its topography and geographic position. Its varied climatic regions allow for the production of a wide variety of agricultural crops, and its central position between industrial centers in Asia, Europe, Canada and South America make it a favorable location for trading. Additionally, unlike many developing nations, the U.S. is a politically stable nation with well-developed infrastructure for transportation and export of crops through established railways and ports; as well as the financial resources (such as investor capital and government support through subsidies and crop insurance) to sustain its agriculture industry, giving the U.S. a comparative advantage even when the U.S. is not the lowest-cost producer.
Market Opportunity
Farmland as an asset class
The U.S. farmland investment industry is large and well diversified by commodity groups. As a dominant producer and exporter of key agricultural crops, the U.S. is a leader in agricultural trade. We believe an investment in U.S. farmland can be seen as a hedge against inflation, as farmland value may continue to appreciate regardless of the inflationary environment. Global trends of increasing wealth and population are expected to continue, which should increase demand for farmland and agriculture products. Meanwhile, we believe additional factors that should increase farmland values such as supply constraints due to decreasing arable land, water concerns and urbanization of emerging markets are likely to persist.
The U.S. is a world leader in the agricultural industry
Crops harvested are broadly categorized into row crops and permanent crops. In general, due to the structure of leases, row crops generate lower cash yields and exhibit less variability of rental return, while permanent crops generate higher cash yields and exhibit greater variability of rental return.
Permanent crops
Permanent crops include fruits and nuts grown on trees and vines. According to the USDA, permanent crops account for approximately $18 billion in U.S. farm cash receipts on less than 2% of its harvested cropland acreage. The U.S. is a worldwide leader in certain permanent crops such as almonds. California produces approximately 80% of the global supply and nearly 100% of the domestic supply of this crop. According to the Almond Almanac, emerging markets such as China and India are expected to continue to have significant long-term growth in almond consumption as the middle class in these markets continues to see an increase in disposable income. China alone accounts for over 50% of the Northeast Asia exports and over 11% of global almond exports. In early 2015, China decreased its import tariff on pecans from 24% to 10% to support the nation's burgeoning demand for U.S. pecans.
Fruits remain an important component of the national farm sector, with production increasing on average by 10-20% in the 1990s and 2000s from the 1980s as a result of factors such as: the adoption of newer technologies; inclusion of early and late-season varieties; increased domestic consumption; and export markets. In addition, exports of certain key crop types have been increasing. Fresh berry exports have more than tripled in the ten year period between 2000 and 2010, per the USDA. Annualized returns over the five year period ended March 31, 2015 for permanent crop farmland were 20.0%, based on NCREIF data. Permanent crops have varying multi-year lifespans ( e.g. , almond trees, in general, are often expected to have an average productive life of 25 years or longer, and walnut trees are expected to have an average productive life of 35 years.)
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Row crops
Row crops include two categories, (i) commodity row crops and (ii) specialty/vegetable row crops (including fruits such as strawberries). The U.S. is a dominant producer and exporter of many commodity row crops. According to the USDA, the U.S. is the leading producer and exporter of corn and soybeans and is one of the top producers of cotton. The U.S. is also a dominant producer of certain vegetable row crops with top export nations including Canada, Mexico, Japan, Taiwan and South Korea, with potatoes, tomatoes, lettuce, onions and sweet corn dominant in terms of export value, according to the USDA. Annualized total returns over the five year period ended March 31, 2015 for row crops, which include specialty/vegetable and commodity row crops, were 12.5%, based on NCREIF data. Row crops are also known as "annual crops" and are generally replanted yearly (with limited exceptions).
Farmland generates strong returns with relatively lower volatility
Farmland has a history of higher returns with lower volatility compared to the S&P 500 and certain bond indices. The NCREIF Farmland Index, for the last 10 years on an annualized basis, generated returns of 16.7%, outperforming the S&P 500 Index by approximately 8.7%, while the NCREIF Farmland Index generated less than half the volatility of the S&P 500 and the MSCI World Index.
Annualized Performance Comparison10 Year Returns
(as of December 2014) (1) |
Standard Deviation Since Inception (1991)
(as of December 2014) |
|
|
|
|
Sources: NCREIF, FactSet.
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NCREIF Farmland Index cumulative returns have also outperformed the MSCI World Index and the Barclays Capital Aggregate Bond Index by a wide margin; and since 1991, the NCREIF Farmland Index has had little correlation to the S&P 500, the MSCI World and the Barclays Capital Aggregate Bond Indices.
NCREIF Farmland Index Return Statistics (from Inception in January 1991March 31, 2015):
Historical Return Statistics | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jan. 1991 - Mar. 2015
|
Annual
Returns (Inception) |
Annual
Returns (1 year) |
Annual
Returns (3 years) |
Annual
Returns (5 years) |
Annual
Returns (10 years) |
Standard
Deviation (Inception) |
Cumulative
Returns (Inception) |
Drawdown | Correlation to NFI | |||||||||||||||||||
NCREIF Farmland Index (NFI) |
11.9 | % | 12.3 | % | 16.7 | % | 15.4 | % | 16.7 | % | 6.4 | % | 1421.4 | % | 0.0 | % | | |||||||||||
NCREIF Permanent Crop |
12.5 | % | 22.6 | % | 24.7 | % | 20.0 | % | 20.1 | % | 9.9 | % | 1629.3 | % | 3.8 | % | | |||||||||||
NCREIF Row Crop |
11.1 | % | 4.8 | % | 11.9 | % | 12.5 | % | 13.9 | % | 3.9 | % | 1179.2 | % | 0.0 | % | | |||||||||||
S&P 500 Index |
10.1 | % | 12.7 | % | 16.1 | % | 14.5 | % | 8.0 | % | 15.8 | % | 935.1 | % | 45.8 | % | 0.12 | |||||||||||
MSCI World Index |
7.5 | % | 6.0 | % | 12.2 | % | 10.0 | % | 6.4 | % | 16.2 | % | 476.9 | % | 49.1 | % | 0.15 | |||||||||||
NCREIF Property Index |
7.9 | % | 12.7 | % | 11.5 | % | 12.8 | % | 8.4 | % | 4.8 | % | 533.2 | % | 23.9 | % | 0.19 | |||||||||||
Barclays Capital Aggregate |
6.4 | % | 5.7 | % | 3.1 | % | 4.4 | % | 4.9 | % | 3.9 | % | 349.7 | % | 3.9 | % | 0.13 |
U.S. farmland performance vs. other real estate
Historically, U.S. farmland has been an asset class with relatively stable returns through income and value appreciation. The average annual return of the NCREIF Farmland Index since inception in 1991 has been approximately 11.9% per year versus an average of 7.9% for NCREIF's property index.
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Cumulative Returns (1991Mar. 2015)
(1991 = indexed to 100) |
Cumulative Return at March 31, 2015
(1991Mar. 2015) |
|
|
|
|
U.S. farmland may serve as a hedge against both inflation and deflation with limited correlation to other asset classes
We believe the farmland asset class may provide both diversification and a hedge against inflation in a portfolio of investments. The Purdue University Center for Commercial Agriculture published research on farmland values. In its analysis, the Center found that over a period of time that spanned various market cycles (1914-2011) farmland values were highly correlated with inflation with a correlation coefficient of 0.63 between land prices and the Consumer Price Index . In addition, farmland's returns to major asset classes such as the U.S. 10yr Treasury and the S&P 500 Index, as noted in the chart below (based on research from The Center for Farmland Research at the University of Illinois), demonstrate farmland's potential ability to diversify a portfolio.
Return Correlation with U.S. Farmland (1970 to 2012)
U.S. farmland performance during different interest rate environments and during recent credit shocks
U.S. farmland property values have generally been increasing over the long-term, although exceptions may exist, with lower than historical debt-to-equity and debt-to-asset ratios over the past 44 years, and have risen in both increasing and decreasing interest rate environments. With less debt, farmland has been and may be more resistant to interest rate changes, credit shocks and financial recessions. During the financial crisis in 2008, the NCREIF Farmland Index generated robust gross cumulative gains while the S&P 500 Index and the MSCI World Index generated substantial losses.
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Farmland Values vs. Interest Rates
A confluence of events in the mid-1980s, including the Savings and Loan crisis, led to a turbulent time in U.S. agriculture often referred to as a "farm crisis" whereby there was a (i) swift decline in farm income, (ii) reduced export demand resulting from a foreign grain sale embargo and (iii) decreased real estate values. In addition, the 1981 Farm Bill was implemented, which increased price supports for grain in the U.S., which in-turn led U.S. crop exports to become more expensive. The agricultural shock of that time endured during a period characterized by higher debt levels, high interest rates and a government imposed grain-sale embargo to the Soviet Union. Reduced income impaired the farmers' ability to service debt on historically high leverage levels, supply of credit declined and the environment and circumstances led to a wave of farm bank failures. Today's current
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conditions differ from those in the mid-1980s as interest rates are historically low and leverage levels are moderate and well below those experienced during the 1980s.
NCREIF Farmland Index performance
compared to select indices |
Declining Leverage for Farmland Sector
Over Time |
|
|
|
|
During the period from December 2003 to December 2013, the Consumer Price Index (CPI) has increased approximately 26.5% from 185.5 to 234.6. During the same period, the producer prices for walnuts, corn, soybeans and almonds have increased approximately 215%, 116%, 92%, 85%, respectively. The increase in the prices of fruits, nuts and vegetables compared to the overall CPI demonstrates a potential hedge against inflation.
Consumer Price Index
(December 2003December 2013)
Appreciation trends differ by crop type, creating potential crop specific opportunities
We believe crop types that are less commoditized than row crops, such as mature permanent crops and specialty/vegetable crops, provide a meaningful opportunity to generate higher income than if we concentrated our portfolio solely on farms suitable only for commodity row crop production. Mature permanent crops have generated greater income in recent years, with the rate of change in farmland appreciation outpacing that of row crops and providing an outsized opportunity for capital appreciation. We believe that our diversified portfolio of crop types and farms diversified by region will generate higher levels of appreciation and income returns.
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5-year Row vs. Permanent Farmland Income and Appreciation
Income 2009-2015 | Appreciation 2009-2015 | |
|
|
|
Note: Appreciation data shown above does not include returns from income.
Source: NCREIF.
Global and domestic trends benefiting farmland
We expect that farmland as an asset class will benefit from several global and domestic long-term trends. We believe that as global population continues to grow (according to the U.S. Census Bureau worldwide population is expected to grow by over 1 billion people from 2014 to 2028), there will continue to be increased demand for agricultural products and increased incomes in emerging markets will lead to rising global demand for biofuels. Additional trends that we believe will positively benefit farmland include that U.S. agricultural exports are projected to continue to increase and arable land per capita will continue to decline (due to a number of factors, including population growth and an increase in urbanization converting farmland to other uses). Historically, there have been relatively few available options for publicly traded investments in U.S. farmland. We believe farmland is an attractive investment opportunity both due to its return profile and its relatively newer position as an alternative asset class for institutional investors.
Increasing demand for crops
Demand for U.S. agricultural crops is forecasted to increase over the long-term, due to increasing global population, rising emerging market incomes, growing demand from improving diet and nutrition and continued demand for biofuels. While short-term declines occurred as demand for agriculture products was negatively affected by the recent global downturn, according to USDA projections, demand is expected to have recovered in the 2014 calendar year.
Global population is growing. According to data from the U.S. Census Bureau, in the next five years (2014 - 2019), the world is projected to gain more than 381 million people (approximately 26% of which are forecasted to come from China and India), and by 2028, the world is projected to gain more than 1 billion people (24% of which are forecasted to come from China and India).
The USDA expects that by 2023/2024 China's soybean imports will have continued to rise and will reach over 70% of the global soybean imports. The U.S. is a significant soybean supplier with over 40% of China's soybean imports in most years.
As emerging markets advance and earnings rise, diets are expected to improve by becoming more diverse and by integrating more protein (from both crops and livestock). Agricultural crops high in protein include grains (wheat and oats), beans, soybeans, oilseed, lentils and amaranth as well as nut crops. As diets around the world continue to integrate greater amounts of livestock, there will also be
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an increased need for crops that comprise the feed for those animals. According to data provided by the USDA, approximately two times the amount of processed feeds are required to produce each grain-consuming animal unit (1,000 metric tons).
The overall trend toward reducing the global "carbon footprint" has led to increased demand for alternative energy. Key alternative energy commodities include corn, for ethanol, and soybeans, for biodiesel among other crops that can be used for biofuel. These alternative fuels provide a cleaner burning alternative to hydrocarbon fuels and can help reduce the nation's dependency on foreign oil. According to the USDA, while growth moderates, current high levels of U.S. ethanol production are anticipated to continue over the next ten years, and are projected to account for 35% of total expected corn use.
U.S. corn: Feed and residual use, ethanol, and exports
Farmland can be used to produce alternative energy, including geothermal, solar and wind. Through wind farms and solar panel installations, farmers can receive additional revenues. For example with wheat farms, a farm operator can lease fields as locations for clean electricity generation. This dual use of farmland can be mutually beneficial to both the farmer and the environment.
Decreasing supply of arable farmland
Land resources are finite and arable land with access to ample water sources are further limited. Even with technological advances improving productivity, the availability of arable land for agricultural use is diminishing, and with an expectation of the global population continuing to expand, the amount of arable land per capita is expected to continue to decline in the future. The continued urbanization, especially of emerging markets, as well as due to land erosion, desertification and degradation, among other causes, reduces the supply of farmland and potentially increases foreign dependence on agricultural imports from regions like the U.S. Scarcity of water is another concern.
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Global Population and Arable Land Per Capita
Source: World Bank; UNFAO.
Farmland as a publicly traded investment opportunity
Historically, there have been relatively few opportunities to invest in publicly traded companies with a focused farmland portfolio. As an asset class, farmland has generally been under-represented in institutional investments. However, interest in hard assets such as farmland has been increasing among institutional investors, such as pension funds, over the last several years. We believe that the return profile of U.S. farmland and the relative scarcity of alternative public farmland investments offers an attractive opportunity for potential investors. In addition to the potential for income return and future appreciation, institutions may continue to be interested in farmland as an asset class for both portfolio diversification and as a hedge against inflation.
Agricultural Act of 2014 (the "Act")
The Act was enacted in February 2014 and remains in effect through 2018. The Act makes changes to commodity programs, increases crop insurance and strengthens programs for organic farmers and specialty vegetables, among other elements that are less directly pertinent to our portfolio. Direct payments, which did not have specific price or yield triggers, were eliminated with more funds allocated towards crop insurance. New crop insurance programs were implemented, including PLC (Price Loss Coverage), which makes a payment to a farmer when the covered crop falls below a set price, and ARC (Agricultural Risk Coverage), whereby a farmer is paid based on whether national revenues or the farmer's farming revenues (farmer chooses which option) fall below a certain threshold. The Act also provides capital to support the purchase of fruit and vegetables. In addition, the law provides funds for organic farmers and increases monetary support for pest and disease control.
Crop insurance as an important risk management and revenue protection tool for farmers
The Federal Crop Insurance Act was passed by Congress in 1938 to establish the Federal Crop Insurance Corporation and was broadened to make insurance more affordable through laws passed by Congress in 1980. Such legislation was not widely adopted until the Federal Crop Insurance Reform Act was passed in 1994, and the USDA Risk Management Agency was formed in 1996. Today, the U.S. government and private insurance companies work together to provide insurance to the nation's farmers. U.S. crop insurance takes two primary forms, crop-hail insurance and multi-peril insurance. Crop-hail insurance is private insurance that is not federally supported and is used by farmers to protect high yielding crops that may be subject to the potentially significant harm caused by hail. Multi-peril insurance covers varied natural disasters, including floods, fire, hail, drought, freezes and pests and diseases. It also provides coverage for losses due to crop price declines. Multi-peril insurance is
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federally supported and sold through private insurance companies. More than 100 crops are covered. 89% of insurable U.S. farmland is protected by federally backed crop insurance programs.
Increased application of technologically-improved crops by U.S. farmers
Technology in the form of genetically engineered ("GE") seeds account for a significant portion of U.S. crops and have allowed farmers to better manage weeds, increase yield and mitigate yield or other agronomic property, disease resistance and mitigate yield loss from pests and insects. The three crops that make up the bulk of planted acres of GE crops in the U.S. consist of corn, cotton, and soybeans. According to the U.S. Department of Agriculture, approximately half of total planted acres in 2013 were used to grow GE crops. In 2013, over 80 percent of acreage for corn and cotton was devoted to GE herbicide-tolerant crops. According to a USDA report in 2014, farmers that planted insect-resistant ("Bt") crops experienced increased yield from reduced crop loss from insects and used less insecticide when they planted Bt corn and Bt cotton. Planting these crops has also been associated with higher net returns when pest pressure is high.
U.S. agricultural exports projected to increase
Since 1960, the U.S. has consistently been a net exporter of agricultural products. Over the past decade, agricultural exports from the U.S. have generally been growing, with such exports projected to continue to increase by 31% in the aggregate over the coming decade, from a projected $143.5 billion in 2015 to a projected $188.1 billion in 2024, based on USDA information. While the overall value of U.S. exports are projected to decline and stagnate in 2014 to 2016 from record 2013 levels, the total value of U.S. agricultural exports is projected to increase in 2017 and thereafter, based on the "USDA Agricultural Projections to 2023" report released in February 2014. According to the report, the decrease primarily stems from declining prices across several key crops, which reached record high levels in 2013, while the total value of U.S. agricultural exports for fruits, vegetables and tree nuts is projected to steadily increase from 2013 to 2023.
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Our Directors, Director Nominees and Executive Officers
Currently, our Board of Directors consists of 9 members, including 5 directors who are independent for purposes of applicable New York Stock Exchange rules. Pursuant to our charter, our directors are elected annually by our stockholders to serve until the next annual meeting of our stockholders and until his or her successor is duly elected and qualifies. See "Certain Provisions of Maryland Law and of Our Charter and BylawsOur Board of Directors." The next annual meeting of our stockholders will be held in 2015. Our officers serve at the discretion of our Board of Directors.
The following table sets forth certain information concerning our directors and executive officers upon completion of this offering:
Name
|
Age | Position | |||
---|---|---|---|---|---|
D. Dixon Boardman |
69 | Chairman of the Board of Directors | |||
Harrison T. LeFrak |
43 | Vice Chairman of the Board of Directors | |||
Robert L. Cowan |
65 | President and Chief Investment Officer | |||
Thomas S.T. Gimbel |
60 | Chief Executive Officer and Director | |||
Geoffrey M. Lewis |
53 | Chief Financial Officer, Treasurer and Director | |||
Lindsey B. Sichel |
34 | Chief Administrative Officer, Chief Marketing Officer and Executive Vice President | |||
Morton Allan Cohn* |
74 | Director | |||
Roberto A. de Guardiola, Jr.* |
70 | Director | |||
James B. Hoover* |
60 | Director | |||
Terry Allen Kramer* |
81 | Director | |||
Mark Wilkinson* |
94 | Director |
The following are biographical summaries of the experience of our executive officers and directors.
Name
|
Biographical Summary | |
---|---|---|
D. Dixon Boardman |
Mr. Boardman served as our President since our inception in 2009 and is now Chairman of the Board of Directors. Mr. Boardman is the founder and chief executive officer of Optima Fund
Management LLC, a multi-disciplined hedge fund management firm that is SEC-registered and has assets under management of $4 billion, having launched its flagship fund in 1988. Prior to forming Optima Fund Management LLC,
Mr. Boardman advised high net worth individuals at UBS PaineWebber, a global financial services firm, as a member of the Chairman's Council and earlier as a Senior Vice President at Kidder, Peabody, a U.S.-based securities firm. In addition,
Mr. Boardman has served as Chairman of the Special Projects Committee of Memorial Sloan Kettering Cancer Center and is currently a member of the President's Council of Memorial Sloan Kettering Cancer Center. He is also a member of the Executive
Committee of New York Presbyterian-Weill Cornell Council. Mr. Boardman is also a director of Florida Crystals Corporation and a director of Kadmon Corporation, and is an Advisory Board director of J. C. Bamford Excavators Limited.
|
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Name
|
Biographical Summary | |
---|---|---|
Harrison T. LeFrak | Mr. LeFrak was our Vice President since our inception in 2009, is currently a director and the Vice Chairman of our Board, and has been managing director of LeFrak Organization, Inc., which owns, builds and manages an extensive portfolio of real estate and holds significant investments in securities, private businesses and energy, since 1997. Mr. LeFrak has also been president and chief executive officer of The LeFrak Trust Company, which provides trust services to the LeFrak family, since 2000 and an advisor to The LeFrak Foundation, which includes private grant making foundations that serve the charitable interests of the LeFrak family, since 1998. He has previously served as a member of the United Nations Development Commission, and is currently a Trustee of The Boys Club of New York, a Young Associate Director of the Metropolitan Opera and a public member of the Real Estate Committee of New York Presbyterian Hospital. Mr. LeFrak earned an A.B. from the Woodrow Wilson School of Public and International Affairs at Princeton University, a Doctor of Law from Harvard Law School and an M.B.A. from the Graduate School of Business of Columbia University. He is a member of the New York Bar and a licensed real estate broker. | |
Robert L. Cowan |
|
Mr. Cowan has served as President and Chief Investment Officer since December 2014. Mr. Cowan served as the Agriculture and Timber Director for the Utah Retirement System, or URS, which administers pensions and defined contribution benefits for state, local government and public education employees in the State of Utah from February 2014 to December 2014. Before moving to URS, he worked in various roles at Farmland Reserve, Inc., a large private agricultural investment portfolio, starting in 1980 and most recently as Assistant Vice President from 2009 to 2014. Mr. Cowan obtained his Bachelor's Degree from Brigham Young University in 1974, and a Master of Science, specializing in Agricultural Economics, from Brigham Young University in 1977. Mr. Cowan has 30 years of experience in farmland property analysis, investment, acquisition and management. |
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Name
|
Biographical Summary | |
---|---|---|
Thomas S.T. Gimbel | Mr. Gimbel has served as Vice President and a director since our inception in 2009. In addition, he is Executive Managing Director of Optima Fund Management LLC, a multi-disciplined hedge fund management firm that is SEC-registered and has assets under management of $4 billion, which he joined in 2004. Prior to joining Optima Fund Management LLC, Mr. Gimbel was Managing Director for Hedge Fund Investments at Credit Suisse Asset Management, LLC, an investment management firm. Prior to joining Credit Suisse, Mr. Gimbel was head of the Hedge Fund Department at Donaldson, Lufkin & Jenrette, which provided investment banking and security brokerage services prior to being acquired by Credit Suisse. Earlier in his career, Mr. Gimbel was Vice President and Treasurer of Smith Barney's real estate acquisition and syndication subsidiary. He is also a member of the Board and Investment Committee of Lighthouse Guild, the Board of Overseers of Children's Hospital in Boston and a director of Prime Energy Corporation. Mr. Gimbel has a B.A. in economics from Bowdoin College and an M.B.A. in finance from Columbia Business School. | |
Geoffrey M. Lewis |
|
Mr. Lewis is a Chartered Accountant (South Africa) and a Certified Public Accountant who has served as our Treasurer since our inception in 2009. In addition, Mr. Lewis is Partner, Chief Financial Officer, Chief Operations Risk Officer and Chief Compliance Officer of Optima Fund Management LLC, a multi-disciplined hedge fund management firm that is SEC-registered and has assets under management of $4 billion, which he joined in 1989 and is responsible for all aspects of accounting, tax, operations and compliance. From 1986 to 1989, Mr. Lewis was Senior Audit Manager at Spicer & Oppenheim, a public accounting firm. From 1981 to 1986, Mr. Lewis was a Partner at Fisher Hoffman Stride, among the ten largest auditing firms in South Africa at the time. He is currently the President of Jewish Family Service of Bergen and North Hudson, a Trustee of Solomon Schechter Day School of Bergen County and a former President and Board Member of the Northern New Jersey/Rockland County Chapter of the Juvenile Diabetes Research Foundation. Mr. Lewis earned a Bachelor of Accounting, with distinction, from the University of Witwatersrand in Johannesburg, South Africa. |
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Name
|
Biographical Summary | |
---|---|---|
Lindsey B. Sichel | Ms. Sichel has been working with us since our inception in 2009 and has been our Senior Agricultural Analyst since 2012. In addition, she is a Vice President in the Risk Management Group of Optima Fund Management LLC, a multi-disciplined hedge fund management firm that is SEC-registered and has assets under management of $4 billion, which she joined in 2005. Prior to joining Optima Fund Management LLC, she was a Finance and Operations Associate at D. E. Shaw & Co., L.P., an investment and technology development company. Before joining D. E. Shaw & Co. L.P., Ms. Sichel worked at Teachers Insurance and Annuity AssociationCollege Retirement Equities Fund (TIAACREF), where she obtained her Series 6 & 63 Licenses. Ms. Sichel serves on the board of directors of Thru My Eyes, a non-profit organization. She received her B.A. in English from Cornell University, College of Arts and Sciences, with Distinction in All Subjects. Ms. Sichel has more than a dozen years of varied financial, operations and marketing experience within the investment industry. | |
Morton Allan Cohn |
|
Mr. Cohn is a private investor and has been continuously for the past five years. Mr. Cohn is currently a director of Houston Distributing Company, and has previously served as a director of the Texas Heart Institute, the 100 Club, Cash America, Kincaid Furniture, Capital Bank, MBank and The Childress Foundation. Mr. Cohn received his Bachelor's Degree from the University of Texas, a Masters from the London School of Economics and served in the Air National Guard Reserves. |
Roberto A. de Guardiola |
|
Mr. de Guardiola is President of de Guardiola Advisors, LLC, an investment banking firm based in Florida that specializes in the investment management industry since 2000. From 1998 to 2000, he served as Managing Director of Putnam, Lovell, de Guardiola & Thornton, an investment banking firm based in New York. Mr. de Guardiola holds a B.S. in economics from the University of Pennsylvania and an M.B.A. from the Wharton School of the University of Pennsylvania. |
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Name
|
Biographical Summary | |
---|---|---|
James B. Hoover | Mr. Hoover has served as a director since 2014. Mr. Hoover is the Founder and Managing Member of Dauphin Capital Partners, which is a family office that he founded in 1998. Prior to founding Dauphin Capital Partners, Mr. Hoover was a general partner of Welsh, Carson, Anderson & Stowe, a private equity firm, from 1992 to 1998. Before joining Welsh, Carson, Anderson & Stowe, Mr. Hoover was a general partner of Robertson, Stephens & Company, an investment banking firm, from 1984. Mr. Hoover started his investment career at Citibank, N.A. in 1977. He obtained an M.B.A. in finance from the Indiana University Graduate School of Business. During his more than 35 year investment career, Mr. Hoover has served on numerous private and public company boards of directors. | |
Terry Allen Kramer |
|
Ms. Kramer is a Tony Award-winning Broadway producer. She is currently and has spent over 30 years producing Broadway shows and is the President of Remarkable Partners LP, an investment advisor. She has an extensive background in finance and theatre and is also a significant private investor. Ms. Kramer is a co-owner of the Marquis theatre in New York City and the Aldwych and Adelphi theatres in London. Ms. Kramer is also a Trustee of New York Presbyterian Hospital, the Preservation Foundation of Palm Beach and the Foundation for Italian Art & Culture. |
Mark Wilkinson |
|
Mr. Wilkinson retired in 1986 as a Senior Vice President and senior agricultural professional from Prudential Insurance Company of America, an affiliate of our Agricultural Sub-Adviser, where he led the agricultural business and was involved with the acquisitions of CAPS, our property manager. Mr. Wilkinson is not affiliated with our Agricultural Sub-Adviser. Mr. Wilkinson has served on our Board of Directors since our inception. |
Director Qualifications
When considering whether directors have the experience, qualifications, attributes or skills, taken as a whole, to enable our Board of Directors to satisfy its oversight responsibilities effectively in light of our business and structure, our Board of Directors focused primarily on each person's background and experience as reflected in the information discussed in each of the director's individual biographies set forth above. We believe that our directors provide an appropriate combination of experience and skills relevant to the size and nature of our business. In particular, the members of our Board of Directors noted the following important characteristics, among others:
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Additionally, each of Messrs. Boardman, LeFrak, Gimbel and Lewis are founders of us and certain of our directors are also shareholders. See "Principal Stockholders."
Corporate Governance Profile
We have structured our corporate governance in a manner we believe closely aligns our interests with those of our stockholders. Notable features of our corporate governance structure include the following:
Our directors stay informed about our business by attending meetings of our Board of Directors and its committees and through supplemental reports and communications.
Role of the Board in Risk Oversight
One of the key functions of our Board of Directors is informed oversight of our risk management process. Our Board of Directors administers this oversight function directly, with support from its three standing committees, the audit committee, the nominating and corporate governance committee and the compensation committee, each of which addresses risks specific to their respective areas of oversight. In particular, our audit committee has the responsibility to consider and discuss our major financial risk exposures and the steps our management has taken to monitor and control these exposures, including guidelines and policies to govern the process by which risk assessment and management is undertaken. The audit committee also monitors compliance with legal and regulatory
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requirements, in addition to oversight of the performance of our internal audit function. Our nominating and corporate governance committee monitors the effectiveness of our corporate governance guidelines and code of business conduct and ethics, including whether they are successful in preventing illegal or improper liability-creating conduct. Our compensation committee assesses and monitors whether any of our compensation policies and programs has the potential to encourage excessive risk-taking.
Director Independence
Our Board of Directors will review the materiality of any relationship that each of our directors has with us, either directly or indirectly. Based on this review, we expect our Board of Directors to determine that each of the following, constituting at least a majority, is an "independent director" as defined by the New York Stock Exchange rules: Messrs. Cohn, de Guardiola, Hoover and Wilkinson and Ms. Kramer. Our independent directors will meet regularly in executive sessions without the presence of our officers and non-independent directors.
Board Committees
Our Board of Directors has established three standing committees: an audit committee, a compensation committee and a nominating and corporate governance committee. The principal functions of each committee are described below. We intend to comply with the corporate governance requirements and other rules and regulations of the New York Stock Exchange, as amended or modified from time to time, and each of these committees will be comprised exclusively of independent directors. Additionally, our Board of Directors may from time to time establish certain other committees to facilitate the management of our company.
Audit Committee
Our audit committee is comprised of Messrs. de Guardiola, Hoover and Cohn, Mr. de Guardiola, the chairman of our audit committee, qualifies as an "audit committee financial expert" as that term is defined by the applicable SEC regulations and New York Stock Exchange corporate governance listing standards. Our Board of Directors has determined that each of the audit committee members is "financially literate" as that term is defined by the New York Stock Exchange corporate governance listing standards. We have adopted an audit committee charter, which details the principal functions of the audit committee, including oversight related to:
The audit committee is also responsible for engaging an independent registered public accounting firm, reviewing with the independent registered public accounting firm the plans and results of the audit engagement, approving professional services provided by the independent registered public accounting firm, including all audit and non-audit services, reviewing the independence of the independent registered public accounting firm, considering the range of audit and non-audit fees and
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reviewing the adequacy of our internal accounting controls. The audit committee also will prepare the audit committee report required by SEC regulations to be included in our annual proxy statement.
Compensation Committee
Our compensation committee is comprised of Messrs. de Guardiola, Hoover and Cohn and Ms. Kramer, with Mr. de Guardiola serving as chairman. We have adopted a compensation committee charter, which details the principal functions of the compensation committee, including:
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee is comprised of Messrs. Hoover and Wilkinson and Ms. Kramer, with Mr. Hoover serving as chairman. We have adopted a nominating and corporate governance committee charter, which details the principal functions of the nominating and corporate governance committee, including:
In identifying and recommending nominees for directors, the nominating and corporate governance committee may consider diversity of relevant experience, expertise and background.
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Code of Business Conduct and Ethics
Our Board of Directors has established a code of business conduct and ethics that applies to our officers, directors and employees. Among other matters, our code of business conduct and ethics is designed to deter wrongdoing and to promote:
Any waiver of the code of business conduct and ethics for our executive officers or directors must be approved by a majority of our independent directors, and any such waiver shall be promptly disclosed as required by law or New York Stock Exchange regulations.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves as a member of a board of directors or compensation committee, or other committee serving an equivalent function, of any other entity that has one or more of its executive officers serving as a member of our Board of Directors or compensation committee.
Executive Officer and Director Compensation
Executive Officer Compensation
With the exception of Mr. Cowan who was hired in December of 2014, prior to the completion of this offering and the Internalization, because we did not conduct business in our current corporate structure, we did not have any employees and we did not pay compensation to any of our named executive officers for 2014. Accordingly, no compensation policies or objectives governed our named executive officer compensation. In connection with the completion of this offering, we expect to enter into employment agreements with each of our named executive officers. We have already entered into an employment agreement with Mr. Cowan. See "ManagementExecutive Officer and Director CompensationEmployment Agreements."
The table below sets forth the compensation expected to be paid in fiscal year 2015 to our named executive officers in order to provide some understanding of our expected compensation levels. While the table below accurately reflects our current expectations with respect to 2015 named executive officer compensation, actual 2015 compensation for these officers may be increased or decreased, including through the use of compensation components not currently contemplated or described herein.
Name and Principal Position
|
Year | Salary (1) | Bonus (2) |
Non-Equity
Incentive Awards (2) |
All Other Compensation | Total | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Thomas S.T. GimbelChief Executive Officer (3) |
2015 | $ | 450,000 | $ | 337,500 | $ | | $ | | $ | 787,500 | ||||||||
Robert L. CowanPresident and Chief Investment Officer |
2015 | $ | 300,000 | $ | 180,000 | $ | | $ | | $ | 480,000 | ||||||||
Geoffrey M. LewisChief Financial Officer and Treasurer (4) |
2015 | $ | 315,000 | $ | 126,000 | $ | | $ | | $ | 441,000 |
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amount payable pursuant to the Transitional Services Agreement will be pro-rated for each named executive officer based on the percentage of their time spent on the Company's business.
No equity awards have previously been granted to our named executive officers. Going forward, we may grant restricted shares of our common stock to our named executive officers pursuant to our 2014 Equity Incentive Plan.
Each individual will be eligible to participate in any retirement, pension, profit-sharing or other similar plans of ours or our affiliates. The individual will also be reimbursed for all ordinary and necessary business expenses incurred by the individual in connection with the individual's duties.
Our Board of Directors has established a Compensation Committee, with a charter for such committee. The Compensation Committee will be responsible for examining and establishing compensation programs for our Chief Executive Officer and other executive officers.
Director Compensation
Upon completion of this offering, as compensation for serving on our Board of Directors, each of our independent directors will receive an annual fee of $90,000, which may be paid in a combination of cash and equity, and to initially pay an additional $2,000 for each Board of Directors meeting attended in person and $500 for each Board of Directors meeting attended by telephone. The chairman of each of the audit, compensation and nominating and corporate governance committees will receive an additional annual fee of $15,000, $7,500 and $5,000, respectively. Further, for serving as a member of the audit, compensation and/or nominating and corporate governance committees, such members will receive an additional fee of $7,500, $3,750 and $2,500, respectively. In addition, we will reimburse our directors for their reasonable out-of-pocket expenses incurred in attending Board of Directors and committee meetings. Our Board of Directors may change the compensation of our independent directors in its discretion. We have not made any payments to any of our directors or director nominees to date.
Additionally, going forward, we may grant restricted shares of our common stock to our independent directors pursuant to our 2014 Equity Incentive Plan. See "2014 Equity Incentive Plan."
Our Board of Directors may change the compensation of our independent directors in its discretion.
2014 Equity Incentive Plan
In December 2014, our Board of Directors adopted, and our stockholders approved, our 2014 Equity Incentive Plan, under which we expect to grant future cash and equity incentive awards to our executive officers, employees, non-employee directors and other key persons in order to attract, motivate and retain the talent for which we compete. The 2014 Equity Incentive Plan will become effective upon the date immediately preceding the date of pricing for this offering. The material terms of the 2014 Equity Incentive Plan are summarized below.
The 2014 Equity Incentive Plan permits us to make grants of options, stock appreciation rights, restricted stock units, restricted stock, unrestricted stock, cash-based awards, dividend equivalent rights, performance-based awards and other equity-based awards or any combination of the foregoing. We have initially reserved a number of shares of common stock equal to 4.00% of the outstanding shares
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of common stock as of immediately following the consummation of this offering (including any shares of common stock subsequently issued pursuant to the underwriters' option to purchase additional shares in connection with this offering) (such number, the "Share Maximum") for the issuance of awards under the 2014 Equity Incentive Plan.
The shares we issue under the 2014 Equity Incentive Plan may be authorized but unissued shares or shares that we reacquire. The shares of common stock underlying any awards that are forfeited, canceled, expired or are otherwise terminated (other than by exercise) under the 2014 Equity Incentive Plan will be added back to the shares of common stock available for issuance under the 2014 Equity Incentive Plan. Shares tendered or held back upon the exercise of a stock option or settlement of an award to cover the exercise price or tax withholding and shares subject to a stock appreciation right that are not issued in connection with the settlement of the stock appreciation right upon the exercise thereof will not be added to the shares of common stock authorized for grant under the 2014 Equity Incentive Plan.
Stock options and stock appreciation rights with respect to no more than the Share Maximum may be granted to any one individual in any one calendar year. The maximum number of shares that may be issued as incentive stock options may not exceed the Share Maximum.
The 2014 Equity Incentive Plan will be administered by our compensation committee. Our compensation committee will have full power to select, from among the individuals eligible for awards, the individuals to whom awards will be granted, to make any combination of awards to participants and to determine the specific terms and conditions of each award, subject to the provisions of the 2014 Equity Incentive Plan. Persons eligible to participate in the 2014 Equity Incentive Plan will be those full- or part-time officers, employees, non-employee directors and other key persons (including consultants) as selected from time to time by our compensation committee in its discretion.
The 2014 Equity Incentive Plan permits the granting of both options to purchase shares of our common stock intended to qualify as incentive stock options under Section 422 of the Code and options that do not so qualify. The option exercise price of each option will be determined by our compensation committee but may not be less than 100% of the fair market value of our common stock on the date of grant. The term of each option will be fixed by our compensation committee and may not exceed 10 years from the date of grant. Our compensation committee will determine the vesting conditions for each option.
Our compensation committee may award stock appreciation rights subject to such conditions and restrictions as it may determine. Stock appreciation rights entitle the recipient to shares of our common stock, or cash, equal to the value of the appreciation in our stock price over the exercise price. The exercise price of a stock appreciation right may not be less than 100% of fair market value of our common stock on the date of grant and the term of each stock appreciation right may not exceed 10 years.
Our compensation committee may award restricted shares of common stock and restricted stock units to participants subject to such conditions and restrictions as it may determine. These conditions and restrictions may include the achievement of certain performance goals and/or continued employment with us through a specified vesting period. Our compensation committee may also grant shares of our common stock that are free from any restrictions under the 2014 Equity Incentive Plan. Unrestricted stock may be granted to participants in recognition of past services or for other valid consideration and may be issued in lieu of cash compensation due to such participant.
Our compensation committee may grant performance share awards to participants, which entitle the recipient to receive shares of common stock upon the achievement of certain performance goals and such other conditions as our compensation committee shall determine. Our compensation committee may grant dividend equivalent rights to participants, which entitle the recipient to receive credits for dividends that would be paid if the recipient had held a specified number of shares of our common stock.
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Our compensation committee may grant cash bonuses under the 2014 Equity Incentive Plan to participants, subject to the achievement of certain performance goals.
Our compensation committee may grant other equity-based awards, including LTIP units representing profits interests in our operating partnership. These units may be settled in cash or shares of common stock at our option.
Our compensation committee may grant awards of restricted stock, restricted stock units, performance share awards or cash-based awards under the 2014 Equity Incentive Plan that are intended to qualify as "performance-based compensation" under Section 162(m) of the Code. Those awards will only vest or become payable upon the attainment of performance goals that are established by our compensation committee and related to one or more performance criteria. The performance criteria that could be used with respect to any such awards may include any or all of the following: (1) total shareholder return; (2) net income (loss) (either before or after interest, taxes, depreciation and/or amortization); (3) changes in the market price of the common stock; (4) funds from operations or similar measure; (5) sales or revenue; (6) acquisitions or strategic transactions; (7) operating income; (8) return on capital, assets, equity or investment; (9) gross or net profit levels; (10) occupancy rates; (11) expense; (12) margins; (13) earnings (loss) per share of common stock; or (14) market share, any of which may be measured either in absolute terms or as compared to any incremental increase or as compared to results of a peer group. From and after the time that we become subject to Section 162(m) of the Code, the maximum award that is intended to qualify as "performance-based compensation" under Section 162(m) of the Code that may be made to any one employee during any one calendar year period is the Share Maximum with respect to a stock-based award and $5.0 million with respect to a cash-based award.
The 2014 Equity Incentive Plan provides that upon the effectiveness of a "sale event" (as defined in the 2014 Equity Incentive Plan), except as otherwise provided by our compensation committee in an award agreement, the parties to such sale event may cause the assumption or continuation of awards by the successor entity in the sale event, or the substitution of awards by such successor, with appropriate adjustment to awards as the parties shall agree. To the extent, however, that the parties to such sale event do not provide for assumption, continuation or substitution of awards, all stock options and stock appreciation rights shall become fully exercisable, awards subject to time-based vesting conditions will become vested and non-forfeitable and all awards with conditions and restrictions relating to the attainment of performance goals shall become vested and non-forfeitable to the extent provided in the relevant award agreement, and upon the effective time of the sale event, the 2014 Equity Incentive Plan and all awards thereunder shall terminate. In the event of such termination, we may make or provide for a cash payment to participants holding options and stock appreciation rights equal to the difference between the per-share consideration received in the sale event and the exercise price of the options or stock appreciation rights in exchange for the cancellation thereto or provide such participants with a specified period of time to exercise outstanding stock options and stock appreciation rights prior to the consummation of the sale event.
Our Board of Directors may amend or discontinue the 2014 Equity Incentive Plan and our compensation committee may amend or cancel outstanding awards for purposes of satisfying changes in law or any other lawful purpose, but no such action may adversely affect rights under an award without the holder's consent. Certain amendments to the 2014 Equity Incentive Plan require the approval of our stockholders. The 2014 Equity Incentive Plan provides that our compensation committee may not reduce the exercise price of outstanding stock options or stock appreciation rights or re-price these awards through cancellation and re-grants or through cancellation in exchange for a cash payment without stockholder approval.
No awards may be granted under the 2014 Equity Incentive Plan after the date that is 10 years from the date of stockholder approval of the 2014 Equity Incentive Plan, and no incentive stock options may be granted after the date that is 10 years from the date on which our Board of Directors
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adopted the 2014 Equity Incentive Plan. No awards under the 2014 Equity Incentive Plan have been made prior to the date hereof.
Employment Agreements
We entered into an employment agreement with Robert L. Cowan, our President and Chief Investment Officer, on October 1, 2014, and amended the employment agreement on October 29, 2014. Pursuant to the terms of the employment agreement, as amended, Mr. Cowan will receive an annual salary of $300,000 and will be eligible to receive a cash bonus of at least $80,000 for the 2015 calendar year and a discretionary bonus based on performance in subsequent years. Going forward, Mr. Cowan will also be entitled to stock grants pursuant to our 2014 Equity Incentive Plan, to be determined by our non-Executive Board members and our compensation committee in its sole discretion. In the event Mr. Cowan elects to terminate his employment with us after at least nine months of employment due to a change in his management level and position, he will be entitled to receive the full bonus amount described above. Mr. Cowan's employment commenced on December 1, 2014.
In connection with the completion of this offering, we expect to enter into employment agreements with each of our named executive officers, except for Mr. Cowan. The employment agreements for Mr. Gimbel and Ms. Sichel will provide for a base salary and bonus opportunity for each named executive officer, a portion of which will be reimbursed by Optima under the Transitional Services Agreement. It is expected that Mr. Gimbel and Ms. Sichel will dedicate a substantial majority of their time to the Company's business. Mr. Lewis's employment agreement with the Company will also provide that his base salary and bonus opportunity will be incurred by Optima given that while he will dedicate a significant amount of his time to the Company's business, he is expected to also dedicate substantial time to Optima. Going forward, management will also be entitled to stock grants pursuant to our 2014 Equity Incentive Plan, to be determined by our non-Executive Board members and our compensation committee in its sole discretion. The Company will reimburse Optima for this time pursuant to the Transitional Services Agreement. We expect these employment agreements will have a term of years, unless terminated earlier by us for Cause (as defined in the employment agreements) or by the named executive officer upon 90 days' prior written notice. If an employment agreement is terminated by us for Cause, then the named executive officer will only receive his or her salary through the date of termination, if applicable. If an employment agreement is terminated by us without Cause, then the named executive officer will be eligible to receive , if applicable. Following the completion of this offering, we intend to hire additional dedicated senior-level financial/accounting personnel to support the Company's internal accounting function.
Indemnification of Directors and Officers and Limitation of Liability
For information concerning indemnification applicable to our directors and officers, see "Certain Provisions of Maryland Law and of Our Charter and Bylaws."
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The following table sets forth certain information regarding the beneficial ownership of shares of our common stock and shares of common stock issuable upon redemption of Common Units as of March 31, 2015 for (1) each person known to us to be the beneficial owner of 5% or more of our outstanding common stock, (2) each of our directors, director nominees and named executive officers, and (3) all of our directors, director nominees and executive officers as a group. Each person named in the table has sole voting and investment power with respect to all of the shares of our common stock shown as beneficially owned by such person, except as otherwise set forth in the footnotes to the table.
The SEC has defined "beneficial ownership" of a security to mean the possession, directly or indirectly, of voting power or investment power over such security. A stockholder is also deemed to be, as of any date, the beneficial owner of all securities that such stockholder has the right to acquire within 60 days after that date through (1) the exercise of any option, warrant or right, (2) the conversion of a security, (3) the power to revoke a trust, discretionary account or similar arrangement or (4) the automatic termination of a trust, discretionary account or similar arrangement. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of our common stock subject to options or other rights (as set forth above) held by that person that are exercisable as of the completion of this offering or will become exercisable within 60 days thereafter, are deemed outstanding, while such shares are not deemed outstanding for purposes of computing percentage ownership of any other person.
Unless otherwise indicated, the address of each named person is c/o American Farmland Company, 10 East 53 rd Street, New York, New York 10022. No shares or Common Units beneficially owned by any executive officer or director have been pledged as security for a loan.
|
Common Stock | Common Units |
Common Stock and
Common Units |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name of Beneficial Owner
|
Number of
Shares |
Percent
Before Offering |
Number of
Units |
Percentage
Before Offering (1) |
Percentage
Before the Offering (1) |
Percentage
After the Offering (1) |
|||||||||||||
Named Executive Officers and Directors |
|||||||||||||||||||
D. Dixon Boardman (2) (10) |
| | 239,610 | 10.05 | % | 1.58 | % | ||||||||||||
Morton A. Cohn |
200,000 | 1.84 | % | | | 1.50 | % | ||||||||||||
Robert L. Cowan |
| | | | | ||||||||||||||
Thomas S.T. Gimbel (3) |
| | 17,716 | * | * | ||||||||||||||
Robert A. de Guardiola, Jr. (4) |
126,426 | 1.16 | % | | | * | |||||||||||||
James B. Hoover |
26,322 | * | | | * | ||||||||||||||
Terry Allen Kramer |
500,000 | 4.59 | % | | | 3.77 | % | ||||||||||||
Harrison T. LeFrak (5) |
| | 974,312 | 40.85 | % | 6.85 | % | ||||||||||||
Geoffrey M. Lewis (6) |
| | 10,167 | * | * | ||||||||||||||
Lindsey Sichel |
| | | | | ||||||||||||||
Mark Wilkinson |
| | | | | ||||||||||||||
All executive officers and directors as a group (11 people) |
852,748 | 7.59 | % | 1,241,805 | 52.07 | % | 14.59 | % | |||||||||||
5% Holders |
|
|
|
|
|
|
|||||||||||||
Merseyside Pension Fund (7) |
1,545,894 | 14.19 | % | | | 11.65 | % | ||||||||||||
Goldstar Limited (8) |
1,253,945 | 11.51 | % | | | 9.45 | % | ||||||||||||
Forrest General County Hospital Pension Plan (9) |
802,881 | 7.37 | % | | | 6.05 | % |
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Interests of Certain Directors and Executive Officers in the Internalization
D. Dixon Boardman, Thomas S. T. Gimbel and Geoffrey M. Lewis are members of our Board of Directors, and each is a partner or officer of Optima. Furthermore, Harrison LeFrak owns an indirect interest in AFA, is a current member of the Board and is expected to serve as a director after the Internalization. Each of these individuals are, or have an ownership interest in, a Contributor and, as a result, each of them has interests in the Internalization that differ from those of our stockholders as each will have an interest in the consideration received by the Contributors in the Internalization. The following table sets forth the number of Common Units received by these individuals as a result of the Internalization.
Name | Relationship with Us |
Number of
Common Units Received in Contribution |
||
---|---|---|---|---|
D. Dixon Boardman |
Chairman | |||
Harrison LeFrak |
Vice Chairman | |||
Thomas S. T. Gimbel |
Executive Officer and Director | |||
Geoffrey M. Lewis |
Executive Officer and Director |
Advisory Fees
The following section describes certain fee arrangements in effect prior to the Internalization. After the Internalization, they will no longer be in effect.
Our operating partnership, through which we conduct substantially all of our business, prior to the Internalization was managed and advised by AFA, an affiliate of Optima prior to the Internalization, subject to the oversight of our Board of Directors. Pursuant to the terms of the existing Amended and Restated Agreement of Limited Partnership of our operating partnership, AFA provides substantially all of the investment advisory, acquisition, disposition, property management, leasing, financing and other administrative services that we require in pursuing our investment policies and objectives. Until the Internalization occurs, AFA is a joint venture between Optima, an affiliate of LeFrak Organization, Inc., Alfonso Fanjul, J. Pepe Fanjul and William von Mueffling.
AFA has historically received a quarterly management fee, payable in arrears by our operating partnership, equal to (i) one-quarter of 1% of the gross asset value of our operating partnership as of the end of the preceding quarter in respect of the partnership interests held by us and any other partners other than AFA, Optima and their respective owners, and (ii) one-quarter of 0.5% of the gross asset value of our operating partnership as of the end of the preceding quarter in respect of partnership interests held by AFA, Optima and their respective owners.
AFA has also received performance fees. AFA has historically been entitled to an amount at the end of each calendar year equal to the sum of (i) 15% of the contractual definition of FFO attributable to our operating partnership (which is comparable to "Core FFO attributable to the Company" after excluding certain adjustments for noncontrolling interests) for the calendar year attributable to the partnership interests held by us and any partners other than AFA, Optima and their respective owners, plus (ii) 10% of the contractual definition of FFO attributable to our operating partnership for the calendar year attributable to the partnership interests held by AFA, Optima and their respective owners. Additionally, AFA has historically been entitled to an amount at the end of each calendar year equal to the sum of (i) 15% of two-thirds of the sum of (a) net realized capital appreciation in our operating partnership's fixed assets and (b) net unrealized capital appreciation in our operating partnership's fixed assets for such year that is attributable to the partnership interests held by us and
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any partners other than Optima, AFA and their respective owners, (ii) 10% of two-thirds of the sum of (a) net realized capital appreciation in our operating partnership's fixed assets and (b) net unrealized capital appreciation in our operating partnership's fixed assets for such year that is attributable to the partnership interests held by Optima, AFA and their respective owners, plus (iii) with respect to any net realized capital appreciation in our operating partnership's fixed assets for such calendar year, (a) 15% of one-third of the net realized capital appreciation attributable to the partnership interests held by us and any partners other than AFA, Optima and their respective owners, and (b) 10% of one-third of the net realized capital appreciation attributable to the partnership interests held by AFA, Optima and their respective owners.
Our operating partnership paid an aggregate of $1,211,390 and $1,296,857 in fees to AFA during the fiscal years ended December 31, 2013 and 2014, respectively. The following table sets forth the approximate dollar amount of the interests of Messrs. Boardman, Gimbel, Lewis and LeFrak as a result of their direct or indirect ownership in AFA:
Name
|
Relationship with Us |
Interest in Fees
for the Fiscal Year Ended December 31, 2013 |
Interest in Fees
for the Fiscal Year Ended December 31, 2014 |
Interest in Fees
for the Three Months Ended March 31, 2015 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
D. Dixon Boardman |
Director | 284,434 | 302,634 | 170,089 | ||||||||
Harrison LeFrak |
Director | 367,428 | 396,538 | | ||||||||
Thomas S.T. Gimbel |
Executive Officer and Director | 73,126 | 80,726 | 4,750 | ||||||||
Geoffrey M. Lewis |
Executive Officer and Director | 61,238 | 64,858 | 48,324 |
Amended Partnership Agreement
In connection with this offering, we will enter into the amended partnership agreement for our operating partnership. As a result of the Internalization, the Contributors will become limited partners of our operating partnership. Beginning on or after the date which is 12 months after the issuance of Common Units to a limited partner in our operating partnership, other than us, such limited partner will have the right to require our operating partnership to redeem part or all of its Common Units for cash, based upon the value of an equivalent number of shares of our common stock at the time of the election to redeem, or, at our election, shares of our common stock on a one-for-one basis. See "Our Operating Partnership and the Amended Partnership Agreement" for a summary of the terms of the amended partnership agreement.
Registration Rights
In connection with the Internalization, we will enter into a registration rights agreement pursuant to which each person who receives Common Units in as a result of the Internalization will have the right to cause us to register with the SEC the shares of our common stock that they receive upon redemption of any Common Units held by such holders pursuant to the terms of the amended partnership agreement, which shares are referred to as registrable securities.
Under this agreement, beginning within 10 business days following the first date when we become eligible to file a shelf registration statement with respect to the registrable shares, we will agree to file a shelf registration statement relating to the issuance of such parties' registrable securities, or a resale shelf registration statement, and maintain the effectiveness of the shelf registration statement until all of the registrable securities have been disposed of by the holders or the date on which all registrable securities may be sold pursuant to Rule 144 under the Securities Act. This agreement will not provide the parties with any piggyback registration rights. We will bear all expenses incident to registering the shares, except such expenses shall not include any taxes (including transfer taxes), underwriting fees, discounts or commissions, legal fees and expenses of counsel to the holders and any underwriter engaged by holders and all other expenses incurred by the holders in connection with the
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performance of their obligations under the terms of the registration rights agreement. The agreement will also include an indemnification by us to the holders relating to certain liabilities under the applicable securities laws incurred in connection with the registration of any registrable securities. Any party to the agreement may transfer its rights to any wholly owned affiliate of such holder, any family member or trust established for the benefit of a holder that is a natural person, or in connection with a distribution by a holder to any partner, member, former partner, former member or the estate of such partner or member.
Ownership Limit Waivers
Our charter prohibits any person or entity from beneficially owning shares in excess of 9.8% (in value or in number of shares, whichever is more restrictive) of the outstanding shares of our common stock, or 9.8% in value of the aggregate of the outstanding shares of all classes and series of our stock. In connection with previous private placements of our common stock, we have granted two waivers from the ownership limit contained in our charter to two current stockholders to own up to approximately 12% and 14.8%, respectively, of shares of our outstanding common stock in the aggregate. We anticipate these stockholders will own less than 9.8% upon the completion of this offering, in which case the waivers will terminate. We do not expect that the issuance of these waivers will adversely affect our ability to qualify as a REIT.
Amended and Restated Sub-Advisory Agreement and Advisory Agreement
We, AFA and our operating partnership entered into an Amended and Restated Sub-Advisory Agreement with our Agricultural Sub-Adviser, effective as of the consummation of this offering, to provide us with certain agricultural investment, acquisition and property management services. See "Our Business and PropertiesInvestment Focus and ProcessUnderwriting Criteria and Due Diligence ProcessAgricultural Sub-Adviser" for details on the terms of the Amended and Restated Sub-Advisory Agreement, including the fees that will be payable to our Agricultural Sub-Adviser. Additionally, we have entered into an Advisory Agreement with AFA, effective as of the consummation of this offering, pursuant to which AFA, as our indirectly wholly-owned subsidiary will receive a quarterly management fee of 1.05% per annum plus other fees sufficient to allow AFA to pay our Agricultural Sub-Adviser for its services under the Amended & Restated Sub-Advisory Agreement.
Property Management
As part of its services, our Agricultural Sub-Adviser will thoroughly survey the local market of the proposed investment and identify a reputable, qualified property management firm and will provide a written recommendation proposing a firm to provide on-site property management services. In most, if not all cases, our Agricultural Sub-Adviser will recommend CAPS. CAPS is an affiliate of our Agricultural Sub-Adviser and provides property management and brokerage services to both affiliated and external clients. CAPS serves as the property manager for all of our properties, and we expect that CAPS will serve as the property manager for properties we acquire in the future.
We pay CAPS a property management fee for each property it manages based on either a percentage of a property's rental revenue, the number of acres comprising a property or a combination of the two. Such fees are determined and approved by management and the Board of Directors prior to closing the acquisition of any farm. For permanent crop mature farms, where leases are usually participating leases, CAPS' fees are generally stipulated by a "greater of" formula wherein CAPS is paid the greater of a fixed percent of the annual gross lease revenues or a fixed dollar amount per planted acre. For commodity and specialty/vegetable row crop mature farms, where leases are usually fixed in nature, CAPS' fees are generally fixed as a set percentage of the annual gross lease revenues. On development farms, where CAPS oversees a property developer, CAPS usually receives a fixed dollar per planted acre per year. As stipulated in our Amended and Restated Sub-Advisory Agreement,
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in determining whether to use CAPS or an alternate property management service, our Agricultural Sub-Adviser makes reasonable efforts to determine that CAPS' fees are commercially reasonably as compared to third party property management service providers providing comparable services and of comparable size, quality, expertise and ability. For the years ended December 31, 2014 and 2013, CAPS received aggregate fees of $569,468 and $449,073, respectively.
Transitional Services Agreement
At the closing of the Internalization, we will enter a Transitional Services Agreement, pursuant to which Optima will provide us with certain services at cost to the extent such services are necessary to operate our business, including office space, employees, financial accounting services and information technology resources. Mr. Gimbel and Ms. Sichel will be dedicating a substantial majority of their time to the Company's business with Mr. Lewis dedicating a significant amount of his time to the Company's business. Mr. Gimbel's and Ms Sichel's compensation, including salary, bonus, if applicable, and benefits, which will be set forth in employment agreements, will be incurred by the Company and will be reimbursed by Optima pursuant to the Transitional Services Agreement based on the allocation of time spent on Optima's business versus that of the Company. Mr. Lewis's compensation, including salary, bonus, if applicable, and benefits, which will be set forth in an employment agreement, will be incurred by Optima and will be reimbursed by the Company. Such reimbursement will be based on the allocation of time spent on the Company's business versus Optima's and will be a percentage of the named executive officer's compensation as described in such officer's employment agreement, if applicable. The Company will reimburse Optima for the costs of office space, data processing support and accounting and internal legal services provide by Optima. We anticipate these costs will amount to approximately $ on an annual basis.
This agreement is terminable by us on 30 days' notice without penalty, is terminable by Optima on 6 months' written notice and will terminate 12 months after the Internalization, unless otherwise extended or renewed. Because such personnel will also be employees of Optima, a substantial amount of their time and attention may be diverted from us. Additionally, each of Messrs. Boardman, Gimbel and Lewis are members of our Board of Directors and Messrs. Gimbel and Lewis are also members of our executive management team, and each is a partner or officer of Optima. As a result, the terms of this agreement may not be as favorable to us if they were negotiated with an unaffiliated party. We may choose not to enforce, or to enforce less vigorously, our rights under this agreement because of our desire to maintain an ongoing relationship with Optima.
Employment Agreements
In connection with the completion of this offering, we expect to enter into employment agreements with each of our named executive officers. The employment agreements for Mr. Gimbel and Ms. Sichel will provide for base salary and a bonus opportunity, a portion of which will be reimbursed by Optima under the Transitional Services Agreement based on the allocation of time spent on Optima's business versus that of the Company. Mr. Lewis's employment agreement with the Company will also provide for base salary and a bonus opportunity, which will be incurred by Optima and a portion of which will be reimbursed by the Company under the Transitional Services Agreement. We have already entered into an employment agreement with Mr. Cowan. See "ManagementExecutive Officer and Director CompensationEmployment Agreements/Severance Agreement."
Review and Approval of Future Transactions with Related Persons
Upon completion of this offering, we expect our Board of Directors to adopt a Related Person Transaction Approval and Disclosure Policy for the review, approval or ratification of any related person transaction. We expect this policy to provide that all related person transactions, other than a transaction for which an obligation to disclose under Item 404 of Regulation S-K (or any successor
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provision) arises solely from the fact that a beneficial owner of more than 5% of a class of our voting securities (or an immediate family member of any such beneficial owner) has an interest in the transaction, must be reviewed and approved by a majority of the disinterested directors on our Board of Directors in advance of us or any of our subsidiaries entering into the transaction; provided that, if we or any of our subsidiaries enter into a transaction without recognizing that such transaction constitutes a related person transaction, the approval requirement will be satisfied if such transaction is ratified by a majority of the disinterested directors on our Board of Directors promptly after we recognize that such transaction constituted a related person transaction. Disinterested directors are directors that do not have a personal financial interest in the transaction that is adverse to our financial interest or that of our stockholders. The term "related person transaction" refers to a transaction required to be disclosed by us pursuant to Item 404 of Regulation S-K (or any successor provision) promulgated by the SEC.
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Internalization
Since commencing operations in October 2009, we have been externally managed by AFA, which is an affiliate of Optima. During that time, we have relied on Optima personnel through AFA to provide the investment advisory, acquisition, disposition, property management, leasing, financing and other operating functions and administrative services that we require to achieve our investment objectives. Since 2009, AFA has engaged the Agricultural Sub-Adviser to assist it in providing us with a suite of investment, acquisition and property management services using the combined capabilities of AFA, Optima, and our Agricultural Sub-Adviser. As our business has matured, the Optima management personnel involved with our company have devoted an increasing amount of their time to our business.
On November 25, 2014, we and our operating partnership entered into a Contribution Agreement with each of the holders of equity ownership interests in AFA pursuant to which we will internalize the management functions historically provided by AFA upon the closing of this offering. In the transaction, the owners of 99.8% of the equity of AFA, who we refer to as the Contributors will contribute their AFA equity interests to our operating partnership in exchange for Common Units having an aggregate value of $11,976,000, which transaction we refer to as the Contribution. Certain of these Contributors are affiliated with us, including through affiliations with members of our Board of Directors. See "Certain Relationships and Related Party Transactions." Concurrently, Optima will contribute all of the equity interests of American Farmland TRS LLC, or AFTRS, a wholly owned subsidiary of Optima that owns the remaining 0.2% of the equity interests in AFA, to our operating partnership in exchange for Common Units having an aggregate value of $24,000, with AFTRS becoming a wholly owned subsidiary of our operating partnership, which transaction we refer to as the TRS Contribution. The actual number of Common Units to be issued to a Contributor or Optima, as applicable, will be determined upon the completion of this offering by dividing the value of the applicable consideration by the greater of (1) the public offering price of our common stock in this offering and (2) the net asset value per share of our common stock as of the end of the most recently completed fiscal quarter prior to the closing of this offering, determined in good faith by us in a manner consistent with past practice. We refer to the transactions contemplated by the Contribution Agreement, including the Contribution and the TRS Contribution, as the Internalization.
Under the Contribution Agreement, the completion of the Internalization is conditioned upon the pricing of this offering. If we do not complete the initial public offering, we will not complete the Internalization. We expect to recognize an expense in connection with the Internalization, representing the excess of the amount paid over the fair value of the net assets acquired in connection therewith.
As a result of the Internalization, AFA will become a wholly owned subsidiary of our operating partnership and we will become self-managed. We expect that, after the Internalization, our management team will be comprised of the current executive officers of AFA, new hires with extensive market experience and expertise, and other Optima employees who will dedicate a substantial portion of their time to our business. Management team members may be employees of our company or they may be shared with Optima pursuant to an arrangement described below. In addition, we will continue to rely upon our Agricultural Sub-Adviser, pursuant to the Amended and Restated Sub-Advisory Agreement that is described in more detail under "Our Business and PropertiesInvestment Focus and ProcessUnderwriting Criteria and Due Diligence ProcessAgricultural Sub-Adviser."
At the closing of the Internalization, we will enter into certain ancillary agreements, including a Transitional Services Agreement pursuant to which Optima will provide us with certain services at cost to the extent such services are necessary to operate our business, including office space, employees, financial accounting services and information technology resources. This agreement is terminable by us on 30 days' notice without penalty, is terminable by Optima on 6 months' written notice, and will terminate 12 months after the Internalization, unless otherwise extended or renewed. At the closing of the Internalization, we also will enter into a Registration Rights Agreement with each of the Contributors with respect to the registration of shares of our common stock for which Common Units
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held by such Contributors may be redeemed. See "Shares Eligible for Future SaleRegistration Rights." Additionally, we will enter into a Second Amended and Restated Agreement of Limited Partnership of our operating partnership, pursuant to which, among other matters, AFA will withdraw as a co-general partner of our operating partnership and we will serve as its sole general partner. See "Our Operating Partnership and the Amended Partnership Agreement."
Special Committee, Board and Stockholder Approval
Some of our directors are, or are affiliated with, equity owners of AFA or are employees of Optima. As a result, those directors have, or may have, interests in the Internalization that differ from those of our existing stockholders. To address these potential conflicts of interest, our Board of Directors formed a special committee comprised of two of our independent and disinterested directors, James B. Hoover and Mark Wilkinson, to review, consider and negotiate the proposed Internalization on our behalf. Among other responsibilities, the special committee was asked to ultimately determine whether or not we should pursue the Internalization and to make a recommendation to the full Board of Directors. To advise it in these matters, the special committee engaged an independent financial advisor and independent legal counsel and received a fairness opinion from its independent financial advisor. On the morning of November 25, 2014, the special committee approved the Internalization and related agreements, and recommended that our Board of Directors also approve the Internalization and the related agreements. On November 25, 2014, our Board of Directors considered the special committee's recommendation and, based in part on such recommendation, approved the Internalization and recommended that our stockholders approve the Internalization. On December 15, 2014, we received the requisite consent from a majority of our disinterested stockholders approving the Internalization. We expect that the Internalization will be completed simultaneously with, and conditioned upon, the completion of this offering.
Our Operating Entities
Our Company
We are currently an externally managed Maryland corporation focused primarily on the acquisition of a diversified portfolio of specialty/vegetable row crop, commodity row crop and permanent crop farmland located in the U.S. in select major agricultural states. We have structured our portfolio with the goal of achieving annual returns both from income and capital appreciation that meet or exceed returns from comparable farms and that display low correlation to other asset class returns and limited volatility. We generate virtually all of our revenue by leasing our portfolio of farms. As of March 31, 2015, we owned 17 farms located in Alabama, Arkansas, California, Florida, Georgia and Illinois.
We were incorporated in Maryland and commenced operations on October 15, 2009. Because we did not have taxable income for the years ended December 31, 2009 through December 31, 2011, we did not elect REIT status for those years and were treated for U.S. federal tax purposes as a regular "C" corporation. We elected to be treated as a REIT for U.S. federal tax purposes, commencing with, and in connection with the filing of our federal tax return for, the taxable year ended December 31, 2012. As a REIT, we generally are not subject to federal income tax on the taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax at regular corporate rates. Even if we qualify for taxation as a REIT, we may be subject to some federal, state and local taxes on our income or property. In addition, the income of any taxable REIT subsidiary that we own will be subject to taxation at regular corporate rates.
We conduct our business and own all of our farms through our operating partnership. As of March 31, 2015, we owned approximately 82.0% of the partnership interests in our operating partnership, which includes the Co-General Partner interest, and, following the Internalization described in "Internalization," we anticipate owning approximately % of the partnership interests in our operating partnership.
Our Operating Partnership
Our operating partnership is a Delaware limited partnership formed on August 14, 2009, which commenced operations on October 15, 2009. Our operating partnership holds substantially all of our assets and conducts all of our operations. Following this offering and the Internalization as described above under "Internalization," we will be the exclusive general partner of our operating partnership.
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POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain of our investment, financing and other policies. These policies have been determined by our Board of Directors and, in general, may be amended or revised from time to time by our Board of Directors without a vote of our stockholders.
Investment Policies
Investments in Real Estate or Interests in Real Estate
We conduct all of our investment activities and own all of our farms through our operating partnership. Our investment objectives are to achieve annual returns both from income and capital appreciation which meet or exceed returns from comparable farmland farms and which display low correlation to other asset class returns and limited volatility. Consistent with these investment objectives, we are focused primarily on the acquisition of a diversified portfolio of specialty/vegetable row crop, commodity row crop and permanent crop farmland (including development farmland) located in the U.S. in select major agricultural states. Our operating partnership locates diversified and dynamic farmland investments and provides investment advisory, acquisition, disposition, property management, leasing, financing and other administrative services to achieve our investment objectives. For a discussion of our farms and our acquisition and other strategic objectives, see "Our Business and Farms."
We pursue our investment objectives primarily through the ownership by our operating partnership of our portfolio of farms and we generate virtually all of our revenue by leasing our portfolio of farms. We and our operating partnership have adopted investment guidelines, which our Board of Directors reviews at least annually. We currently intend to invest in farms across four key types of property: permanent crops, specialty/vegetable row crops, commodity row crops and development farmland. The current investment guidelines seek to acquire high-quality cropland diversified by crop type, based on the total value of our portfolio, within the target ranges indicated below:
Property Type
|
Target Range | |
---|---|---|
Permanent crop |
35 - 55% | |
Specialty/vegetable row crop |
15 - 35% | |
Commodity row crop |
10 - 30% | |
Development |
10 - 30% |
Allocations are generally expected to remain within the ranges specified to maintain diversification of the portfolio. Since development farms may not generate lease income for a number of years, the target range for such development farms may be more variable. Furthermore, acquisition opportunities may arise which, due to relatively larger size or particular characteristics deemed suitable by management, will take property type weightings outside of the target ranges shown above. Furthermore, our operating partnership shall generally seek to limit investments in livestock, poultry or dairy farms to 10% of its gross asset value as measured at the time of such investment, excluding investments that are incidental to an acquisition of one or more other assets. We intend to engage in all future investment activities in a manner that is consistent with our intention to qualify and maintain our qualification as a REIT for U.S. federal income tax purposes. In addition, we may expand and improve the farms we presently own or other acquired farms, or sell such farms, in whole or in part, when circumstances warrant.
We also seek farms only in the prime growing and weather regions of the U.S. In acquiring future farms, our operating partnership will seek to maintain geographic diversification across the broad USDA Regions, as well as across varied microclimatic regions within each USDA Region, to the extent applicable. Further, certain regions lend themselves to certain crop types. As an example, the majority of commodity row crops are grown in the Midwest, Plains and Delta regions whereas the majority of
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permanent crops and specialty/vegetable row crops are grown in the Pacific, Southeast and parts of the Mountain regions. Additionally, our operating partnership will seek to limit investments in real property located outside the U.S. to 20% of its gross asset value as measured at the time of such investment.
Other than as described above, our operating partnership seeks to acquire farms where the fair market value of any single property would represent less than 35% of its gross asset value. In the event that two or more assets or farms are acquired simultaneously as a portfolio purchase or otherwise (including, the acquisition of an entity that holds two or more assets or farms), this restriction will apply separately to each asset or property. However, some acquisition opportunities may arise which, due to relatively larger size or particular characteristics deemed suitable by management (such as containing a variety of crop types), will exceed this limitation. Finally, subject to approval by our Board of Directors, we and our operating partnership will, from time to time, implement any changes to the investment guidelines they believe necessary or appropriate. Our operating partnership may also make temporary deviations from the investment guidelines without the need for the consent of our Board of Directors if we determine it is in the best interest of our operating partnership.
We may also participate with third parties in property ownership, through joint ventures or other types of co-ownership. We also may acquire real estate or interests in real estate in exchange for the issuance of common stock, units, preferred stock or options to purchase stock. These types of investments may permit us to own interests in larger assets without unduly restricting our diversification and, therefore, provide us with flexibility in structuring our portfolio. We will not, however, enter into a joint venture or other partnership arrangement to make an investment that would not otherwise meet our investment policies.
Equity investments in acquired farms may be subject to existing mortgage financing and other indebtedness or to new indebtedness which may be incurred in connection with acquiring or refinancing these farms. Debt service on such financing or indebtedness will have a priority over any dividends with respect to our common stock. Investments are also subject to our policy not to fall within the definition of an "investment company" under the 1940 Act.
Investments in Real Estate Debt
Our business objectives emphasize investments in farmland. Although we do not presently intend to invest in mortgages or deeds of trust, other than in a manner that is consistent with an investment in farmland, we may elect, in our discretion and without stockholder approval, to invest in mortgages and other types of real estate interests, including, without limitation, participating or convertible mortgages; provided, in each case, that such investment is consistent with our qualification as a REIT. There is no restriction on the proportion of our assets that may be invested in a type of mortgage or any single mortgage or type of mortgage loan. Investments in real estate mortgages run the risk that one or more borrowers may default under the mortgages and that the collateral securing those mortgages may not be sufficient to enable us to recoup our full investment.
Securities of, or Interests in, Persons Primarily Engaged in Real Estate Activities and Other Issuers
We may in the future invest in securities of other REITs, other entities engaged in real estate activities or securities of other issuers where such investment would be consistent with our investment objectives and our qualification as a REIT. We may invest in the debt or equity securities of such entities, including for the purpose of exercising control over such entities. We have no current plans to invest in entities that are not engaged in real estate activities. While we may attempt to diversify our investments with respect to the farmland owned by such entities, in terms of property locations, size and market, we do not have any limit on the amount or percentage of our assets that may be invested in any one entity, property or geographic area. Our investment objectives are to increase stockholder value by achieving attractive annual returns through a combination of income and capital appreciation,
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primarily from our current farms and through acquisitions of additional farms that meet our established investment guidelines. We have not established a specific policy regarding the relative priority of these investment objectives. We will limit our investment in such securities so that we will not fall within the definition of an "investment company" under the 1940 Act.
Investments in Other Securities
Other than as described above, we do not intend to invest in any additional securities such as bonds, preferred stocks or common stock.
Dispositions
We may from time to time dispose of some of our farms. Generally, we expect to own our farms for an average of ten to fifteen years. However, shorter or longer holding periods may be warranted depending on the particular circumstances of a property. We anticipate that development farms, and those farms with alternative use potential, will tend to have longer holding periods. In all cases, we will try to take advantage of property cycles and both buy and sell farms at opportune times. Any dispositions will be based on management's periodic review of our portfolio and if our Board of Directors determines such action would be in our best interest.
Financings and Leverage Policy
We anticipate using a number of different sources to finance our acquisitions and operations, including cash flows from operations, asset sales, seller financing, issuance of debt securities, private financings (such as additional bank credit facilities, which may or may not be secured by our assets), property-level mortgage debt, common or preferred equity issuances or any combination of these sources, to the extent available to us, or other sources that may become available from time to time. Any debt that we incur may be recourse or non-recourse and may be secured or unsecured. We also may take advantage of joint venture or other partnering opportunities as such opportunities arise in order to acquire farms that would otherwise be unavailable to us. We may use the proceeds of our borrowings to acquire assets, to refinance existing debt or for general corporate purposes.
Although we are not required to maintain any particular leverage ratio, we intend, when appropriate, to employ prudent amounts of leverage and to use debt as a means of providing additional funds for the acquisition of assets, to refinance existing debt, to make tenant or other capital expenditures or for general corporate purposes. We expect to use leverage conservatively, assessing the appropriateness of new equity or debt capital based on market conditions, including prudent assumptions regarding future cash flow, the creditworthiness of tenants and future rental rates. Our charter and bylaws do not limit the amount of debt that we may incur, and our Board of Directors has not adopted a policy limiting the total amount of debt that we may incur. However, we intend to limit our use of indebtedness to less than 50%, and expect generally to have indebtedness within the 35 - 40% range, of our gross asset value, but our amount of leverage may vary over time.
Our Board of Directors will consider a number of factors in evaluating the amount of debt that we may incur. If we adopt a debt policy, our Board of Directors may from time to time modify such policy in light of then-current economic conditions, relative costs of debt and equity capital, cash flows and market values of our farms, general conditions in the market for debt and equity securities, fluctuations in the market price of our common stock, growth and acquisition opportunities and other factors. Our decision to use leverage in the future to finance our assets will be at our discretion and will not be subject to the approval of our stockholders, and we are not restricted by our governing documents or otherwise in the amount of leverage we may use.
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Conflicts of Interest Policies
Relationship with Our Operating Partnership
Conflicts of interest may exist or could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and our operating partnership or any partner thereof, on the other. Our directors and officers have duties to our company under applicable Maryland law in connection with their management of our company. At the same time, we, as the general partner of our operating partnership, have fiduciary duties and obligations to our operating partnership and its limited partners under Delaware law and the amended partnership agreement in connection with the management of our operating partnership. Our fiduciary duties and obligations, as the general partner of our operating partnership, may come into conflict with the duties of our directors and officers to our company.
Unless otherwise provided for in a partnership agreement, Delaware law generally requires a general partner of a Delaware limited partnership to adhere to fiduciary duty standards under which it owes its limited partners the highest duties of good faith, fairness and loyalty and which generally prohibit such general partner from taking any action or engaging in any transaction as to which it has a conflict of interest. The amended partnership agreement, provides that, in the event of a conflict between the interests of the limited partners of our operating partnership, on the one hand, and the separate interests of our stockholders, on the other hand, we, in our capacity as the general partner of our operating partnership, shall endeavor in good faith to resolve the conflict in a manner not adverse to either our stockholders or the limited partners of our operating partnership, provided that any such conflict that cannot be resolved in a manner not adverse to either our stockholders or the limited partners of our operating partnership will be resolved in favor of our stockholders. The amended partnership agreement further provides that we, in our capacity as the general partner of our operating partnership, and any of our directors, officers, agents or employees, owe no duties, fiduciary or otherwise, to our operating partnership, its partners, any assignee or any creditor of our operating partnership except our duty to fulfill our obligations expressly set forth in the amended partnership agreement in good faith.
Additionally, the amended partnership agreement provides that we, in our capacity as the general partner of our operating partnership, will not be not liable or accountable to our operating partnership or any partner or assignee for monetary damages for losses sustained, liabilities incurred or benefits not derived as a result of errors in judgment or mistakes of fact or law or any act or omission unless we (1) acted in bad faith or with active and deliberate dishonesty as established by a final nonappealable judgment, and the act or omission was material to the matter giving rise to the loss, liability or benefit not derived, (2) actually received an improper benefit or profit in money, property or services, or (3) in the case of a criminal proceeding, had reasonable cause to believe that the act or omission was unlawful. Our operating partnership must indemnify us, our directors, officers or employees and others designated by us, against any and all claims that relate to the operations of our operating partnership, our operations or the operations of our subsidiaries, unless (1) an act or omission of the indemnified person was material to the matter giving rise to the action and either was committed in bad faith or was the result of active and deliberate dishonesty, (2) the indemnified person actually received an improper personal benefit in money, property or services, or (3) in the case of a criminal proceeding, the person had reasonable cause to believe the act or omission was unlawful.
Our operating partnership must also pay or reimburse the reasonable expenses of any such person upon its receipt of a written affirmation of the person's good faith belief that the standard of conduct necessary for indemnification has been met and a written undertaking to repay any amounts paid or advanced if it is ultimately determined that the person did not meet the standard of conduct for indemnification. Our operating partnership will not indemnify or advance funds to any person with respect to any action initiated by the person seeking indemnification without our approval (except for
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any proceeding brought to enforce such person's right to indemnification under the amended partnership agreement) or if the person is found to be liable to us or our operating partnership on any portion of any claim in the action.
Optima
Several of our executive officers and the chairman of our Board of Directors are also partners or officers of Optima and will continue to be following the completion of our this offering. Because several of our named executive officers will be employees of Optima, a substantial amount of their time and attention may be diverted from us. Such executive officers owe a fiduciary duty to Optima, which may conflict with their fiduciary duty that they owe to us. If these executive officers were to act or fail to act in a manner that was detrimental to our business, or favor one entity over another, they could be subject to liability for breach of their fiduciary duty to us and our stockholders. Additionally, any agreements between us and Optima, including the Transitional Services Agreement, may not be as favorable to us as if they were negotiated with an unaffiliated third party, and such agreements are subject to an inherent conflict of interest. In addition, our Board of Directors may encounter conflicts of interest in enforcing our rights against Optima in the event of a default or disagreement under any agreements between us and Optima.
Although Optima does not currently and, in the future, does not intend to facilitate the purchase of farmland farms on behalf of any other affiliated entity, it could do so in the future. In such an event, our named executive officers would have a conflict of interest allocating the investment opportunity to us or to Optima. In the event that such a conflict arises, our best interests may not be met when persons acting on our behalf and on behalf of Optima or its affiliates decide whether to allocate any particular property to us, to Optima or to Optima's affiliates.
Amended and Restated Sub-Advisory Agreement
Our Agricultural Sub-Adviser's services under the Amended and Restated Sub-Advisory Agreement are not exclusive, and it, and its directors, officers and employees are free to earn fees and provide similar investment advisory and asset management services to a variety of other entities. See "Our Business and FarmsInvestment Focus and ProcessUnderwriting Criteria and Due Diligence ProcessAgricultural Sub-Adviser."
Additionally, one of our independent directors, Mark Wilkinson, retired in 1986 as a Senior Vice President and senior agricultural professional from Prudential Insurance Company of America, an affiliate of our Agricultural Sub-Adviser, where he led the agricultural business and was involved with the acquisition of CAPS, our property manager. Mr. Wilkinson is not affiliated with our Agricultural Sub-Adviser.
Transitional Service Agreement with Optima
Upon completion of the Internalization, we will enter into a Transitional Services Agreement with Optima under which Optima will provide us with office space, information technology support services and general administrative services at cost as well as access to certain of its personnel. Each service under the Transitional Services Agreement will be provided at cost and we will be responsible for certain approved third-party expenses. Because such personnel will be employees of Optima, a substantial amount of their time and attention may be diverted from us. This agreement is cancellable by us upon 30 days written notice and by Optima upon six months written notice.
Each of Messrs. Boardman, Gimbel and Lewis are members of our Board of Directors and Messrs. Gimbel and Lewis are also members of our executive management team, and each is a partner or officer of Optima. As a result, the terms of this agreement may not be as favorable to us if they
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were negotiated with an unaffiliated party. We may choose not to enforce, or to enforce less vigorously, our rights under this agreement because of our desire to maintain an ongoing relationship with Optima.
Policies with Respect to Other Activities
We have authority to offer common stock, preferred stock or options to purchase stock in exchange for property and to repurchase or otherwise acquire our common stock or other securities in the open market or otherwise, and we may engage in such activities in the future. As described in "Our Operating Partnership and the Amended Partnership Agreement," we expect, but are not obligated, to issue common stock to holders of Common Units upon some or all of their exercises of their redemption rights. Our Board of Directors has the authority, without further stockholder approval, to amend our charter to increase or decrease the number of authorized shares of common stock or preferred stock or the number of shares of stock of any class or series that we have authority to issue and our Board of Directors, without stockholder approval, has the authority to authorize us to issue additional shares of common stock or preferred stock, in one or more series, including senior securities, in any manner, and on the terms and for the consideration, it deems appropriate. See "Description of Our Capital Stock." We have not engaged in trading, underwriting or agency distribution or sale of securities of other issuers other than our operating partnership and do not intend to do so. At all times, we intend to make investments in such a manner as to qualify and maintain our qualification as a REIT, unless because of circumstances or changes in the Code, or the Treasury regulations, our Board of Directors determines that it is no longer in our best interests to qualify as a REIT. In addition, we intend to make investments in such a way that we will not be treated as an "investment company" under the 1940 Act.
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DESCRIPTION OF OUR CAPITAL STOCK
The following is a summary of the material terms of our capital stock and certain terms of our charter and bylaws. Unless otherwise indicated, the following summary assumes that (i) the amendment and restatement of our charter approved by our stockholders on December 15, 2014 has become effective, (ii) the Internalization is completed and (iii) certain changes to our bylaws and other corporate governance documents that we expect to make prior to the completion of this offering have been made. While we believe that the following description covers the material terms of our capital stock, the description may not contain all of the information that is important to you. For a more complete understanding of our capital stock, we encourage you to read carefully this entire prospectus, as well as our charter and bylaws and the relevant provisions of Maryland law. Copies of our charter and bylaws will be filed as exhibits to the registration statement of which this prospectus forms a part and the following summary, to the extent that it relates to those documents, is qualified in its entirety by reference thereto. See "Where You Can Find More Information."
General
We are authorized to issue 310,000,000 shares of stock, consisting of 300,000,000 shares of common stock, $0.01 par value per share, or our common stock, and 10,000,000 shares of preferred stock, $0.01 par value per share, or our preferred stock. Our charter authorizes our Board of Directors, with the approval of a majority of the entire Board of Directors and without any action by our stockholders, to amend our charter to increase or decrease the aggregate number of authorized shares of stock or the number of authorized shares of stock of any class or series. As of the date of this prospectus, we have 10,890,847 outstanding shares of common stock and 29 outstanding shares of our Series A Cumulative Non-Voting Preferred Stock.
Under Maryland law, stockholders generally are not liable for a corporation's debts or obligations solely as a result of their status as stockholders.
Common Stock
All shares of our common stock offered hereby will be duly authorized, validly issued, fully paid and nonassessable and all of the shares of our common stock have equal rights as to earnings, assets, dividends and voting. Subject to our charter restrictions on the transfer and ownership of our stock and the preferential rights of holders of any other class or series of our stock, if any, outstanding, at any time, the holders of our common stock are entitled to receive dividends when and as authorized by our Board of Directors and declared by us, out of funds legally available therefor. Shares of our common stock generally have no preemptive, appraisal, preferential exchange, conversion, sinking fund or redemption rights and are freely transferable, except where their transfer is restricted by federal and state securities laws, by contract or by the restrictions in our charter. In the event of our liquidation, dissolution or winding up, each share of our common stock would be entitled to share ratably in all of our assets that are legally available for distribution after payment of or provision for payment of our known debts and other liabilities and subject to any preferential rights of shares of any class or series, if any such shares are outstanding at such time, and our charter restrictions on the transfer and ownership of our stock.
Subject to our charter restrictions on the transfer and ownership of our stock and except as may otherwise be specified in the terms of any class or series of common stock, each share of our common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors. Except as may be provided with respect to any other class or series of stock, the holders of our common stock will possess exclusive voting power. Except as required under Maryland law, holders of all classes of our common stock will vote together as a single class. In elections of directors, a director will be elected by a plurality of the votes cast in the election of directors. There is
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no cumulative voting in the election of directors, which means that holders of a majority of the outstanding shares of common stock can elect all of our directors. For more information regarding the voting standard for director elections, see "Certain Provisions of Maryland Law and of Our Charter and BylawsAnnual Elections."
Under Maryland law, a Maryland corporation generally cannot amend its charter, consolidate, merge, sell all or substantially all of its assets, engage in a share exchange or dissolve unless the action is advised by our Board of Directors and approved by the affirmative vote of at least two-thirds of the votes entitled to be cast with respect to such matter. However, a Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast with respect to such matter. As permitted by Maryland law, our charter provides for approval of any of these matters by the affirmative vote of a majority of all the votes entitled to be cast with respect to such matter, except that the provisions of our charter relating to the removal of directors, the restrictions on ownership and transfer of shares of our stock and the vote required to amend these provisions may be amended only if such amendment is declared advisable by our Board of Directors and approved by the affirmative vote of stockholders entitled to cast at least two-thirds of all of the votes entitled to be cast on the matter. Maryland law also permits a Maryland corporation to transfer all or substantially all of its assets without the approval of stockholders of the corporation to any entity if all of the equity interests of the entity are owned, directly or indirectly, by the corporation. Because substantially all of our assets are held by our operating partnership or its subsidiaries, these subsidiaries may be able to merge or transfer all or substantially all of their assets without the approval of our stockholders.
Power to Reclassify and Issue Stock
Our charter authorizes our Board of Directors to classify any unissued shares of preferred stock and to reclassify any previously classified but unissued shares of common or preferred stock into one or more classes or series of stock. Prior to the issuance of shares of each class or series, our Board of Directors is required by Maryland law and our charter to set, subject to the provisions of our charter restrictions on ownership and transfer of our stock and to the express terms of any class or series of stock outstanding at the time, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each such class or series. As a result, our Board of Directors could authorize the issuance of shares of common or preferred stock with terms and conditions that could have the effect of delaying, deferring or preventing a change in control or other transaction that might involve a premium price for our shares of common stock or otherwise be in the best interest of our stockholders. Currently, we have 29 outstanding shares of our Series A Cumulative Non-Voting Preferred Stock, which we plan to redeem prior to the consummation of this offering. Additionally, we have no present plans to issue any shares of preferred stock subsequent to the redemption described above.
Power to Increase or Decrease Authorized Stock and Issue Additional Shares of Our Common Stock and Preferred Stock
Our charter authorizes our Board of Directors, with the approval of a majority of the entire Board of Directors and without any action by our stockholders, to amend our charter to increase or decrease the aggregate number of authorized shares of stock or the number of authorized shares of stock of any class or series. We believe that the power of our Board of Directors to amend our charter to increase or decrease the number of authorized shares of stock, to issue additional authorized but unissued shares of common or preferred stock and to classify or reclassify unissued shares of our common preferred stock and thereafter to issue such classified or reclassified shares of stock will provide us with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs which might arise. The additional classes or series, as well as the additional shares of stock, will
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be available for future issuance without further action by our stockholders, unless such action is required by applicable law, the terms of any other class or series of stock or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Although it does not currently intend to do so, our Board of Directors could authorize us to issue a class or series that could, depending upon the terms of the particular class or series, delay, defer or prevent a transaction or a change in control of our company that might involve a premium price for shares of our common stock or otherwise be in the best interests of our stockholders.
Restrictions on Ownership and Transfer
In order for us to qualify as a REIT under the Code, our stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year (other than the first year for which an election to be a REIT has been made). Also, not more than 50% of the value of our outstanding shares of our stock (after taking into account certain options to acquire shares of stock) may be owned, directly or indirectly or through application of certain attribution rules, by five or fewer "individuals" (as defined in the Code to include certain entities, such as private foundations) at any time during the last half of a taxable year (other than the first taxable year for which an election to be a REIT has been made).
Our charter contains restrictions on the ownership and transfer of our stock that are, among other things, intended to assist us in complying with these requirements and to continue to qualify as a REIT. The relevant sections of our charter provide that, subject to the exceptions described below, no person or entity may actually own or be deemed to own by virtue of the applicable constructive ownership provisions, more than 9.8% (in value or in number of shares, whichever is more restrictive) of the outstanding shares of our common stock, or 9.8% in value of the aggregate of the outstanding shares of all classes and series of our stock, in each case excluding any shares of our stock that are not treated as outstanding for U.S. federal income tax purposes. We refer to each of these restrictions as an "ownership limit" and collectively as the "ownership limits." A person or entity that would have acquired actual, beneficial or constructive ownership of our stock but for the application of the ownership limits or any of the other restrictions on ownership and transfer of our stock discussed below, and, if appropriate in the context, any person or entity that would have been the record or actual owner of such shares, is referred to as a "prohibited owner."
The applicable constructive ownership rules under the Code are complex and, for instance, may cause stock owned actually or constructively by a group of related individuals and/or entities to be treated as owned constructively by one individual or entity. As a result, the acquisition of less than 9.8% in value of our outstanding stock or less than 9.8% in the value or number of our outstanding common stock (or the acquisition of an interest in an entity that owns, actually or constructively, our stock) by an individual or entity could nevertheless cause that individual or entity, or another individual or entity, to own, constructively or beneficially, in excess of 9.8% of our outstanding common stock and thereby violate the applicable ownership limit.
Our charter provides that our Board of Directors may, prospectively or retroactively, exempt a person from the ownership limit with respect to a particular stockholder and establish or increase a different limit on ownership for such stockholder. As a condition to granting such exemption, our Board of Directors may require, among other things, the stockholder receiving such exemption to make certain representations and undertakings related to our ability to qualify as a REIT. In addition, our Board of Directors may require an opinion of counsel or IRS ruling, in either case in form and substance satisfactory to our Board of Directors, in its sole and absolute discretion, as it may deem necessary or advisable, in order to determine or ensure our qualification as a REIT. Our Board of Directors may impose such other conditions or restrictions as it deems appropriate in connection with granting such exemption or waiver or creating a different limit on ownership.
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Our charter further prohibits:
Any person who acquires or attempts or intends to acquire beneficial or constructive ownership of shares of our stock that will or may violate the ownership limitation provisions or any of the other restrictions on ownership and transfer of our stock described above must give written notice immediately to us or, in the case of a proposed or attempted transaction, provide us at least 15 days prior written notice, and provide us with such other information as we may request in order to determine the effect, if any, of such transfer on our qualification as a REIT.
The ownership limitation provisions and other restrictions on ownership and transfer of our stock described above will not apply if our Board of Directors determines that it is no longer in our best interests to continue to qualify as a REIT or that compliance with any such restriction or limitation is no longer required for REIT qualification.
Pursuant to our charter, if any purported transfer of our stock or any other event otherwise would result in any person violating the ownership limits or other restrictions described above, then that number of shares in excess of the ownership limit or causing a violation of one of the other restrictions (other than the 100 person limit addressed below) (rounded up to the nearest whole share) will be automatically transferred to a trust for the exclusive benefit of one or more charitable organizations selected by us. The prohibited owner will have no rights in shares of our stock held by the trustee. The automatic transfer will be effective as of the close of business on the business day prior to the date of the purported transfer or other event that results in the transfer to the trust. Any dividend or other distribution paid to the prohibited owner, prior to our discovery that the shares of stock had been automatically transferred to a trust as described above, must be repaid by the recipient to the trustee upon demand, and any dividend or other distribution authorized but unpaid shall be paid when due to the trustee, for distribution to the beneficiary of the trust. If the transfer to the trust as described above is not automatically effective, for any reason, to prevent violation of the applicable ownership limit or our failing to qualify as a REIT, then our charter provides that the transfer of shares resulting in such violation will be void. If, however, any transfer of our stock would result in shares of our stock being beneficially owned by fewer than 100 persons (determined without reference to any rules of attribution), then any such purported transfer will be automatically void and of no force or effect and the intended transferee will acquire no rights in the shares.
The trustee must sell the shares to one or more persons or entities designated by the trustee who could own the shares without violating the ownership limits or any of the other restrictions on ownership and transfer of our stock; provided that the right of the trustee to sell the shares will be
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subject to the rights of any person or entity to purchase such shares from the trust that we establish by an agreement entered into prior to the date the shares are transferred to the trust. Upon such sale, the interest of the charitable beneficiary in the shares sold shall terminate and the trustee must distribute the net proceeds of the sale to the prohibited owner in an amount equal to the lesser of: (a) the price paid by the prohibited owner for the shares (or, if the prohibited owner did not give value for the shares in connection with the transfer or other event that resulted in the transfer to the trust ( e.g., a gift, devise or other such transaction), the market price of such shares on the day of the transfer or other event that resulted in the transfer of such shares to the trust), as determined under our charter, and (b) the price per share received by the trustee (net of any commissions and other expenses of sale) from the sale or other disposition of the shares held in trust. The trustee may reduce the amount payable to the prohibited owner by the amount of any dividends or other distributions which have been paid to the prohibited owner and are owed by the prohibited owner to the trustee. Any net sales proceeds in excess of the amount payable to the prohibited owner will be immediately paid to the charitable beneficiary. In addition, if prior to discovery by us that shares of our stock have been transferred to the trust, such shares of stock are sold by a prohibited owner, then such shares shall be deemed to have been sold on behalf of the trust and, to the extent that the prohibited owner received an amount for such shares that exceeds the amount that such prohibited owner was entitled to receive, such excess amount shall be paid to the trustee upon demand. The prohibited owner has no rights in the shares held by the trustee.
The trustee will be appointed by us and will be unaffiliated with us and with any prohibited owner. Prior to the sale of any shares by the trust, the trustee will receive, in trust for the charitable beneficiary, all dividends and other distributions paid by us with respect to such shares and may also exercise all voting rights with respect to such shares for the exclusive benefit of the charitable beneficiary.
Subject to Maryland law, effective as of the date that the shares have been transferred to the trust, the trustee shall have the authority, at the trustee's sole and absolute discretion:
However, if we have already taken irreversible corporate action, then the trustee will not have the authority to rescind and recast the vote.
If our Board of Directors determines that a proposed transfer or other event has taken place that would violate, or that a person or entity intends to acquire or has attempted to acquire beneficial or constructive ownership of any shares or our stock in violation of, the restrictions on ownership and transfer of our stock set forth in our charter (whether or not such violation is intended), our Board of Directors shall take such action as it deems advisable to refuse to give effect to or to prevent such transfer or other event, or otherwise prevent such violation, including, without limitation, causing us to redeem shares of stock, refusing to give effect to the transfer or other event on our books or instituting proceedings to enjoin the transfer or other event.
Following the end of each REIT taxable year, each owner of 5% or more (or such lower percentage as required by the Code or the U.S. Treasury Department regulations promulgated thereunder) of the outstanding shares of any class or series of our stock, upon request, must give written notice to us stating the name and address of such owner, the number of shares of each class and series of our stock that the owner beneficially owns and a description of the manner in which the shares are held. Each such owner also must provide us with any additional information that we request in order to determine the effect, if any, of the person's beneficial ownership on our qualification as a
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REIT and to ensure compliance with the ownership limits. In addition, any person or entity that is an actual owner, beneficial owner or constructive owner of shares of our stock and each person or entity (including the stockholder of record) who is holding shares of our stock for a beneficial owner or constructive owner must provide in writing to us such information as we may request, in good faith, in order to determine our qualification as a REIT and comply with requirements of any taxing authority or governmental authority or to determine such compliance.
Each certificate representing shares of our stock, if certificated, will bear a legend substantially describing the restrictions on ownership and transfer of our stock described above. Instead of such legend, the certificate, if any, may state that we will furnish a full statement about certain restrictions on transferability to a stockholder on request and without charge.
These restrictions on ownership and transfer could delay, defer or prevent a transaction or a change of control of our company that might involve a premium price for our shares common stock or otherwise be in the best interests of our stockholders.
Listing
We intend to apply to list our common stock on the New York Stock Exchange under the symbol "AFCO."
Transfer Agent and Registrar
We expect the transfer agent and registrar for our shares of common stock to be American Stock Transfer.
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SHARES ELIGIBLE FOR FUTURE SALE
General
Upon completion of this offering, we will have outstanding shares of our common stock, ( shares if the underwriters exercise their option to purchase additional shares of our common stock in full).
Of these shares, the shares sold in this offering ( shares if the underwriters exercise their option to purchase additional shares of our common stock in full) will be freely transferable without restriction or further registration under the Securities Act, subject to the limitations on ownership set forth in our charter, except for any shares purchased in this offering by our "affiliates," as that term is defined by Rule 144 under the Securities Act. The remaining shares of our common stock to be issued to our officers, directors and affiliates pursuant to the 2014 Equity Incentive Plan and the shares of our common stock issuable to officers, directors and affiliates upon redemption of Common Units will be "restricted securities" as defined in Rule 144. Restricted securities may be sold in the public market only if the sale is registered under the Securities Act or qualifies for an exemption from registration, including an exemption under Rule 144, as described below. In addition, upon completion of this offering, shares will be available for future issuance under the 2014 Equity Incentive Plan, including shares of common stock reserved for issuance upon the exercise of options intended to be granted to our executive officers, directors and employees pursuant to the 2014 Equity Incentive Plan. See "ManagementExecutive Officer and Director Compensation2014 Equity Incentive Plan."
Prior to this offering, there has been no public market for our common stock. Trading of our common stock on the New York Stock Exchange is expected to commence immediately following the completion of this offering. No assurance can be given as to (1) the likelihood that an active market for our shares of common stock will develop or be sustained, (2) the liquidity of any such market, (3) the ability of the stockholders to sell the shares or (4) the prices that stockholders may obtain for any of the shares. No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price prevailing from time to time. Sales of substantial amounts of our common stock (including shares issued upon the redemption of Common Units), or the perception that such sales could occur, may adversely affect prevailing market prices of our common stock. See "Risk FactorsRisks Related to this Offering and the Market for Our Common Stock." For a description of certain restrictions on transfers of our shares of common stock held by certain of our stockholders, see "Description of Our Capital StockRestrictions on Ownership and Transfer."
Rule 144
Rule 144(b)(1) provides a safe harbor pursuant to which certain persons may sell shares of our stock that constitute restricted securities without registration under the Securities Act."Restricted securities" include, among other things, securities acquired directly or indirectly from the issuer, or from an affiliate of the issuer, in a transaction or chain of transactions not involving any public offering. In general, the conditions that must be met for a person to sell shares of our stock pursuant to Rule 144(b)(1) are as follows: (1) the person selling the shares must not be an affiliate of ours at the time of the sale, and must not have been an affiliate of ours during the preceding three months, and (2) either (A) at least one year must have elapsed since the date of acquisition of the restricted securities from us or any of our affiliates or (B) if we satisfy the current public information requirements set forth in Rule 144, at least six months have elapsed since the date of acquisition of the restricted securities from us or any of our affiliates.
Rule 144(b)(2) provides a safe harbor pursuant to which persons who are affiliates of ours may sell shares of our stock, whether restricted securities or not, without registration under the Securities Act if
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certain conditions are met. In general, the conditions that must be met for a person who is an affiliate of ours (or has been within three months prior to the date of sale) to sell shares of our stock pursuant to Rule 144(b)(2) are as follows: (1) at least six months must have elapsed since the date of acquisition of the shares of stock from us or any of our affiliates, (2) the seller must comply with volume limitations, manner of sale restrictions and notice requirements, and (3) we must satisfy the current public information requirements set forth in Rule 144. In order to comply with the volume limitations, a seller may not sell, in any three month period, more than the following number of shares:
Redemption/Exchange Rights
Beginning on or after the date which is 12 months after the issuance of Common Units to a limited partner in our operating partnership, other than us, such limited partner will have the right to require our operating partnership to redeem part or all of its Common Units for cash, based upon the value of an equivalent number of shares of our common stock at the time of the election to redeem, or, at our election, shares of our common stock on a one-for-one basis.
Registration Rights
In connection with the Internalization, we will enter into a registration rights agreement pursuant to which each person who receives Common Units as a result of the Internalization will have the right to cause us to register with the SEC the shares of our common stock that they will receive upon redemption of any Common Units held by such holder pursuant to the terms of the amended partnership agreement, which shares are referred to as registrable securities. Under this agreement, beginning within 10 business days following the first date when we become eligible to file a shelf registration statement with respect to the registrable securities, we will agree to file a shelf registration statement relating to the issuance of such parties' registrable securities, or a resale shelf registration statement, and maintain the effectiveness of the shelf registration statement until all of the registrable securities have been disposed of by the holders or the date on which all registrable securities may be sold pursuant to Rule 144 under the Securities Act. See "Certain Relationships and Related Party TransactionsRegistration Rights."
2014 Equity Incentive Plan
In December 2014, we adopted the 2014 Equity Incentive Plan, which will become effective upon the date immediately preceding the date of pricing for this offering. Pursuant to the 2014 Equity Incentive Plan, we may grant equity incentive awards to our officers, employees, non-employee directors and other key persons. We have initially reserved a number of shares of common stock equal to 4.00% of the outstanding shares of common stock as of immediately following the consummation of
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this offering (including any shares of common stock subsequently issued pursuant to the underwriters' option to purchase additional shares in connection with this offering) for the issuance of awards under the 2014 Equity Incentive Plan. Upon completion of this offering, we intend to issue options to purchase an aggregate of shares of our common stock and LTIP Units to our executive officers, directors and other employees pursuant to the 2014 Equity Incentive Plan.
Following completion of this offering, we intend to file with the SEC a registration statement on Form S-8 covering the shares of our common stock issuable under the 2014 Equity Incentive Plan. Shares of our common stock issued under such registration statement on Form S-8 will be eligible for transfer or resale without restriction under the Securities Act unless held by affiliates.
Lock-Up Agreements
We and our executive officers and directors have agreed that, during the period beginning from the date of this prospectus and continuing to and including the date that is 180 days after the date of this prospectus, none of them will, directly or indirectly (1) offer, pledge, sell, contract to sell (including any short sale), grant any option to purchase or otherwise dispose of any shares (including shares that may be deemed to be beneficially owned by any of our executive officers or directors currently or hereafter in accordance with the rules and regulations of the SEC, shares that may be issued upon exercise of an option or warrant and any other security convertible into or exchangeable for shares) or (2) enter into any short sale (whether or not against the box) or any purchase, sale or grant of any right (including any put or call option) with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from our shares, without the prior written consent of Deutsche Bank Securities Inc. (which such consents may be given at any time without public notice), except in limited circumstances. These restrictions do not apply to sales of shares in this offering.
Additionally, our existing stockholders have agreed that, without the prior written consent of Deutsche Bank Securities Inc. (which such consent may be given at any time without public notice, except in limited circumstances), during the period beginning from the date of this prospectus and continuing to and including the date that is 180 days after the date of this prospectus, none of them will, directly or indirectly (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, lend or otherwise transfer or dispose of, any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the shares of common stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of shares of common stock or such other securities, in cash or otherwise. These restrictions do not apply to sales of shares to the public pursuant to this offering.
In each case, in the event we cease to be an emerging growth company, the applicable restricted period described in the preceding paragraph will be extended if (1) during the last 17 days of the applicable restricted period we issue an earnings release or material news or a material event relating to us occurs or (2) prior to the expiration of the applicable restricted period, we announce that we will release earnings results during the 16-day period following the last day of the applicable restricted period, then in each case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the date of the release of the earnings results or the occurrence of material news or a material event relating to us, unless Deutsche Bank Securities Inc. waives, in writing, such extension.
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS
The following is a summary of certain provisions of Maryland law and the material provisions of our charter and bylaws. Unless otherwise indicated, the following summary assume that (i) the amendment and restatement of our charter approved by our stockholders on December 15, 2014 has become effective, (ii) the Internalization is completed and (iii) certain changes to our bylaws and other corporate governance documents that we expect to make prior to the completion of this offering have been made. While we believe that the following description covers the material aspects of these provisions, the description may not contain all of the information that is important to you. For a more complete understanding of these provisions, we encourage you to read carefully this entire prospectus, as well as our charter and bylaws and the relevant provisions of Maryland law. Copies of our charter and bylaws will be filed as exhibits to the registration statement of which this prospectus forms a part and the following summary, to the extent that it relates to those documents, is qualified in its entirety by reference thereto. See "Where You Can Find More Information."
Number of Directors; Vacancies
Our charter provides that the number of directors is nine, which number may be established, increased or decreased only by our Board of Directors pursuant to our bylaws, but may not be less than the minimum number required under the MGCL, which is one, or, unless our bylaws are amended, more than fifteen.
Upon completion of this offering, subject to the terms of any class or series of preferred stock, any and all vacancies on our Board of Directors may be filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any individual elected to fill such vacancy will serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is duly elected and qualifies.
Annual Elections
Each member of our Board of Directors is elected by our stockholders to serve until the next annual meeting of our stockholders and until his or her successor is duly elected and qualifies. Directors will be elected by a plurality of the votes cast at a meeting of stockholders at which a quorum is present. Holders of shares of common stock will have no right to cumulative voting in the election of directors. Consequently, at each annual meeting of stockholders, the holders of a majority of the shares of common stock entitled to vote will be able to elect all of our directors at any annual meeting.
Removal of Directors
Our charter provides that, subject to the rights of holders of one or more classes or series of preferred stock to elect or remove one or more directors, a director may only be removed only for cause (as defined in our charter) at a meeting of stockholders by the affirmative vote of stockholders entitled to cast at least two-thirds of all the votes entitled to be cast generally in the election of directors.
Business Combinations
Under the MGCL, certain "business combinations" (including a merger, consolidation, share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and any interested stockholder or an affiliate of such an interested stockholder, are prohibited for five years following the most recent date on which the
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interested stockholder became an interested stockholder. Maryland law defines an interested stockholder as:
After such five-year period, any such business combination must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
These supermajority approval requirements do not apply if, among other conditions, the corporation's common stockholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the interested stockholder for its shares. A person is not an interested stockholder under the statute if the board of directors of the corporation approved in advance the transaction by which the person otherwise would have become an interested stockholder. The board of directors of the corporation may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by it.
These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by a corporation's board of directors prior to the time that the interested stockholder becomes an interested stockholder. As permitted by the MGCL, our Board of Directors has adopted a resolution exempting any business combinations between us and any other person or entity that is approved by our Board of Directors, including a majority of our directors who are not affiliates or associates of such person from the business combination provisions of the MGCL and, consequently, the five-year prohibition and the supermajority vote requirements will not apply to business combinations between us and any such person or entity as described above. As a result, any such person or entity described above may be able to enter into business combinations with us that may not be in the best interest of our stockholders without compliance by us with the supermajority vote requirements and other provisions of the statute. However, our Board of Directors may repeal or modify this resolution at any time in the future, in which case the applicable provisions of this statute will become applicable to business combinations between us and interested stockholders.
Control Share Acquisitions
The MGCL provides that holders of "control shares" of a Maryland corporation acquired in a "control share acquisition" have no voting rights with respect to any control shares except to the extent approved at a special meeting of stockholders by the affirmative vote of at least two-thirds of the votes entitled to be cast on the matter, excluding shares of stock of a corporation in respect of which any of the following persons is entitled to exercise or direct the exercise of the voting power of such shares in the election of directors: (1) the person who makes or proposes to make a control share acquisition; (2) an officer of the corporation; or (3) an employee of the corporation who is also a director of the corporation."Control shares" are voting shares of stock which, if aggregated with all other such shares of stock previously acquired by the acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the
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acquirer to exercise voting power in electing directors within one of the following ranges of voting power:
Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval or shares acquired directly from the corporation. A "control share acquisition" means the acquisition, directly or indirectly, of ownership of, or power to direct the exercise of voting power with respect to, issued and outstanding control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses and making an "acquiring person statement" as described in the MGCL), may compel the board of directors of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares acquired or to be acquired in the control share acquisition. If no request for a special meeting is made, the corporation may itself present the question at any stockholders meeting.
If voting rights of control shares are not approved at the meeting or if the acquiring person does not deliver an "acquiring person statement" as required by the statute, then, subject to certain conditions and limitations, the corporation may redeem any or all of the control shares (except those for which voting rights have previously been approved) for fair value determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquirer or of any meeting of stockholders at which the voting rights of such shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquirer becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights, unless these specific appraisal rights are eliminated under the charter or bylaws. Our charter provides that our stockholders generally will not be entitled to exercise statutory appraisal rights.
The control share acquisition statute does not apply to, among other things, (1) shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (2) acquisitions approved or exempted by the charter or bylaws of the corporation.
Our bylaws contain a provision exempting from the control share acquisition statute any acquisition by any person of shares of our stock. There can be no assurance that such provision will not be amended or repealed at any time in the future by our Board of Directors.
Subtitle 8
Subtitle 8 of Title 3 of the MGCL permits a Maryland corporation with a class of equity securities registered under the Exchange Act and at least three independent directors who are not officers or employees of the corporation, and who are not affiliated with a person who is seeking to acquire control of the corporation, to elect to be subject, by provision in its charter or bylaws or a resolution of its board of directors, without stockholder approval, and notwithstanding any contrary provision in the charter or bylaws, to any or all of the following five provisions:
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Through provisions in our charter and bylaws unrelated to Subtitle 8, we already (1) require the affirmative vote of stockholders entitled to cast at least two-thirds of all the votes entitled to be cast generally in the election of directors for the removal of any director from our Board of Directors, which removal also requires cause, (2) vest in our Board of Directors the exclusive power to fix the number of directorships, subject to the limitations set forth in our charter and bylaws and (3) require, unless called by the chairman of our Board of Directors, president, chief executive officer or our Board of Directors, the request of stockholders entitled to cast a majority of all the votes entitled to be cast on such matter to call a special meeting to consider and vote on any matter that may properly be considered at a meeting of stockholders. We have elected to be subject to the provision of Subtitle 8 requiring that any vacancy on our Board of Directors be filled only by the affirmative vote of a majority of the remaining directors for the remainder of the full term of the class of directors in which the vacancy occurred, and until a successor is duly elected and qualifies. Our Board of Directors is not currently classified. In the future, our Board of Directors may elect, without stockholder approval, to classify our Board of Directors or elect to be subject to one or more of the other provisions of Subtitle 8.
Amendments to Our Charter and Bylaws
Other than amendments to certain provisions of our charter described below and amendments permitted to be made without stockholder approval under Maryland law or by a specific provision in our charter, our charter may be amended only if such amendment is declared advisable by our Board of Directors and approved by the affirmative vote of stockholders entitled to cast a majority of all of the votes entitled to be cast on the matter. The provisions of our charter relating to the removal of directors, the restrictions on ownership and transfer of shares of our stock and the vote required to amend these provisions, may be amended only if such amendment is declared advisable by our Board of Directors and approved by the affirmative vote of stockholders entitled to cast at least two-thirds of all of the votes entitled to be cast on the matter. Our Board of Directors, with the approval of a majority of the entire board, and without any action by our stockholders, has the power under our charter to amend our charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series we are authorized to issue, to authorize us to issue outstanding but unissued shares of our common stock or preferred stock and to classify or reclassify any unissued shares of our common or preferred stock into one or more classes or series of stock and set the terms of such newly classified or reclassified shares.
Our Board of Directors has the exclusive power to adopt, alter or repeal any provision of our bylaws and to make new bylaws, except the following bylaw provisions, each of which may be altered or repealed only by our Board of Directors, including the approval of all of the independent directors of the Board of Directors in office:
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Transactions Outside the Ordinary Course of Business
Under the MGCL, a Maryland corporation generally cannot amend its charter, dissolve, consolidate, merge, convert, sell all or substantially all of its assets or engage in a statutory share exchange unless the action is declared advisable by the corporation's board of directors and approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter unless a lesser percentage (but not less than a majority of all of the votes entitled to be cast on the matter) is set forth in the corporation's charter. As permitted by the MGCL, our charter provides that any of these actions may be approved by the affirmative vote of stockholders entitled to cast a majority of all of the votes entitled to be cast on the matter. Many of our operating assets will be held by our subsidiaries, and these subsidiaries may be able to merge or sell all or substantially all of their assets without the approval of our stockholders.
Dissolution
Our voluntary dissolution must be declared advisable by a majority of our entire Board of Directors and approved by the affirmative vote of stockholders entitled to cast a majority of all of the votes entitled to be cast on the matter.
No Stockholder Rights Plan
We have no stockholder rights plan.
Meetings of Stockholders
Pursuant to our bylaws, an annual meeting of our stockholders must be held at such time, date and place as may be set by our Board of Directors. In addition, the chairman of our Board of Directors, our president, our chief executive officer or our Board of Directors may call a special meeting of our stockholders. Further, subject to the provisions of our bylaws, a special meeting of stockholders must be called by our secretary to act on any matter that may properly be considered at a meeting of stockholders upon the written request of stockholders entitled to cast a majority of all the votes entitled to be cast on such matter at such meeting in accordance with the procedures specified in our bylaws and accompanied by the information required by our bylaws. Only matters set forth in the notice of a special meeting of stockholders may be considered and acted upon at such meeting. Our secretary will inform the requesting stockholders of the reasonably estimated cost of preparing and delivering the notice of meeting (including our proxy materials), and the requesting stockholder must pay such estimated cost before our secretary may prepare and mail or deliver the notice of the special meeting.
Advance Notice of Director Nominations and New Business
Our bylaws provide that, with respect to an annual meeting of stockholders, nominations of individuals for election to our Board of Directors and the proposal of other business to be considered by our stockholders at an annual meeting of stockholders may be made only: (1) pursuant to our notice of the meeting; (2) by or at the direction of our Board of Directors; or (3) by any stockholder who was a stockholder of record both at the time of giving of notice required by our bylaws and at the time of the annual meeting, who is entitled to vote at the meeting in the election of each individual so nominated or on any such other business and who has complied with the advance notice procedures set forth in our bylaws, including a requirement to provide certain information regarding the stockholder, its affiliates and the nominee or business proposal, as applicable.
With respect to special meetings of stockholders, only the business specified in our notice of meeting may be brought before the meeting of stockholders, and nominations of individuals for election to our Board of Directors may be made at a special meeting of stockholders at which directors
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are to be elected only: (1) by or at the direction of our Board of Directors; or (2) provided that the special meeting has been called in accordance with our bylaws for the purpose of electing directors, by any stockholder who is a stockholder of record both at the time of giving of notice required by our bylaws and at the time of the special meeting, who is entitled to vote at the meeting in the election of each individual so nominated and who has complied with the advance notice procedures set forth in our bylaws, including a requirement to provide certain information regarding the stockholder, its affiliates and the nominee.
The purpose of requiring stockholders to give advance notice of nominations and other proposals is to afford our Board of Directors the opportunity to consider the qualifications of the proposed nominees or the advisability of the other proposals and, to the extent considered necessary by our Board of Directors, to inform stockholders and make recommendations regarding the nominations or other proposals. The advance notice procedures also permit a more orderly procedure for conducting our stockholder meetings. Although our bylaws do not give our Board of Directors any power to disapprove stockholder nominations for the election of directors or proposals recommending certain actions, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if proper procedures are not followed and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal without regard to whether consideration of such nominees or proposals might be harmful or beneficial to us and our stockholders.
Anti-Takeover Effect of Certain Provisions of Maryland Law and of Our Charter and Bylaws
The provisions of the MGCL, our charter and our bylaws described above including, among others, the restrictions on ownership and transfer of our stock, the exclusive power of our Board of Directors to fill vacancies on the Board of Directors and the advance notice provisions of our bylaws could delay, defer or prevent a change in control or other transaction that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders. Likewise, if our Board of Directors were to opt in to the provisions of Subtitle 8 of Title 3 of the MGCL providing for a classified Board of Directors, revoke its exemption from the business combination provisions of any transaction between us and any other person that is approved by our Board of Directors, including a majority of our directors who are not affiliates or associates of such person or amend our bylaws to opt in to the control share acquisition provisions of the MGCL, these provisions of the MGCL could have similar anti-takeover effects.
Exclusive Forum
Our bylaws contain a provision designating the Circuit Court for Baltimore City, Maryland (or, if that court does not have jurisdiction, the U.S. District Court for the District of Maryland, Baltimore Division) as the sole and exclusive forum for derivative claims brought on our behalf, claims against any of our directors, officers or other employees alleging a breach of duty owed to us or our stockholders, claims against us or any of our directors, officers or other employees arising pursuant to any provision of the MGCL or our charter or bylaws, claims against us or any of our directors, officers or other employees governed by the internal affairs doctrine, and any other claims brought by or on behalf of any stockholder of record or any beneficial owner of our common stock (either on his, her or its own behalf or on behalf of any series or class of shares of our stock or any group of our stockholders) against us or any of our directors, officers or other employees, unless we consent to an alternative forum. However, it is possible that a court could find our forum selection provision to be inapplicable or unenforceable.
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Indemnification and Limitation of Directors' and Officers' Liability
Maryland law permits a Maryland corporation to include in its charter a provision eliminating the liability of its directors and officers to the corporation and its stockholders for money damages, except to the extent that: (1) it is proved that the person actually received an improper benefit or profit in money, property or services, for the amount of the benefit or profit in money, property or services actually received; or (2) a judgment or other final adjudication adverse to the person is entered in a proceeding based on a finding in the proceeding that the person's action, or failure to act, was a result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. Our charter contains a provision that eliminates such liability to the maximum extent permitted by Maryland law.
The MGCL requires a corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service in that capacity, or in defense of any claim, issue or matter in the proceeding, against reasonable expenses incurred by the director or officer in connection with the proceeding, claim, issue or matter. The MGCL permits a Maryland corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made, or threatened to be made, a party by reason of their service in those or other capacities unless it is established that:
However, under the MGCL, a Maryland corporation may not indemnify a director or officer for an adverse judgment in a suit by or on behalf of the corporation in which the director or officer was adjudged liable to the corporation or if the director or officer was adjudged liable on the basis that personal benefit was improperly received. Notwithstanding the foregoing, unless limited by the charter (which our charter does not), a court of appropriate jurisdiction, upon application of a director or officer, may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification in view of all of the relevant circumstances, whether or not the director or officer met the standards of conduct described above or has been adjudged liable on the basis that a personal benefit was improperly received, but such indemnification shall be limited to expenses.
In addition, the MGCL permits a Maryland corporation to advance reasonable expenses to a director or officer, without requiring a preliminary determination of the director's or officer's ultimate entitlement to indemnification, upon the corporation's receipt of:
Our charter authorizes us to obligate us, and our bylaws obligate us, to the maximum extent permitted by Maryland law in effect from time to time, to indemnify and, without requiring a
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preliminary determination of the ultimate entitlement to indemnification, pay or reimburse reasonable expenses in advance of final disposition of such a proceeding to:
in either case, from and against any claim or liability to which such person may become subject or which such person may incur by reason of his or her service in such capacity.
Our charter and bylaws also permit us, with the approval of the Board of Directors or any duly authorized committee thereof, to provide such indemnification and advancement of expenses to (1) a person who served a predecessor of ours in any of the capacities described above and (2) to any employee or agent of ours or a predecessor of ours.
We plan on entering into indemnification agreements with each of our executive officers and directors, whereby we will agree to indemnify our executive officers and directors against all expenses and liabilities and pay or reimburse their reasonable expenses in advance of final disposition of a proceeding to the fullest extent permitted by Maryland law if they are made or threatened to be made a party to the proceeding by reason of their service to our company, subject to limited exceptions.
Insofar as the foregoing provisions permit indemnification of directors, director nominees, officers or persons controlling us for liability arising under the Securities Act, we have been informed that in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
We may, to the fullest extent permitted by the law, purchase and maintain insurance on behalf of any person described above against any liability asserted against such person, whether or not such person is indemnified against such liability under the provisions of our charter.
REIT Qualification
Our charter provides that our Board of Directors may revoke or otherwise terminate our REIT election, without approval of our stockholders, if it determines that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT. Our charter also provides that our Board of Directors may determine that compliance with any restriction or limitation on ownership and transfer of our stock is no longer required for us to qualify as a REIT.
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OUR OPERATING PARTNERSHIP AND THE AMENDED PARTNERSHIP AGREEMENT
The following is a summary of the terms of the amended partnership agreement. Unless otherwise indicated, the following summary assumes that (i) the amended partnership agreement approved on December 15, 2014 has become effective and (ii) the Internalization is complete. While we believe that the following description covers the material terms of the amended partnership agreement, the description may not contain all of the information that is important to you. For a more complete understanding of the amended partnership agreement, we encourage you to read carefully this entire prospectus, as well as the amended partnership agreement. A copy of the amended partnership agreement will be filed as an exhibit to the registration statement of which this prospectus forms a part, and the following summary is qualified in its entirety by reference thereto.
Management
We are the sole general partner of our operating partnership, which is organized as a Delaware limited partnership. We conduct substantially all of our operations and make substantially all of our investments through our operating partnership and we have full, exclusive and complete responsibility and discretion in the management and control of our operating partnership, including the ability to cause our operating partnership to enter into certain major transactions, including acquisitions, dispositions and refinancings, make distributions to partners and to cause changes in our operating partnership's business activities. The amended partnership agreement requires that our operating partnership be operated in a manner that permits us to qualify as a REIT.
Transferability of General Partner Interests; Extraordinary Transactions
We may not voluntarily withdraw from our operating partnership or transfer or assign our interest in our operating partnership or engage in any merger, consolidation or other combination, or sale of all or substantially all of our assets except, in any such case:
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such transaction and as those applicable to any other limited partners or non-managing members of the surviving partnership (who have, in either case, the rights of a common equity holder); and (iv) such rights of the limited partners include the right to exchange their Common Unit equivalent interests in the surviving partnership for at least one of: (x) the consideration available to such limited partners or (y) if the ultimate controlling person of the surviving partnership has publicly traded common equity securities, such common equity securities, with an exchange ratio based on the determination of relative fair market value of such securities and the shares of our common stock as of the time of the transaction; or
We also may transfer all or any portion of our general partner interest to an entity that is wholly owned by us (directly or indirectly), including any qualified REIT subsidiary within the meaning of Section 856(i) of the Code or any other entity disregarded as an entity separate from us for U.S. federal income tax purposes.
Limited partners will generally have no voting or consent rights, except as set forth above and for certain amendments to the amended partnership agreement. Amendments to reflect the issuance of additional partnership interests or to set forth or modify the designations, rights, powers, duties and preferences of holders of any additional partnership interests in our operating partnership may be made by the general partner without the consent of the limited partners. In addition, amendments that would not adversely affect the rights of the limited partners in any material respect and certain other specified types of amendments may be made by the general partner without the consent of the limited partners. Otherwise, amendments to the amended partnership agreement that would adversely affect the rights of the limited partners in any material respect must be approved by limited partners holding a majority of the Common Units (including the Common Units held by us and our affiliates) and, if such amendments would modify certain provisions of the amended partnership agreement relating to distributions, allocations and redemptions, among others, the consent of a majority in interest of the Common Units held by limited partners (other than us and our affiliates) is required if such an amendment would disproportionately affect such limited partners. In addition, any amendment to the amended partnership agreement that would convert a limited partner interest into a general partner interest (except for our acquiring such interest) or modify the limited liability of a limited partner would require the consent of each limited partner adversely affected or otherwise will be effective against only those limited partners who provide consent.
Capital Contributions
We will contribute, directly to our operating partnership, substantially all of the net proceeds from this offering as a capital contribution in exchange for Common Units. The amended partnership agreement provides that if our operating partnership requires additional funds at any time in excess of funds available to our operating partnership from borrowing or capital contributions, we may borrow such funds from a financial institution or other lender and lend such funds to our operating partnership on the same terms and conditions as are applicable to our borrowing of such funds. Under the amended partnership agreement, if we issue any additional equity securities, we will be obligated to contribute the proceeds from such issuance as additional capital to our operating partnership and we will receive additional Common Units with economic interests substantially similar to those of the securities we issued. In addition, if we contribute additional capital to our operating partnership, we generally will revalue the property of our operating partnership to its fair market value (as determined by us) and the capital accounts of the partners will be adjusted to reflect the manner in which the unrealized gain or loss inherent in such property (that has not been reflected in the capital accounts previously) would be allocated among the partners under the terms of the amended partnership agreement if there were a taxable disposition of such property for its fair market value (as determined
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by us) on the date of the revaluation. Our operating partnership may issue preferred partnership interests, in connection with acquisitions of property or otherwise, which could have priority over Common Units with respect to distributions from our operating partnership, including the Common Units we own.
Redemption Rights
Any future limited partners, other than us or our subsidiaries, will receive redemption rights, which will enable them to cause our operating partnership, on or after the date that is 12 months from the date of issuance of a Common Unit to a limited partner, to redeem all or a portion of the Common Units held by such limited partner in exchange for cash, or at our option, for shares of our common stock on a one-for-one basis. The cash redemption amount per Common Unit would be based on the market price of our common stock at the time of redemption. The number of shares of our common stock issuable upon redemption of Common Units held by limited partners may be adjusted upon the occurrence of certain events such as stock dividends, stock subdivisions or combinations. We expect to fund cash redemptions, if any, out of available cash and/or borrowings. Notwithstanding the foregoing, a limited partner will not be entitled to exercise its redemption rights if the delivery of common stock to the redeeming limited partner would cause:
Reimbursement of Expenses
In addition to the administrative and operating costs and expenses incurred by our operating partnership, our operating partnership generally will pay all of our administrative costs and expenses, including:
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Fiduciary Responsibilities
Our directors and officers have duties under applicable Maryland law to manage us in a manner consistent with the best interests of our stockholders. At the same time, we, as the general partner of our operating partnership, will have fiduciary duties under applicable Delaware law to manage our operating partnership in a manner beneficial to our operating partnership and its partners. Our duties to our operating partnership and its limited partners, therefore, may come into conflict with the duties of our directors and officers to our stockholders. The limited partners of our operating partnership expressly will acknowledge that, as the general partner of our operating partnership, we are acting for the benefit of our operating partnership, the limited partners and our stockholders collectively. When deciding whether to cause our operating partnership to take or decline to take any action, we, as the general partner, will be under no obligation to give priority to the separate interest of (i) the limited partners in our operating partnership (including, without limitation, tax considerations of our limited partners except as provided in a separate written agreement) or (ii) our stockholders.
Distributions
The amended partnership agreement provides that, subject to the terms of any preferred partnership interests, our operating partnership will make non-liquidating distributions at such time and in such amounts as determined by us in our sole discretion, to us and the limited partners in accordance with their respective percentage interests in our operating partnership. Upon liquidation of our operating partnership, after payment of debts and liabilities of the partnership, including any partner loans and subject to the terms of any preferred partnership interests, any remaining assets of the partnership will be distributed to us and the limited partners with positive capital accounts in accordance with their respective positive capital account balances.
Allocations
Profits and losses of our operating partnership (including depreciation and amortization deductions) for each taxable year generally will be allocated to us and the other limited partners in accordance with the respective percentage interests in our operating partnership, subject to certain allocations to be made with respect to LTIP units as described below or the terms of any preferred partnership interests. All of the foregoing allocations are subject to compliance with the provisions of Sections 704(b) and 704(c) of the Code and Treasury Regulations promulgated thereunder. To the extent Treasury Regulations promulgated pursuant to Section 704(c) of the Code permit, we, as the general partner, shall have the authority to elect the method to be used by our operating partnership for allocating items with respect to any contributed property acquired in connection with this offering or thereafter for which fair market value differs from the adjusted tax basis at the time of contribution, or with respect to farms that are revalued and carried for purposes of maintaining capital accounts at a value different from adjusted tax basis at the time of revaluation, and such election shall be binding on all partners.
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LTIP Units
We may cause our operating partnership to issue LTIP units, which are intended to qualify as "profits interests" in our operating partnership for U.S. federal income tax purposes, to persons providing services to our operating partnership. LTIP units may be issued subject to vesting requirements, which, if they are not met, may result in the automatic forfeiture of any LTIP units issued. Generally, LTIP units will be entitled to the same non-liquidating distributions and allocations of profits and losses as the Common Units on a per unit basis.
As with Common Units, liquidating distributions with respect to LTIP units are made in accordance with the positive capital account balances of the holders of these LTIP units to the extent associated with these LTIP units. However, unlike Common Units, upon issuance, LTIP units generally will have a capital account equal to zero. Upon the sale of all or substantially all of the assets of our operating partnership or a book-up event for tax purposes in which the book values of our operating partnership's assets are adjusted, holders of LTIP units will be entitled to priority allocations of any book gain that may be allocated by our operating partnership to increase the value of their capital accounts associated with their LTIP units until these capital accounts are equal, on a per unit basis, to the capital accounts associated with the Common Units. The amount of these priority allocations will determine the liquidation value of the LTIP units. In addition, once the capital account associated with a vested LTIP unit has increased to an amount equal, on a per unit basis, to the capital accounts associated with the Common Units, that LTIP unit generally may be converted into a Common Unit. The book gain that may be allocated to increase the capital accounts associated with LTIP units is comprised in part of unrealized gain, if any, inherent in the property of our operating partnership on an aggregate basis at the time of a book-up event. Book-up events are events that, for U.S. federal income tax purposes, require a partnership to revalue its property and allocate any unrealized gain or loss since the last book-up event to its partners. Book-up events generally include, among other things, the issuance or redemption by a partnership of more than a de minimis partnership interest.
LTIP units are not entitled to the redemption right described above, but any Common Units into which LTIP units are converted are entitled to this redemption right. LTIP units, generally, vote with the Common Units and do not have any separate voting rights except in connection with actions that could materially adversely affect the rights of the LTIP units.
Term
Our operating partnership will continue indefinitely, or until sooner dissolved upon:
Tax Matters
The amended partnership agreement provides that we, as the sole general partner of our operating partnership, will be the tax matters partner of our operating partnership and will have authority to handle tax audits and to make tax elections under the Code on behalf of our operating partnership.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material U.S. federal income tax considerations relating to our qualification as a REIT and relating to the purchase, ownership and disposition of shares of our common stock. Because this is a summary that is intended to address only certain material U.S. federal income tax consequences relating to the ownership and disposition of our common stock generally applicable to holders, it may not contain all the information that may be important to you. As you review this discussion, you should keep in mind that:
You are urged both to review the following discussion and to consult with your own tax advisor to determine the effect of ownership and disposition of our common stock on your particular tax situation, including any state, local or non-U.S. tax consequences.
For purposes of this discussion, references to "we," "us" or "our," and any similar terms, refer solely to American Farmland Company and not our operating partnership.
The information in this section is based on the current Code, current, temporary and proposed Treasury Regulations, the legislative history of the Code, current administrative interpretations and practices of the IRS, including its practices and policies as endorsed in private letter rulings, which are not binding on the IRS except in the case of the taxpayer to whom a private letter ruling is addressed, and existing court decisions. Future legislation, regulations, administrative interpretations and court decisions could change current law or adversely affect existing interpretations of current law, possibly with retroactive effect. Any change could apply retroactively. We have not obtained any rulings from the IRS concerning the tax treatment of the matters discussed below. Thus, it is possible that the IRS could challenge the statements in this discussion that do not bind the IRS or the courts and that a court could agree with the IRS.
Classification and Taxation of American Farmland Company as a REIT
We have elected to be taxed as a REIT under Sections 856 through 860 of the Code beginning with the taxable year ended December 31, 2012. A REIT generally is not subject to U.S. federal income tax on the income that it distributes to stockholders if it meets the applicable REIT distribution requirements and other requirements for qualification. We believe that we have been organized and operated in conformity with the requirements for qualification and taxation as a REIT under the Code
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beginning with our taxable year ended December 31, 2012 and that our intended manner of operations will enable us to continue to meet the requirements for qualification and taxation as a REIT for federal income tax purposes. For our taxable years ended December 31, 2009 through December 31, 2011, we were taxed as a regular "C" corporation; however, we did not incur any amount of federal income tax during those periods.
In connection with this offering, we will receive an opinion of our tax counsel, Goodwin Procter LLP, to the effect that (i) commencing with our taxable year ended December 31, 2012, we have been organized and operated in conformity with the requirements for qualification and taxation as a REIT under the Code and (ii) our prior, current and proposed ownership and method of operation as represented by management have enabled and will enable us to satisfy the requirements for qualification and taxation as a REIT under the Code for subsequent taxable years. This opinion will be based on representations made by us as to certain factual matters relating to our prior and intended and expected organization, our past and contemplated future ownership, the valuation of our shares and our prior and intended and expected manner of operation. Goodwin Procter LLP has not verified and will not verify those representations, and their opinion will assume that such representations and covenants are accurate and complete, that we have been owned, organized and operated and will continue to be owned and organized and will continue to operate in accordance with such representations and that we will take no action inconsistent with our status as a REIT. In addition, this opinion will be based on the law existing and in effect as of its date and will not cover subsequent periods. Our qualification and taxation as a REIT will depend on our ability to meet on a continuing basis, through actual operating results, asset composition, distribution levels, diversity of share ownership and various other qualification tests imposed under the Code discussed below. Goodwin Procter LLP has not reviewed and will not review our compliance with these tests on a continuing basis. Accordingly, the opinion of our tax counsel does not guarantee our ability to qualify as or remain qualified as a REIT, and no assurance can be given that we have satisfied and will satisfy such tests for our taxable year ended December 31, 2012 or for any subsequent period. Also, the opinion of Goodwin Procter LLP is not binding on the IRS, or any court, and could be subject to modification or withdrawal based on future legislative, judicial or administrative changes to U.S. federal income tax laws, any of which could be applied retroactively. Goodwin Procter LLP will have no obligation to advise us or the holders of our stock of any subsequent change in the matters addressed in its opinion, the factual representations or assumptions on which the conclusions in the opinion are based, or of any subsequent change in applicable law.
So long as we qualify for taxation as a REIT, we generally will be entitled to a deduction for dividends that we pay and therefore will not be subject to U.S. federal income tax on our net income that we distribute currently to our stockholders. This treatment substantially eliminates "double taxation" (that is, taxation at both the corporate and stockholder levels) that generally results from an investment in a corporation. However, even if we qualify for taxation as a REIT, we will be subject to federal income tax as follows:
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included in inventory if on hand at the close of the taxable year or (ii) held primarily for sale to customers in the ordinary course of business other than foreclosure property.
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No assurance can be given that the amount of any such U.S. federal income taxes will not be substantial. In addition, we and our subsidiaries may be subject to a variety of taxes other than U.S. federal income tax, including payroll taxes and state, local and foreign income, franchise, property and other taxes on assets and operations. We could also be subject to tax in situations and on transactions not presently contemplated.
Requirements for Qualification as a REIT
The Code defines a REIT as a corporation, trust or association:
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest;
(3) that would be taxable as a domestic corporation, but for its election to be subject to tax as a REIT under Sections 856 through 860 of the Code;
(4) that is neither a financial institution nor an insurance company subject to applicable provisions of the Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) during the last half of each taxable year not more than 50% in value of the outstanding shares of which is owned directly or indirectly by five or fewer "individuals," as defined in the Code to include specified entities;
(7) that makes an election to be taxable as a REIT, or has made this election for a previous taxable year, which has not been revoked or terminated, and satisfies all relevant filing and other administrative requirements established by the IRS that must be met to elect and maintain REIT status;
(8) that uses a calendar year for U.S. federal income tax purposes and complies with the recordkeeping requirements of the Code and regulations promulgated thereunder; and
(9) that meets other applicable tests, described below, regarding the nature of its income and assets and the amount of its distributions.
Conditions (1), (2), (3) and (4) above must be met during the entire taxable year and condition (5) above must be met during at least 335 days of a taxable year of 12 months or during a proportionate part of a taxable year of less than 12 months. For purposes of determining stock ownership under condition (6) above, a supplemental unemployment compensation benefits plan, a private foundation
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and a portion of a trust permanently set aside or used exclusively for charitable purposes generally are each considered an individual. A trust that is a qualified trust under Code Section 401(a) generally is not considered an individual, and beneficiaries of a qualified trust are treated as holding shares of a REIT in proportion to their actuarial interests in the trust for purposes of condition (6) above.
We believe that we have satisfied and will continue to satisfy the above ownership requirements. In addition, our charter provides restrictions regarding the transfer of shares of our capital stock that are intended to assist us in satisfying the share ownership requirements described in conditions (5) and (6) above. These restrictions, however, may not ensure that we will be able to satisfy these share ownership requirements.
To monitor its compliance with condition (6) above, a REIT is required to send annual letters to its stockholders requesting information regarding the actual ownership of its shares. If we comply with the annual letters requirement and we do not know or, exercising reasonable diligence, would not have known of our failure to meet condition (6) above, then we will be treated as having met condition (6) above.
For purposes of condition (8) above, we will have used and will continue to use a calendar year for U.S. federal income tax purposes, and we intend to continue to comply with the applicable recordkeeping requirements.
Non-REIT Accumulated Earnings and Profits
As a REIT, we may not have any undistributed non-REIT earnings and profits at the end of any taxable year. Although we do not currently expect to have had any non-REIT earnings and profits, if it is subsequently determined that we had undistributed non-REIT earnings and profits as of the end of our first taxable year as a REIT or at the end of any subsequent taxable year, we would fail to qualify as a REIT unless we distribute the undistributed amounts in a manner consistent with Section 852(e) of the Code.
Taxable REIT Subsidiaries
A TRS is a corporation in which we directly or indirectly own stock and that jointly with us elects to be treated as our TRS under Section 856(l) of the Code. In addition, if one of our TRSs owns, directly or indirectly, securities representing more than 35% of the vote or value of a subsidiary corporation, that subsidiary will also be treated as our TRS. We will have at least one TRS, AFTRS. A TRS is subject to U.S. federal income tax and state and local income tax, where applicable, as a regular "C" corporation.
Generally, a TRS can perform impermissible tenant services without causing us to receive impermissible tenant services income from those services under the REIT income tests. A TRS may also engage in other activities that, if conducted by us other than through a TRS, could result in the receipt of non-qualified income, the ownership of non-qualified assets or the incurrence of the 100% tax on net income from prohibited transactions. However, several provisions regarding the arrangements between a REIT and its TRSs ensure that a TRS will be subject to an appropriate level of U.S. federal income taxation. For example, a TRS is limited in its ability to deduct interest payments made to us in excess of a certain amount. In addition, we will be obligated to pay a 100% penalty tax on some payments that we receive or on certain expenses deducted by the TRS if the economic arrangements among us, our tenants and/or the TRS are not comparable to similar arrangements among unrelated parties.
In addition to our interests in AFTRS, we may own interests in one or more other TRSs that engage in activities, hold assets or generate income that could cause us to fail the REIT income or
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asset tests or subject us to the 100% tax on prohibited transactions. Our TRSs may incur significant amounts of U.S. federal, state and local income taxes.
Although we do not expect any non-U.S. TRSs (or other non-U.S. subsidiaries) to incur significant U.S. income taxes, any such non-U.S. entities may incur significant non-U.S. taxes.
Subsidiary REITs
If any REIT in which we acquire an interest fails to qualify for taxation as a REIT in any taxable year, that failure could, depending on the circumstances, adversely affect our ability to satisfy the various asset and gross income requirements applicable to REITs, including the requirement that REITs generally may not own, directly or indirectly, more than 10% of the securities of another corporation that is not a REIT or a TRS, as further described below.
Ownership of Partnership Interests and Disregarded Subsidiaries by a REIT
A REIT that is a partner in a partnership (or a member of a limited liability company or other entity that is treated as a partnership for U.S. federal income tax purposes) will be deemed to own its proportionate share of the assets of the partnership and will be deemed to earn its proportionate share of the partnership's income. The assets and gross income of the partnership retain the same character in the hands of the REIT for purposes of the gross income and asset tests applicable to REITs, as described below. Thus, our proportionate share of the assets and items of income of our operating partnership, including our operating partnership's share of the assets, liabilities and items of income of any subsidiary partnership (or other entity treated as a partnership for U.S. federal income tax purposes) in which our operating partnership holds an interest, will be treated as our assets, liabilities and items of income for purposes of applying the REIT income and asset tests. As a result, to the extent that our operating partnership holds interests in partnerships that it does not control, our operating partnership may need to hold such interests through TRSs.
If a REIT owns a corporate subsidiary (including an entity that is treated as an association taxable as a corporation for U.S. federal income tax purposes) that is a "qualified REIT subsidiary," the separate existence of that subsidiary is disregarded for U.S. federal income tax purposes. Generally, a qualified REIT subsidiary is a corporation, other than a TRS, all of the capital stock of which is owned by the REIT (either directly or through other disregarded subsidiaries). For U.S. federal income tax purposes, all assets, liabilities and items of income, deduction and credit of the qualified REIT subsidiary will be treated as assets, liabilities and items of income, deduction and credit of the REIT itself. Our qualified REIT subsidiaries will not be subject to U.S. federal income taxation but may be subject to state and local taxation in some states. Certain other entities also may be treated as disregarded entities for U.S. federal income tax purposes, generally including any domestic unincorporated entity that would be treated as a partnership if it had more than one owner. For U.S. federal income tax purposes, all assets, liabilities and items of income, deduction and credit of any such disregarded entity will be treated as assets, liabilities and items of income, deduction and credit of the owner of the disregarded entity.
Income Tests Applicable to REITs
To qualify as a REIT, we must satisfy two gross income tests annually. First, at least 75% of our gross income, excluding gross income from prohibited transactions and certain other income and gains described below, for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property, including "rents from real property," gains on the disposition of real estate assets, dividends paid by another REIT and interest on obligations secured by mortgages on real property or on interests in real property, or from some types of temporary investments. Second, at least 95% of our gross income for each taxable year, excluding gross income
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from prohibited transactions and certain other income and gains described below, must be derived from any combination of income qualifying under the 75% test and dividends, interest and gain from the sale or disposition of stock or securities.
Rents we receive will qualify as rents from real property in satisfying the gross income requirements for a REIT described above only if several conditions are met. First, the amount of rent must not be based in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term "rents from real property" solely by reason of being based on a fixed percentage or percentages of receipts or sales. In the case of rents which consists, in whole or in part, of one or more percentages of the lessee's receipts or sales in excess of determinable dollar amounts, in order to qualify as "rents from real property,"(i) the determinable amounts must not depend in whole or in part on the income or profits of the lessee, and (ii) the percentages and the determinable amounts, must be fixed at the time the lease is entered into and a change in percentages and determinable amounts is not renegotiated during the term of the lease (including any renewal periods of the lease) in a manner which has the effect of basing rent on income or profits. Moreover, an amount will not qualify as "rents from real property" if, considering the lease and all the surrounding circumstances, the arrangement does not conform with normal business practice but is in reality used as a means of basing the rent on income or profits.
Second, rents received from a "related party tenant" will not qualify as rents from real property in satisfying the gross income tests unless the tenant is a TRS and either (i) at least 90% of the property is leased to unrelated tenants and the rent paid by the TRS is substantially comparable to the rent paid by the unrelated tenants for comparable space, or (ii) the property leased is a "qualified lodging facility," as defined in Section 856(d)(9)(D) of the Code, or a "qualified health care property," as defined in Section 856(e)(6)(D)(i) of the Code, and certain other conditions are satisfied. A tenant is a related party tenant if the REIT, or an actual or constructive owner of 10% or more of the REIT, actually or constructively owns 10% or more of the tenant. Third, if rent attributable to personal property, leased in connection with a lease of real property, is greater than 15% of the total rent received under the lease, then the portion of rent attributable to the personal property will not qualify as rents from real property.
Generally, for rents to qualify as rents from real property for the purpose of satisfying the gross income tests, we may provide directly only an insignificant amount of services, unless those services are "usually or customarily rendered" in connection with the rental of real property and not otherwise considered "rendered to the occupant." Accordingly, we may not provide "impermissible services" to tenants (except through an independent contractor from whom we derive no revenue and that meets other requirements or through a TRS) without giving rise to "impermissible tenant service income." Impermissible tenant service income is deemed to be at least 150% of the direct cost to us of providing the service. If the impermissible tenant service income exceeds 1% of our total income from a property, then all of the income from that property will fail to qualify as rents from real property. If the total amount of impermissible tenant service income from a property does not exceed 1% of our total income from the property, the services will not disqualify any other income from the property that qualifies as rents from real property, but the impermissible tenant service income will not qualify as rents from real property.
Operating farm revenues are not qualifying income for purposes of either the 75% or the 95% gross income tests. Accordingly, in order for our operating partnership to generate qualifying income with respect to its farmland investments under the REIT rules, our operating partnership must lease its properties. Our operating partnership leases its properties to third-party farm operators to run the farms.
Certain of our operating partnership's leases provide for rent (or additional rent) determined based on a percentage (or percentages) of certain receipts of the lessee from the property. The rent
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formulas may include, without limitation, formulas that provide for different percentages to apply to revenues in excess of one or more specified thresholds and/or percentages that vary by formula based on revenue per acre. We believe we have structured these percentage rent formulas in a manner that complies with the REIT prohibition against rent based on the income or profits of any person derived from the property; however, precedents offer sparse guidance as to the proper application of the REIT percentage rent rules and it is possible that the IRS could disagree with our interpretation of such rules.
Some of the leases may provide for partial payments in crops instead of cash. In such cases, our operating partnership may transfer the crops directly to a TRS in order to avoid any potential adverse tax consequences of holding and selling crops. Any profits on a subsequent sale of such crops by the TRS would be subject to corporate level tax, and any net operating loss incurred by the TRS could not be used to reduce our REIT taxable income. If our operating partnership does not transfer the crops to a TRS and elects to sell the crops itself, such crop sales may be deemed to be "prohibited transactions" and subject to a 100% tax on the net income from such crop sales.
In addition, any rents our operating partnership receives under a lease will constitute rents from real property for purposes of the REIT gross income tests only if the lease is respected as a true lease for federal income tax purposes and is not treated as a service contract, joint venture or other type of arrangement. The determination of whether a lease is a true lease depends upon an analysis of all the surrounding facts and circumstances. Our operating partnership intends to structure its leases so that they will be respected as true leases under the tax laws. However, there can be no assurances that the IRS will not assert a contrary position and that a court will not sustain such a challenge. If any of our operating partnership's leases are re-characterized as service contracts or partnership agreements, rather than as true leases, part or all of the payment that our operating partnership receives from such lessee would not be considered rent and could be treated as non-qualifying income for one or both of the gross income tests.
We have not derived, and do not anticipate deriving, rents from related party tenants and/or rents attributable to personal property leased in connection with real property that exceeds 15% of the total rents from that property in sufficient amounts to jeopardize our status as REIT. We also have not derived, and do not anticipate deriving, impermissible tenant service income that exceeds 1% of our total income from any property if the treatment of the rents from such property as nonqualifying rents would jeopardize our status as a REIT. Our operating partnership and its subsidiaries may receive other amounts of nonqualifying income, but we intend to either limit the underlying activities so that the amounts of nonqualifying income do not exceed applicable limits or to structure our interests in those sources of nonqualifying income as needed to preserve our REIT status, such as by conducting activities that might earn excessive amounts of nonqualifying income through a TRS. In certain cases, it may be difficult to accurately predict the amount of nonqualifying income to be generated. If activities conducted outside of a TRS generate more nonqualifying income than anticipated, we could fail the gross income tests.
With respect to certain of our farms under development, we have harvested and sold crops during the development phase prior to leasing the farm, and we may continue to do so in the future. If we were required to include the revenues from such sales in our gross income tests, we would have failed the 95% gross income test for certain years and could fail with respect to future years. We believe, however, that, in a sufficient number of cases, any such crops were (and will be) properly be treated as inventory or property held primarily for sale to customers in the ordinary course of our trade or business, sales of which generate gross income from prohibited transactions that is excluded for purposes of the gross income tests. While disregarded for purposes of the gross income tests, any gain from inventory sales or sales of property held primarily for sale to customers in the ordinary course of our trade or business in excess of directly connected deductions is subject to the 100% prohibited transaction tax.
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If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify as a REIT for that year if we are entitled to relief under the Code. These relief provisions generally will be available if our failure to meet the tests is due to reasonable cause and not due to willful neglect, we attach a schedule of the sources of our income to our federal income tax return and otherwise comply with the applicable Treasury Regulations. It is not possible, however, to state whether in all circumstances we would be entitled to the benefit of these relief provisions. For example, if we fail to satisfy the gross income tests because nonqualifying income that we intentionally incur unexpectedly exceeds the limits on nonqualifying income, the IRS could conclude that the failure to satisfy the tests was not due to reasonable cause. If these relief provisions are inapplicable to a particular set of circumstances involving us, we will fail to qualify as a REIT. Even if these relief provisions apply, a tax would be imposed based on the amount of nonqualifying income.
Asset Tests Applicable to REITs
At the close of each quarter of our taxable year, we must satisfy four tests relating to the nature of our assets:
(1) at least 75% of the value of our total assets must be represented by real estate assets, cash, cash items and U.S. Government securities;
(2) not more than 25% of the value of our total assets may be represented by securities other than those in the 75% asset class;
(3) except for equity investments in REITs, qualified REIT subsidiaries, other securities that qualify as "real estate assets" for purposes of the test described in clause (1) or securities of our TRSs: the value of any one issuer's securities owned by us may not exceed 5% of the value of our total assets; we may not own more than 10% of any one issuer's outstanding voting securities; and we may not own more than 10% of the value of the outstanding securities of any one issuer; and
(4) not more than 25% of the value of our total assets may be represented by securities of one or more TRSs.
Securities for purposes of the asset tests may include debt securities that are not fully secured by a mortgage on real property (or treated as such). However, the 10% value test does not apply to certain "straight debt" and other excluded securities, as described in the Code including, but not limited to, any loan to an individual or estate, any obligation to pay rents from real property and any security issued by a REIT. In addition, for purposes of applying the 10% value test (a) a REIT's interest as a partner in a partnership is not considered a security; (b) any debt instrument issued by a partnership (other than straight debt or another excluded security) will not be considered a security issued by the partnership if at least 75% of the partnership's gross income is derived from sources that would qualify for the 75% REIT gross income test; and (c) any debt instrument issued by a partnership (other than straight debt or another excluded security) will not be considered a security issued by the partnership to the extent of the REIT's interest as a partner in the partnership. In general, straight debt is defined as a written, unconditional promise to pay on demand or at a specific date a fixed principal amount, and the interest rate and payment dates on the debt must not be contingent on profits or the discretion of the debtor. In addition, straight debt may not contain a convertibility feature. Real estate assets for purposes of the above tests include shares in other qualifying REITs and stock or debt instruments held for less than one year purchased with the proceeds from an offering of shares of our stock or certain debt.
Our assets consist primarily of farmland, buildings and permanent crops, vines and trees, which are treated as real property for REIT purposes, and short term investments of cash. In addition, in the Internalization, we will acquire AFA, whose assets are not qualifying REIT assets. We believe that our assets comply and have complied with the above asset tests and that we can operate so that we can
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continue to comply with those tests. However, our ability to satisfy these asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination. For example, we may hold significant assets through our TRSs or hold significant non-real estate assets, and we cannot provide any assurance that the IRS might not disagree with our determinations. Our compliance with the above asset test also depends on certain of our cash investments qualifying as "cash items" for purposes of the above tests. Although we believe that a sufficient portion of our cash investments have so qualified, given the lack of guidance, we cannot provide any assurance that the IRS might not disagree with our determinations.
After initially meeting the asset tests at the close of any quarter, we will not lose our status as a REIT if we fail to satisfy the 25% and 5% asset tests and the 10% value limitation at the end of a later quarter solely by reason of changes in the relative values of our assets (including changes in relative values as a result of fluctuations in foreign currency exchange rates). If the failure to satisfy the 25% or 5% asset tests or the 10% value limitation results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient non-qualifying assets within 30 days after the close of that quarter. We intend to maintain adequate records of the value of our assets to ensure compliance with the asset tests and to take any available actions within 30 days after the close of any quarter as may be required to cure any noncompliance with the 25% or 5% asset tests or 10% value limitation. If we fail the 5% asset test or the 10% asset test at the end of any quarter, and such failure is not cured within 30 days thereafter, we may dispose of sufficient assets or otherwise satisfy the requirements of such asset tests within six months after the last day of the quarter in which our identification of the failure to satisfy those asset tests occurred to cure the violation, provided that the non-permitted assets do not exceed the lesser of 1% of the total value of our assets at the end of the relevant quarter or $10,000,000. If we fail any of the other asset tests, or our failure of the 5% and 10% asset tests is in excess of this amount, as long as the failure was due to reasonable cause and not willful neglect and, following our identification of the failure, we filed a schedule in accordance with the Treasury Regulations describing each asset that caused the failure, we are permitted to avoid disqualification as a REIT, after the thirty-day cure period, by taking steps to satisfy the requirements of the applicable asset test within six months after the last day of the quarter in which our identification of the failure to satisfy the REIT asset test occurred, including the disposition of sufficient assets to meet the asset tests and paying a tax equal to the greater of $50,000 or the product of (x) the net income generated by the nonqualifying assets during the period in which we failed to satisfy the relevant asset test and (y) the highest U.S. federal income tax rate then applicable to U.S. corporations.
Annual Distribution Requirements Applicable to REITs
To qualify as a REIT, we are required to distribute dividends, other than capital gain dividends, to our stockholders each year in an amount at least equal to (1) the sum of (a) 90% of our REIT taxable income, computed without regard to the dividends paid deduction and our net capital gain, and (b) 90% of the net income, after tax, from foreclosure property, minus (2) the sum of certain specified items of noncash income. For purposes of the distribution requirements, any built-in gain (net of the applicable tax) we recognize during the applicable recognition period that existed on an asset at the start of our first REIT taxable year or at the time we acquired it from a C corporation in a carry-over basis transaction will be included in our REIT taxable income. See "Sting Tax on Built-in Gains of Former C Corporation Assets" for a discussion of the possible recognition of built-in gain. These distributions must be paid either in the taxable year to which they relate or in the following taxable year if declared before we timely file our tax return for the prior year and if paid with or before the first regular dividend payment date after the declaration is made.
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To the extent that we do not distribute (and are not deemed to have distributed) all of our net capital gain or distribute at least 90%, but less than 100%, of our REIT taxable income, as adjusted, we will be subject to U.S. federal income tax on these retained amounts at regular corporate tax rates.
We will be subject to a nondeductible 4% excise tax on the excess of the required distribution over the sum of amounts actually distributed and amounts retained for which U.S. federal income tax was paid, if we fail to distribute during each calendar year at least the sum of:
A REIT may elect to retain rather than distribute all or a portion of its net capital gains and pay the tax on the gains. In that case, a REIT may elect to have its stockholders include their proportionate share of the undistributed net capital gains in income as long-term capital gains and receive a credit for their share of the tax paid by the REIT. For purposes of the 4% excise tax described above, any retained amounts would be treated as having been distributed.
We intend to make timely distributions sufficient to satisfy the annual distribution requirements.
We anticipate that we will generally have sufficient cash or liquid assets to enable us to satisfy the 90% distribution requirement and to distribute such greater amount as may be necessary to avoid U.S. federal income and excise taxes. It is possible, however, that, from time to time, we may not have sufficient cash or other liquid assets to fund required distributions as a result, for example, of differences in timing between our cash flow, the receipt of income for GAAP purposes and the recognition of income for U.S. federal income tax purposes, the effect of non-deductible capital expenditures, the creation of reserves, payment of required debt service or amortization payments, or the need to make additional investments in qualifying real estate assets. The insufficiency of our cash flow to cover our distribution requirements could require us to (i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms, (iii) distribute amounts that would otherwise be invested in future acquisitions or capital expenditures or used for the repayment of debt, (iv) pay dividends in the form of taxable stock dividends or (v) use cash reserves in order to comply with the REIT distribution requirements. In particular, we may use a portion of the net proceeds of this offering to make distributions to our common shareholders while we are in the process of deploying the remainder of the net proceeds from this offering in connection with acquisitions and other corporate purposes. Under some circumstances, we may be able to rectify a failure to meet the distribution requirement for a year by paying dividends to stockholders in a later year, which may be included in our deduction for dividends paid for the earlier year. We will refer to such dividends as "deficiency dividends." Thus, we may be able to avoid being taxed on amounts distributed as deficiency dividends. We will, however, be required to pay interest based upon the amount of any deduction taken for deficiency dividends.
In order to satisfy the REIT distribution requirements, the dividends we pay must not be "preferential" within the meaning of the Code. A dividend determined to be preferential will not qualify for the dividends paid deduction. To avoid paying preferential dividends, we must treat every shareholder of a class of stock with respect to which we make a distribution the same as every other shareholder of that class, and we must not treat any class of stock other than according to its dividend rights as a class. If any part of a distribution is preferential, none of that distribution will be applied towards satisfying our REIT distribution requirements.
Pursuant to an IRS ruling, the prohibition on preferential dividends does not prohibit REITs from offering shares under a dividend reinvestment plan, or DRP, at discounts of up to 5% of fair market value, but a discount in excess of 5% of the fair market value of the shares would be considered a preferential dividend. In the event we reinstate our DRP, we intend for any shares that we offer under
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a DRP plan following this offering to be priced to fall within such 5% safe harbor. Prior to this offering, our DRP allowed shareholders to acquire shares at a price per share equal to the net asset value per share of common stock as of the end of the calendar quarter immediately preceding the applicable reinvestment date, as determined by us, subject to any adjustments we determined to make to reflect the Company's operations and any appreciation or depreciation in the Company's assets from the end of such calendar quarter until the reinvestment date, which prices we believe were not less than the fair market value of our stock on the applicable purchase dates and did not afford any discounts to participants in our DRP. However, prior to the listing of our common stock on a national securities exchange, the fair market value of our common stock was not susceptible to a definitive determination. If it is determined that the purchase price under our DRP in effect prior to the listing of our stock represented a discount from actual fair market value in excess of 5% at any time, we could fail to qualify as a REIT for any such affected year. See "Failure to Qualify as a REIT."
Sting Tax on Built-in Gains of Former C Corporation Assets
If a REIT acquires an asset from a C corporation in a transaction in which the REIT's basis in the asset is determined by reference to the basis of the asset in the hands of the C corporation (including our election to be taxable as a REIT under the Code), the REIT may be subject to an entity-level tax upon a taxable disposition during a 10-year period following the acquisition date (or the date we were first taxable as a REIT). The amount of the tax is determined by applying the highest regular corporate tax rate, which is currently 35%, to the lesser of (i) the excess, if any, of the asset's fair market value over the REIT's basis in the asset on the acquisition date (or the effective date of the REIT election) or (ii) the gain recognized by the REIT in the disposition. The amount described in clause (i) is referred to as "built-in gain." Any of the assets we owned at the start of our first REIT taxable year may be subject to this built-in gains tax if they are disposed of prior to January 1, 2022, the ten-year anniversary of when we elected to be taxable as a REIT. We estimate that the aggregate amount of built-in gains on the assets we held at the start of our first REIT taxable year is approximately $7,077,000, which would result in an aggregate sting tax liability of approximately $2,477,000 if we were to sell all of our assets in a taxable transaction. We are under no obligation to retain these assets to avoid this tax. Further, while we do not currently expect to acquire assets the disposition of which would be subject to the built-in gains tax, we are not foreclosed from doing so in the future.
Prohibited Transactions
Net income derived from prohibited transactions is subject to a 100% tax. The term "prohibited transactions" generally includes a sale or other disposition of property (other than foreclosure property) that is (i) of a kind that is properly included in inventory if on hand at the close of the taxable year or (ii) held primarily for sale to customers in the ordinary course of a trade or business. Whether property is held "primarily for sale to customers in the ordinary course of a trade or business" depends on the specific facts and circumstances. The Code provides a safe harbor pursuant to which sales of properties held for at least two years and meeting certain additional requirements will not be treated as prohibited transactions, but compliance with the safe harbor may not always be practical. The 100% tax will not apply to gains from the sale of property held through a TRS or other taxable corporation, although such income will be subject to U.S. federal income tax at regular corporate income tax rates.
We intend to conduct our operations so that no farm (or other interests in real property) that we own outside of a TRS will be treated as, or as having been, held as inventory or for sale to customers and that a sale of any such farm or other real property will not be treated as having been in the ordinary course of our business. We intend to hold our farms for investment with a view to long-term appreciation, to engage in the business of acquiring, owning, leasing and developing farms and to make sales of farms (or other interests in real property) that are consistent with our investment objectives; however, no assurance can be given that any particular farm or other interest in real property in which
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we hold a direct or indirect interest will not be treated as property held for sale to customers or that the safe-harbor provisions will apply.
The potential application of the prohibited transactions tax could cause us to forego potential dispositions of our farms or interests therein or to forego other opportunities that might otherwise be attractive to us (such as developing property for sale) or to undertake such dispositions or other opportunities through a TRS, which would generally result in corporate income taxes being incurred.
We have acquired and expect to continue to acquire from time to time crops, including (i) crops received as in-kind payments of rent and/or (ii) with respect to certain of our farms under development, crops we harvest during the development phase prior to leasing the farm. In past years, we have not sold any such crops through a TRS, and going forward it may not be feasible (or desirable) to earn the revenue from such sales through a TRS for tax purposes (especially in the case of crops harvested off our development properties). Any such crops should be characterized as inventory or "dealer property" held primarily for the sale to customers in the ordinary course of business (and as noted above, with respect to certain development properties we generally are relying on and may continue to rely on inventory/dealer property treatment to avoid a violation of the gross income tests). Any gain from a sale of inventory/dealer property in excess of directly connected deductions (and without any offset for any losses from other inventory sales) is subject to 100% prohibited transaction tax. We have incurred prohibited transaction tax in the past, and we may incur such taxes in future periods. Moreover, current law provides little guidance as to the deductions that are allowed to offset the gain subject to 100% tax, and thus the IRS might disagree with our calculations of the amount of gain subject to 100% tax.
Foreclosure Property
Foreclosure property is real property (including interests in real property) and any personal property incident to such real property (1) that is acquired by a REIT as a result of the REIT having bid in the property at foreclosure, or having otherwise reduced the property to ownership or possession by agreement or process of law, after there was a default (or default was imminent) on a lease of the property or a mortgage loan held by the REIT and secured by the property, (2) for which the related loan or lease was made, entered into or acquired by the REIT at a time when default was not imminent or anticipated and (3) for which such REIT makes an election to treat the property as foreclosure property. REITs generally are subject to tax at the maximum corporate rate (currently 35%) on any net income from foreclosure property, including any gain from the disposition of the foreclosure property, other than income that would otherwise be qualifying income for purposes of the 75% gross income test. Any gain from the sale of property for which a foreclosure property election has been made will not be subject to the 100% tax on gains from prohibited transactions described above, even if the property is held primarily for sale to customers in the ordinary course of a trade or business.
Hedging Transactions and Foreign Currency Gains
We may enter into hedging transactions with respect to one or more of our assets or liabilities. Hedging transactions could take a variety of forms, including interest rate swaps or cap agreements, options, futures contracts, forward rate agreements or similar financial instruments. Except to the extent provided by Treasury Regulations, any income from a hedging transaction (i) made in the normal course of our business primarily to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred by us to acquire or own real estate assets or (ii) entered into primarily to manage the risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the 75% or 95% income tests (or any property that generates such income or gain), which is clearly identified as such before the close of the day on which it was acquired, originated or entered into, including gain from the disposition or termination of such a transaction, will not constitute gross
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income for purposes of the 95% gross income test and the 75% gross income test. To the extent we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both the 75% and 95% gross income tests. We intend to structure any hedging transactions in a manner that does not jeopardize our ability to qualify as a REIT.
In addition, certain foreign currency gains may be excluded from gross income for purposes of one or both of the REIT gross income tests, provided we do not deal in or engage in substantial and regular trading in securities.
Investments in Loans
If the outstanding principal balance and accrued interest on a mortgage loan during the year exceeds the value of the real property securing the loan at the time we committed to acquire the loan, which may be the case, for instance, if we acquire a "distressed" mortgage loan, including with a view to acquiring the collateral, a portion of the interest accrued during the year will not be qualifying income for purposes of the 75% gross income test applicable to REITs and a portion of such loan may not be a qualifying real estate asset. Furthermore, we may be required to retest modified loans that we hold to determine if the modified loan is adequately secured by real property as of the modification date. If the IRS were to assert successfully that any mortgage loans we hold were not properly secured by real estate or that the value of the real estate collateral (at the time of commitment or retesting) was otherwise less than the amount of the loan, we could, as mentioned, earn income that is not qualifying for the 75% income test and also be treated as holding a non-real estate investment in whole or part, which could result in our failure to qualify as a REIT.
While we do not expect to originate or acquire mortgage or mezzanine loans, we are not prohibited from doing so. The IRS has provided a safe harbor with respect to the treatment of a mezzanine loan as a mortgage loan and therefore as a qualifying asset for purposes of the REIT asset tests but not rules of substantive law. Pursuant to the safe harbor, if a mezzanine loan meets certain requirements, it will be treated by the IRS as a qualifying real estate asset for purposes of the REIT asset tests, and interest derived from the mezzanine loan will be treated as qualifying mortgage interest for purposes of the REIT 75% income test. However, structuring a mezzanine loan to meet the requirements of the safe harbor may not always be practical. To the extent that any of our mezzanine loans do not meet all of the requirements for reliance on the safe harbor, such loans might not be properly treated as qualifying mortgage loans for REIT purposes.
Sale-Leaseback Transactions
Some of our investments may be in the form of sale-leaseback transactions. In general, depending on the economic terms of the transaction, we believe we have been and expect we will be treated for U.S. federal income tax purposes as the owner of the property. We do not expect to request an opinion of counsel concerning the status of any leases of properties as true leases for federal income tax purposes.
The IRS may take the position that specific sale-leaseback transactions we may treat as true leases are not true leases for U.S. federal income tax purposes but are, instead, financing arrangements or loans. We may also structure some sale-leaseback transactions as loans. In this event, for purposes of the asset tests and the 75% income test, each such loan likely would be viewed as secured by real property to the extent of the fair market value of the underlying property. It is expected that, for this purpose, the fair market value of the underlying property would be determined without taking into account our lease. If a sale-leaseback transaction we treat as a lease were re-characterized as a loan, we might fail to satisfy the asset tests or the income tests and consequently lose our REIT status effective
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with the year of re-characterization. Alternatively, the amount of our REIT taxable income could be recalculated which could cause us to fail one or both of the income tests.
Tax Aspects of Our Operating Partnership
In General.
We will own all or substantially all of our assets through our operating partnership, and our operating partnership in turn may own a substantial portion of its assets through interests in various partnerships and limited liability companies.
Except in the case of subsidiaries that have elected REIT or TRS status, we expect that our operating partnership and its partnership and limited liability company subsidiaries will be treated as partnerships or disregarded entities for U.S. federal income tax purposes. In general, entities that are classified as partnerships for U.S. federal income tax purposes are treated as "pass-through" entities that are not required to pay U.S. federal income taxes. Rather, partners or members of such entities are allocated their share of the items of income, gain, loss, deduction and credit of the entity and are potentially required to pay tax on that income without regard to whether the partners or members receive a distribution of cash from the entity. We will include in our income our allocable share of the foregoing items of our operating partnership for purposes of computing our REIT taxable income, based on the applicable operating agreement. For purposes of applying the REIT income and asset tests, we will include our pro rata share of the income generated by and the assets held by our operating partnership, including our operating partnership's share of the income and assets of any subsidiary partnerships and limited liability companies treated as partnerships for U.S. federal income tax purposes, based on our capital interests in such entities. See "Ownership of Partnership Interests and Disregarded Subsidiaries by a REIT."
Our ownership interests in such subsidiaries involve special tax considerations, including the possibility that the IRS might challenge the status of these entities as partnerships or disregarded entities, as opposed to associations taxable as corporations, for U.S. federal income tax purposes. If our operating partnership or one or more of its subsidiary partnerships or limited liability companies intended to be taxed as partnerships were treated as an association, it would be taxable as a corporation and would be subject to U.S. federal income taxes on its income. In that case, the character of the entity and its income would change for purposes of the asset and income tests applicable to REITs and could prevent us from satisfying these tests. See "Asset Tests Applicable to REITs" and "Income Tests Applicable to REITs." This, in turn, could prevent us from qualifying as a REIT. See "Failure to Qualify as a REIT" for a discussion of the effect of our failure to meet these tests for a taxable year.
We believe that our operating partnership and other subsidiary partnerships and limited liability companies that do not elect REIT or TRS status have been and/or will be classified as partnerships or disregarded entities for U.S. federal income tax purposes, and the remainder of the discussion under this section "Tax Aspects of Our Operating Partnership" is based on such classification.
Although a domestic unincorporated entity is generally treated as a partnership (if it has more than one owner) or a disregarded entity (if it has a single owner) for U.S. federal income tax purposes, in certain situations such an entity may be treated as a corporation for U.S. federal income tax purposes, including if the entity is a "publicly traded partnership" that does not qualify for an exemption based on the character of its income. A partnership is a "publicly traded partnership" under Section 7704 of the Code if:
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A partnership will not be treated as a publicly traded partnership if it qualifies for certain safe harbors, one of which applies to certain partnerships with fewer than 100 partners.
There is a risk that the right of a holder of Common Units to redeem the units for cash (or common stock at our option) could cause Common Units to be considered readily tradable on the substantial equivalent of a secondary market, and we may not be eligible for a safe harbor at all times. If our operating partnership is a publicly traded partnership, it will be taxed as a corporation unless at least 90% of its gross income has consisted and will consists of "qualifying income" under Section 7704 of the Code. Qualifying income generally includes real property rents and other types of passive income. We believe that our operating partnership will have sufficient qualifying income so that it would be taxed as a partnership, even if it were classified as a publicly traded partnership. The income requirements applicable to REITs under the Code and the definition of qualifying income under the publicly traded partnership rules are very similar. Although differences exist between these two income tests, we do not believe that these differences will cause our operating partnership to fail the 90% gross income test applicable to publicly traded partnerships.
Allocations of Income, Gain, Loss and Deduction.
A partnership or limited liability company agreement will generally determine the allocation of income and losses among partners or members for U.S. federal income tax purposes (except for purposes of the REIT income tests, for which our share of operating partnership income is based on our share of partnership capital). These allocations, however, will be disregarded for U.S. federal income tax purposes if they do not comply with the provisions of Section 704(b) of the Code and the related Treasury Regulations. Generally, Section 704(b) of the Code and the related Treasury Regulations require that partnership and limited liability company allocations be consistent with the economic arrangement of their partners or members. If an allocation is not recognized by the IRS for U.S. federal income tax purposes, the item subject to the allocation will be reallocated according to the partners' or members' interests in the partnership or limited liability company, as the case may be. This reallocation will be determined by taking into account all of the facts and circumstances relating to the economic arrangement of the partners or members with respect to such item. The allocations of taxable income and loss in our operating partnership and its partnership subsidiaries are intended to comply with the requirements of Section 704(b) of the Code and the Treasury Regulations promulgated thereunder.
Tax Allocations With Respect to Contributed Properties.
In general, when property is contributed to a partnership in exchange for a partnership interest, the partnership inherits the carry-over tax basis of the contributing partner in the contributed property. Any difference between the fair market value and the adjusted tax basis of contributed property at the time of contribution is referred to as a "book-tax difference." Under Section 704(c) of the Code, income, gain, loss and deduction attributable to property with a book-tax difference that is contributed to a partnership in exchange for an interest in the partnership must be allocated in a manner so that the contributing partner is charged with the unrealized gain or benefits from the unrealized loss associated with the property at the time of the contribution, as adjusted from time to time, so that, to the extent possible under the applicable method elected under Section 704(c) of the Code, the non-contributing partners receive allocations of depreciation and gain or loss for tax purposes equal to the allocations they would have received in the absence of book-tax differences. These allocations are solely for U.S. federal income tax purposes and do not affect the book capital accounts or other economic or legal arrangements among the partners or members. Similar tax allocations are required with respect to the book-tax differences in the assets owned by a partnership arising from a restatement of the book value of the partnership's assets to fair market value, for example, in connection with a
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contribution of additional assets to the partnership in exchange for a new partnership interest or the issuance of partnership interests for services.
Under the above rules, if we acquire assets in exchange for interests in our operating partnership in a carry-over basis transaction (i.e., a transaction in which the contributing partner defers its gain for U.S. federal income tax purposes), we may be allocated lower amounts of depreciation and other deductions for tax purposes, and possibly greater amounts of taxable income in the event of a disposition of the contributed properties, as compared to our share of such items for economic or book purposes. Thus, these rules may cause us to recognize taxable income in excess of cash proceeds, which might adversely affect our ability to comply with the REIT distribution requirements. See "Annual Distribution Requirements Applicable to REITs." Because a taxable disposition of the contributed properties generally also accelerates recognition of the contributing partner's deferred tax gain, as part of a tax-deferred acquisition of farms for interests in our operating partnership we may agree to compensate the contributing partner for the accelerated tax, which would further increase the costs to us for taxable disposition of contributed properties.
Withholding Obligations with Respect to Non-U.S. Partners.
With respect to each non-U.S. limited partner, our operating partnership generally will be required to withhold at rates of 20%-35% with respect to the non-U.S. limited partner's share of our operating partnership income (with the rate varying based on the character of the items comprising the income and the status of the limited partner for U.S. federal income tax purposes), regardless of the amounts distributed to such non-U.S. limited partner. We will be liable for any under withholdings (including interest and penalties). Given our status as a REIT and our need to distribute income currently, we generally expect our operating partnership to make distributions on Common Units sufficient to cover a non-U.S. limited partner's withholding obligations. It is also possible that we might be obligated to withhold with respect to a non-U.S. limited partner's share of gain on a disposition generally qualifying for nonrecognition and with respect to which our operating partnership is not making distributions. Our operating partnership will have to make the withholding payments in any event even if the withholding obligation exceeds a limited partner's share of distributions. Unless it can recover the excess withholdings from the limited partner, our operating partnership will have to find other sources of cash to fund excess withholdings.
Failure to Qualify as a REIT
In the event we violate a provision of the Code that would result in our failure to qualify as a REIT, specified relief provisions will be available to us to avoid such disqualification if (1) the violation is due to reasonable cause and not willful neglect, (2) we pay a penalty of $50,000 for each failure to satisfy the provision and (3) the violation does not include a violation under the gross income or asset tests or distribution requirements described above (for which other specified relief provisions are available). This cure provision reduces the instances that could lead to our disqualification as a REIT for violations due to reasonable cause. It is not possible to state whether, in all circumstances, we will be entitled to this statutory relief. If we fail to qualify as a REIT in any taxable year, and the relief provisions of the Code do not apply, we will be subject to tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. Distributions to our stockholders in any year in which we are not a REIT will not be deductible by us, nor will they be required to be made. In this situation, to the extent of current and accumulated earnings and profits, and, subject to limitations of the Code, distributions to our stockholders will generally be taxable to stockholders who are individual U.S. stockholders at a maximum rate of 20%, and dividends received by our corporate U.S. stockholders may be eligible for a dividends received deduction. Unless we are entitled to relief under specific statutory provisions, we will also be disqualified from re-electing REIT status for the four taxable years following a year during which qualification was lost.
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Taxation of Stockholders and Potential Tax Consequences of Their Investment in Shares of Common Stock
Taxation of Taxable U.S. Stockholders
The term "U.S. stockholder" means a holder of shares of our common stock who, for U.S. federal income tax purposes, is:
If a partnership or an entity treated as a partnership for U.S. federal income tax purposes holds our stock, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. If you are a partnership holding our common stock, you should consult your own tax advisor regarding the consequences to your partners of the ownership and disposition of shares of our common stock by you.
Dividends.
As long as we qualify as a REIT, a taxable U.S. stockholder must generally take into account as ordinary income distributions made out of our current or accumulated earnings and profits that we do not designate as capital gain dividends. Dividends paid to a non-corporate U.S. stockholder generally will not qualify for the 20% tax rate for "qualified dividend income." Qualified dividend income generally includes dividends paid to most U.S. non-corporate taxpayers by domestic C corporations and certain qualified foreign corporations. Because we are not generally subject to U.S. federal income tax on the portion of our REIT taxable income distributed to our stockholders, our ordinary dividends generally will not be eligible for the 20% tax rate on qualified dividend income. As a result, our ordinary dividends will continue to be taxed at the higher tax rate applicable to ordinary income. However, the 20% tax rate for qualified dividend income will apply to our ordinary dividends (1) attributable to dividends received by us from taxable corporations, such as our TRSs, and (2) to the extent attributable to income upon which we have paid corporate income tax ( e.g., to the extent that we distribute less than 100% of our taxable income). In general, to qualify for the reduced tax rate on qualified dividend income, a stockholder must hold our stock for more than 60 days during the 121-day period beginning on the date that is 60 days before the date on which our stock becomes ex-dividend. Dividends paid to a corporate U.S. stockholder will not qualify for the dividends received deduction generally available to corporations. If we declare a distribution in October, November or December of any year that is payable to a U.S. stockholder of record on a specified date in any such month, such distribution will be treated as both paid by us and received by the U.S. stockholder on December 31 of such year, provided that we actually pay the distribution during January of the following calendar year.
Distributions from us that are designated as capital gain dividends will be taxed to U.S. stockholders as long-term capital gains, to the extent that they do not exceed our actual net capital gains for the taxable year, without regard to the period for which the U.S. stockholder has held our common stock. Corporate U.S. stockholders may be required to treat up to 20% of some capital gain
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dividends as ordinary income. Long-term capital gains are generally taxable at a maximum U.S. federal rate of 20%, in the case of U.S. stockholders who are individuals, and 35% for corporations. Capital gains dividends attributable to the sale of depreciable real property held for more than 12 months are subject to a 25% U.S. federal income tax rate for U.S. stockholders who are individuals, trusts or estates, to the extent of previously claimed depreciation deductions.
We may elect to retain and pay income tax on the net long-term capital gain that we receive in a taxable year. In that case, we may elect to designate the retained amount as a capital gain dividend with the result that a U.S. stockholder would be taxed on its proportionate share of our undistributed long-term capital gain. The U.S. stockholder would receive a credit or refund for its proportionate share of the tax we paid. The U.S. stockholder would increase the basis in its common stock by the amount of its proportionate share of our undistributed long-term capital gain, minus its share of the tax we paid.
A U.S. stockholder will not incur tax on a distribution in excess of our current and accumulated earnings and profits if the distribution does not exceed the adjusted basis of the U.S. stockholder's stock. Instead, the distribution will reduce the adjusted basis of such stock. A U.S. stockholder will recognize gain upon a distribution in excess of both our current and accumulated earnings and profits and the U.S. stockholder's adjusted basis in his or her stock as long-term capital gain if the shares of stock have been held for more than one year, or short-term capital gain, if the shares of stock have been held for one year or less.
Stockholders may not include in their own income tax returns any of our net operating losses or capital losses. Instead, these losses are generally carried over by us for potential offset against our future income. Taxable distributions from us and gain from the disposition of our common stock will not be treated as passive activity income and, therefore, stockholders generally will not be able to apply any "passive activity losses," such as losses from certain types of limited partnerships in which the stockholder is a limited partner, against such income. In addition, taxable distributions from us generally will be treated as investment income for purposes of the investment interest limitations. A U.S. stockholder that elects to treat capital gain dividends, capital gains from the disposition of stock or qualified dividend income as investment income for purposes of the investment interest limitation will be taxed at ordinary income rates on such amounts. We will notify stockholders after the close of our taxable year as to the portions of the distributions attributable to that year that constitute ordinary income, return of capital and capital gain.
Dispositions of Stock.
In general, a U.S. stockholder who is not a dealer in securities must treat any gain or loss realized upon a taxable disposition of our stock as long-term capital gain or loss if the U.S. stockholder has held our stock for more than one year. Otherwise, the U.S. stockholder must treat any such gain or loss as short-term capital gain or loss. However, a U.S. stockholder must treat any loss upon a sale or exchange of our stock held by such stockholder for six months or less as a long-term capital loss to the extent of capital gain dividends and any other actual or deemed distributions from us that such U.S. stockholder treats as long-term capital gain. All or a portion of any loss that a U.S. stockholder realizes upon a taxable disposition of our common stock may be disallowed if the U.S. stockholder repurchases our common stock within 30 days before or after the disposition.
Capital Gains and Losses.
The tax rate differential between capital gain and ordinary income for non-corporate taxpayers may be significant. A taxpayer generally must hold a capital asset for more than one year for gain or loss derived from its sale or exchange to be treated as long-term capital gain or loss. The highest marginal individual income tax rate is currently 39.6%. The maximum tax rate on long-term capital
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gains applicable to non-corporate taxpayers is 20% for sales and exchanges of capital assets held for more than one year. The maximum tax rate on long-term capital gain from the sale or exchange of "Section 1250 property," or depreciable real property, is 25% to the extent that such gain, known as "unrecaptured Section 1250 gains, would have been treated as ordinary income on depreciation recapture if the property were "Section 1245 property." The foregoing rates do not include the medicare tax discussed below. With respect to distributions that we designate as capital gain dividends and any retained capital gain that we are deemed to distribute, we generally may designate whether such a distribution is taxable to our non-corporate stockholders as long-term capital gains or unrecaptured Section 1250 gains. The IRS has the authority to prescribe, but has not yet prescribed, regulations that would apply a capital gain tax rate of 25% (which is generally higher than the long-term capital gain tax rates for non-corporate taxpayers) to a portion of capital gain realized by a non-corporate stockholder on the sale of REIT stock that would correspond to the REIT's "unrecaptured Section 1250 gain." In addition, the characterization of income as capital gain or ordinary income may affect the deductibility of capital losses. A non-corporate taxpayer may deduct capital losses not offset by capital gains against its ordinary income only up to a maximum annual amount of $3,000. A non-corporate taxpayer may carry forward unused capital losses indefinitely. A corporate taxpayer must pay tax on its net capital gain at ordinary corporate rates (currently up to 35%). A corporate taxpayer can deduct capital losses only to the extent of capital gains, with unused losses being carried back three years and forward five years.
If a U.S. stockholder recognizes a loss upon a subsequent disposition of our common stock in an amount that exceeds a prescribed threshold, it is possible that the provisions of certain Treasury Regulations involving "reportable transactions" could apply, with a resulting requirement to separately disclose the loss generating transactions to the IRS. While these regulations are directed towards "tax shelters," they are written quite broadly and apply to transactions that would not typically be considered tax shelters. Significant penalties apply for failure to comply with these requirements. You should consult your tax advisors concerning any possible disclosure obligation with respect to the receipt or disposition of our common stock or transactions that might be undertaken directly or indirectly by us. Moreover, you should be aware that we and other participants in transactions involving us (including our advisors) might be subject to disclosure or other requirements pursuant to these regulations.
Medicare Tax.
A U.S. person that is an individual is subject to a 3.8% tax on the lesser of (1) the U.S. person's "net investment income" for the relevant taxable year and (2) the excess of the U.S. person's modified gross income for the taxable year over a certain threshold (which currently is between $125,000 and $250,000, depending on the individual's circumstances). Estates and trusts that do not fall into a special class of trusts that is exempt from such tax are subject to the same 3.8% tax on the lesser of their undistributed net investment income and the excess of their adjusted gross income over a certain threshold. Net investment income generally includes dividends on our stock and gain from the sale of our stock. If you are a U.S. shareholder that is an individual, estate or trust, you are urged to consult your tax advisors regarding the applicability of this tax to your income and gains in respect of your investment in our common stock.
Information Reporting and Backup Withholding.
We will report to our stockholders and to the IRS the amount of distributions we make during each calendar year and the amount of tax we withhold, if any. Under the backup withholding rules, a
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stockholder may be subject to backup withholding at a current rate of up to 28% with respect to distributions unless the holder:
A stockholder who does not provide us with its correct taxpayer identification number also may be subject to penalties imposed by the IRS. Any amount paid as backup withholding will be creditable against the stockholder's income tax liability. In addition, we may be required to withhold a portion of any dividends or capital gain distributions to any stockholders who fail to certify their non-foreign status to us. For a discussion of the backup withholding rules as applied to non-U.S. stockholders, see "Taxation of Non-U.S. Stockholders."
Taxation of Tax-Exempt Stockholders
Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts, generally are exempt from federal income taxation. However, they are subject to taxation on their unrelated business taxable income. Subject to the exceptions described below, a tax-exempt stockholder generally would not recognize unrelated business taxable income as a result of an investment in our common stock. However, if a tax-exempt stockholder were to finance its acquisition of common stock with debt, a portion of the income that it receives from us and a portion of the gain on sale of our common stock could constitute unrelated business taxable income pursuant to the "debt-financed property" rules. Furthermore, social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans that are exempt from taxation under special provisions of the federal income tax laws are subject to different unrelated business taxable income rules, which generally will require them to characterize distributions that they receive from us as unrelated business taxable income.
In certain circumstances, a qualified employee pension or profit sharing trust that owns more than 10% of our stock by value at any time during a taxable year must treat a percentage of the dividends that it receives from us for the taxable year as unrelated business taxable income. Such percentage is equal to the gross income we derive from an unrelated trade or business, determined as if we were a pension trust, divided by our total gross income for the year in which we pay the dividends. That rule applies to a pension trust holding more than 10% of our shares by value only if:
Taxation of Non-U.S. Stockholders
The rules governing U.S. federal income taxation of nonresident alien individuals and foreign corporations ("non-U.S. stockholders") are complex. This section is only a summary of such rules. We
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urge non-U.S. stockholders to consult their own tax advisors to determine the impact of federal, state and local income tax laws on ownership of our stock, including any reporting requirements.
Dividends.
A non-U.S. stockholder who receives a distribution that is not attributable to gain from our sale or exchange of U.S. real property interests, or USRPIs, as defined below, and that we do not designate as a capital gain dividend or retained capital gain will recognize ordinary income to the extent that we pay the distribution out of our current or accumulated earnings and profits. A withholding tax equal to 30% of the gross amount of the dividend (including any portion of any dividend that is payable in our stock) ordinarily will apply unless an applicable tax treaty reduces or eliminates the tax. Under some treaties, lower withholding tax rates do not apply to dividends from REITs (or are not as favorable for REIT dividends as compared to non-REIT dividends). However, if a distribution is treated as effectively connected with the non-U.S. stockholder's conduct of a U.S. trade or business, the non-U.S. stockholder generally will be subject to U.S. federal income tax on the distribution at graduated rates, in the same manner as U.S. stockholders are taxed on distributions, and in the case of a corporate non-U.S. stockholder also may be subject to a branch profits tax at the rate of 30% (or lower treaty rate). We plan to withhold U.S. federal income tax at the rate of 30% on the gross amount of any distribution paid to a non-U.S. stockholder unless either:
A non-U.S. stockholder generally will not be subject to U.S. federal income tax on a distribution in excess of our current and accumulated earnings and profits if the excess portion of the distribution does not exceed the adjusted basis of its stock. Instead, the excess portion of the distribution will reduce the adjusted basis of that stock. A non-U.S. stockholder will be subject to U.S. federal income tax on a distribution that exceeds both our current and accumulated earnings and profits and the adjusted basis of its stock, if the non-U.S. stockholder otherwise would be subject to U.S. federal income tax on gain from the sale or disposition of its stock, as described below. Because we generally cannot determine at the time we make a distribution whether or not the distribution will exceed our current and accumulated earnings and profits, we normally will withhold tax on the entire amount of any distribution at the same rate as we would withhold on a dividend. However, a non-U.S. stockholder may obtain a refund of amounts that we withhold if we later determine that a distribution in fact exceeded our current and accumulated earnings and profits.
Additional withholding regulations may require us to withhold 10% of any distribution that exceeds our current and accumulated earnings and profits. Consequently, although we intend to withhold at a rate of 30% on the entire amount of any distribution (other than distributions subject to FIRPTA, as described below, and except to the extent an exemption or a lower rate of withholding applies), to the extent that we do not do so, we will withhold at a rate of 10% on any portion of such a distribution.
Except as discussed below with respect to 5% or less holders of regularly traded classes of stock, for any year in which we qualify as a REIT, a non-U.S. stockholder will incur tax on distributions by us that are attributable to gain from our sale or exchange of USRPIs under special provisions of the U.S. federal income tax laws known as the Foreign Investment in Real Property Act, or FIRPTA. The term USRPIs includes interests in real property and shares in corporations at least 50% of whose real estate and business assets consist of interests in U.S. real property. Under those rules, a non-U.S. stockholder is taxed on distributions by us attributable to gain from sales of USRPIs as if the gain were effectively connected with a U.S. trade or business of the non-U.S. stockholder. A non-U.S. stockholder thus would be taxed on such a distribution at regular tax rates applicable to U.S. stockholders, subject to
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any applicable alternative minimum tax. A corporate non-U.S. stockholder not entitled to treaty relief or exemption also may be subject to the 30% branch profits tax on such a distribution. We must withhold 35% of any distribution that we could designate as a capital gain dividend and is a distribution attributable to USRPI gain and may be required to withhold 35% of any of other capital gain dividends. A non-U.S. stockholder may receive a credit against its tax liability for the amount we withhold. However, FIRPTA and the 35% withholding tax will not apply to any distribution with respect to any class of our stock that is regularly traded on an established securities market located in the United States if the recipient non-U.S. stockholder did not own more than 5% of such class of stock at any time during the 1-year period ending on the date of distribution. Instead, any capital gain dividend will be treated as an ordinary distribution subject to the rules discussed above, which generally impose a 30% withholding tax (unless reduced by a treaty).
Although the law is not clear on the matter, it appears that amounts designated by us as undistributed capital gains generally should be treated with respect to non-U.S. stockholders in the same manner as actual distributions by us of capital gain dividends. Under that approach, the non-U.S. stockholders would be able to offset as a credit against their U.S. federal income tax liability resulting therefrom an amount equal to their proportionate share of the tax paid by us on the undistributed capital gains and to receive from the IRS a refund to the extent their proportionate share of this tax paid by us exceeds their actual U.S. federal income tax liability.
Dispositions of Stock.
A non-U.S. stockholder generally will not incur tax under FIRPTA with respect to gain on a disposition of our common stock as long as at all times during the 5-year period ending on the date of disposition non-U.S. persons hold, directly or indirectly, less than 50% in value of our stock. Because our stock will be publicly traded, we cannot assure you that our non-U.S. ownership will be less than 50% at any time. Even if our non-U.S. ownership remains under 50% for 5 years and we otherwise meet the requirements of this rule, pursuant to "certain wash sale" rules under FIRPTA, a non-U.S. stockholder may incur tax under FIRPTA to the extent such stockholder disposes of our common stock within a certain period prior to a distribution attributable to USRPI gain and directly or indirectly (including through certain affiliates) reacquires our common stock within certain prescribed periods.
Regardless of the extent of our non-U.S. ownership, a non-U.S. stockholder will not incur tax under FIRPTA on a disposition of the shares of our common stock if such non-U.S. stockholder owned, actually or constructively, at all times during a specified testing period, 5% or less of the total fair market value of a class of our stock that is regularly traded on an established securities market. The testing period is the shorter of (i) the period during which the non-U.S. stockholder held the shares and (ii) the 5-year period ending on the disposition date. For as long as our common stock is regularly traded on an established securities market, a non-U.S. stockholder should not incur tax under FIRPTA with respect to gain on a sale of our common stock unless it owns, actually or constructively, more than 5% of our common stock during such testing period.
If the gain on the sale of our stock were taxed under FIRPTA, a non-U.S. stockholder would be taxed on that gain in the same manner as U.S. stockholders subject to any applicable alternative minimum tax. Furthermore, a non-U.S. stockholder generally will incur U.S. federal income tax on gain not subject to FIRPTA if:
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FATCA Withholding on Certain Foreign Accounts and Entities.
The Foreign Account Tax Compliance Act, or FATCA, provisions of the Code, subject to administrative guidance and certain intergovernmental agreements entered into thereunder, impose a 30% withholding tax on certain types of payments (including dividends on our common stock) made to "foreign financial institutions" and certain other non-U.S. entities unless (i) the foreign financial institution undertakes certain diligence and reporting obligations or (ii) the non-financial foreign entity either certifies it does not have any substantial U.S. owners or furnishes identifying information regarding each substantial U.S. owner. If any payee, whether or not it is a beneficial owner or an intermediary with respect to a payment, is a foreign financial institution that is not subject to special treatment under certain intergovernmental agreements, it must enter into an agreement with the U.S. Treasury requiring, among other things, that it undertakes to identify accounts held by certain U.S. persons or U.S.-owned foreign entities, annually report certain information about such accounts, and withhold 30% on payments to account holders whose actions prevent them from complying with these reporting or other requirements. Withholding under this legislation currently applies to withholdable payments to foreign financial institutions and certain non-financial foreign entities and will also apply after December 31, 2016 with respect to the gross proceeds of a disposition of our common stock (which will include sales, redemptions and returns on capital). Failure by a non-U.S. stockholder (or any intermediary through which it holds its stock) that is subject to FATCA to comply with its certification and reporting requirements, or properly document its status as a person not subject to FATCA withholding, could result in withholding at a rate of 30% on withholdable payments made to the non-U.S. investor. Prospective investors should consult their tax advisors regarding this legislation.
Information Reporting and Backup Withholding.
Generally, we must report annually to the IRS the amount of dividends paid to a non-U.S. stockholder, such holder's name and address and the amount of tax withheld, if any. A similar report is sent to the non-U.S. stockholder. Pursuant to tax treaties or other agreements, the IRS may make its reports available to tax authorities in the non-U.S. stockholder's country of residence. Payments of dividends or of proceeds from the disposition of stock made to a non-U.S. stockholder may be subject to information reporting and backup withholding unless such holder establishes an exemption, for example, by properly certifying its non-U.S. status on an IRS Form W-8BEN, IRS Form W-8BEN-E or another appropriate version of IRS Form W-8. Notwithstanding the foregoing, backup withholding may apply if either we or our paying agent has actual knowledge, or reason to know, that a non-U.S. stockholder is a U.S. person.
Backup withholding is not an additional tax. Rather, the U.S. income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may be obtained, provided the required information is timely furnished to the IRS.
State, Local and Foreign Taxes
We and/or holders of our stock may be subject to state, local and foreign taxation in various state or local or foreign jurisdictions, including those in which we or they transact business or reside. The foreign, state and local tax treatment of us and of holders of our stock may not conform to the U.S. federal income tax consequences discussed above. Consequently, prospective investors should consult their own tax advisors regarding the effect of state, local and foreign tax laws on an investment in our common stock or preferred stock.
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Legislative or Other Actions Affecting REITs
The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. No assurance can be given as to whether, when or in what form U.S. federal income tax laws applicable to us and our stockholders may be enacted, amended or repealed. Changes to the U.S. federal income tax laws and to interpretations of the U.S. federal income tax laws could adversely affect an investment in our common stock or preferred stock. In 2014, certain members of Congress circulated a draft of legislative changes to the REIT rules that, if ultimately adopted, could adversely affect our REIT status, including reducing the maximum amount of our gross asset value in TRSs from 25% to 20%.
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We are offering the shares of our common stock described in this prospectus in an underwritten initial public offering in which Deutsche Bank Securities Inc., Raymond James & Associates, Inc., FBR Capital Markets & Co. and Janney Montgomery Scott LLC are acting as representatives of the underwriters. We have entered into an underwriting agreement with Deutsche Bank Securities Inc., Raymond James & Associates, Inc., FBR Capital Markets & Co. and Janney Montgomery Scott LLC acting as representatives of the underwriters named below, with respect to the common stock being offered hereby. Subject to the terms and conditions contained in the underwriting agreement, each underwriter has severally agreed to purchase the respective number of shares of our common stock set forth opposite its name below:
Underwriters
|
Number of
Shares |
|
---|---|---|
Deutsche Bank Securities Inc. |
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Raymond James & Associates, Inc. |
||
FBR Capital Markets & Co. |
||
Janney Montgomery Scott LLC |
||
| | |
Total |
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| | |
| | |
| | |
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of our common stock in the offering if any are purchased, other than those shares covered by the underwriters' option to purchase additional shares we describe below. We have granted to the underwriters a 30-day option to purchase up to additional shares from us ay the initial public offering price less the underwriting discount and commissions. If any shares are purchased with the underwriters' option, the underwriters will purchase shares in approximately the same proportion as shown in the table above. If any additional shares of common stock are purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered.
Our common stock is being offered by the underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the underwriters and the satisfaction of other conditions contained in the underwriting agreement, including:
The underwriters propose to offer shares of our common stock directly to the public at the initial public offering price per share on the cover of this prospectus and to certain dealers at that price less a concession not in excess of $ per share. After this offering, the offering price and other selling terms may be changed by the underwriters. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part. Sales of shares made outside of the United States may be made by affiliates of the underwriters. The representatives have advised us that the underwriters do not intend to confirm discretionary sales in excess of 5% of the shares of our common stock offered in this offering.
The following table shows the per share and total underwriting discount and commissions that we will pay to the underwriters at closing and the proceeds (before expenses) that we will receive from the
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sale of our common stock in this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares of our common stock.
|
Total Fees | |||
---|---|---|---|---|
|
No Exercise | Full Exercise | ||
Underwriting discount per share |
$ | $ | ||
Total underwriting discount |
||||
Proceeds to us (before expenses) |
The Company has agreed to pay Deutsche Bank Securities Inc. an advisory fee in an amount equal to 1% of the gross proceeds of this offering (including with respect to any shares of our common stock issued pursuant to the exercise by the underwriters in whole or in part of their option to purchase additional shares).
D. Dixon Boardman, the Chairman of our Board of Directors, as well as other executive officers, founders and principal stockholders (or their affiliates), have indicated an interest in purchasing $ million, in the aggregate, of shares of our common stock in this offering at the public offering price. However, because indications of interest are not binding agreements or commitments to purchase, such individuals may elect to purchase more, less or no shares in the offering or the underwriters could determine to sell more, less or no shares to these individuals in this offering. The underwriters will receive the same underwriting discount from any shares of our common stock purchased by such individuals as they will from any other shares of our common stock sold to the public in this offering.
We estimate that the total expenses of this offering (exclusive of the underwriting discount and commissions) will be approximately $ million. We have agreed to reimburse the underwriters for all fees and expenses related to the review and qualification of this offering by the Financial Industry Regulatory Authority, Inc.
A prospectus in electronic format may be made available on the websites maintained by one or more underwriters, or selling group members, if any, participating in this offering. The underwriters may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives to underwriters and selling group members that may make Internet distributions on the same basis as other allocations.
We have agreed to indemnify the underwriters, their affiliates and persons who control the underwriters against certain liabilities, including liabilities under the Securities Act, and if we are unable to provide this indemnification to contribute to payments that the underwriters may be required to make in respect of these liabilities.
We, our executive officers and directors have agreed that, during the period beginning from the date of this prospectus and continuing to and including the date that is 180 days after the date of this prospectus, none of them will, directly or indirectly (1) offer, pledge, sell, contract to sell (including any short sale), grant any option to purchase or otherwise dispose of any shares (including shares that may be deemed to be beneficially owned by any of our executive officers or directors currently or hereafter in accordance with the rules and regulations of the SEC, shares that may be issued upon exercise of an option or warrant and any other security convertible into or exchangeable for shares) or (2) enter into any short sale (whether or not against the box) or any purchase, sale or grant of any right (including any put or call option) with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from our shares, without the prior written consent of Deutsche Bank Securities Inc. (which such consents may be given at any time without public notice), except in limited circumstances. These restrictions do not apply to sales of shares in this offering.
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Additionally, our existing stockholders have agreed that, without the prior written consent of Deutsche Bank Securities Inc. (which such consent may be given at any time without public notice, except in limited circumstances), during the period beginning from the date of this prospectus and continuing to and including the date that is 180 days after the date of this prospectus, none of them will, directly or indirectly (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, lend or otherwise transfer or dispose of, any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the shares of common stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of shares of common stock or such other securities, in cash or otherwise. These restrictions do not apply to sales of shares to the public pursuant to this offering.
In each case, in the event we cease to be an emerging growth company, the applicable restricted period described in the preceding paragraph will be extended if (1) during the last 17 days of the applicable restricted period we issue an earnings release or material news or a material event relating to us occurs or (2) prior to the expiration of the applicable restricted period, we announce that we will release earnings results during the 16-day period following the last day of the applicable restricted period, then in each case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the date of the release of the earnings results or the occurrence of material news or a material event relating to us, unless Deutsche Bank Securities Inc. waives, in writing, such extension.
We intend to apply to list our common stock on the New York Stock Exchange under the symbol "AFCO." In order to meet the requirements for listing on that exchange, the underwriters have undertaken to sell a minimum number of shares to a minimum number of beneficial owners as required by the .
Prior to this offering, there has been no public market for shares of our common stock. Consequently, the initial public offering price of our common stock will be determined by negotiation among us and the representatives of the underwriters. Among the primary factors that will be considered in determining the public offering price are:
An active trading market for the shares may not develop. It is also possible that after the offering the shares will not trade in the public market at or above the initial public offering price.
In connection with this offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids.
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underwriters is not greater than the number of shares that they may purchase in the option to purchase additional shares. In a naked short position, the number of shares involved is greater than the number of shares in the option to purchase additional shares. The underwriters may close out any short position by exercising their option to purchase additional shares and/or purchasing shares in the open market.
These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock in the open market may be higher than it would otherwise be in the absence of these transactions. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of our common stock. The underwriters are not required to engage in these activities. If these activities are commenced, they may be discontinued by the underwriters without notice at any time. These transactions may be effected on the New York Stock Exchange, in the over-the-counter market or otherwise and, if commenced, may be discontinued at any time.
Some of the underwriters and their affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with us or our affiliates. They have received, or may in the future receive, customary fees and commissions for these transactions.
In addition, in the ordinary course of their business activities, the underwriters and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.
Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
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The consolidated financial statements of American Farmland Company as of December 31, 2014 and 2013 and for the years then ended and the related financial statement schedule included in this prospectus have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein. Such consolidated financial statements and financial statement schedule are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing
The appraised values of the farms owned by American Farmland Company are included based upon the reliance on appraisals provided by American AgAppraisal; Angus Investments Inc.; Brigantino & Company; Central Coast AgAppraisal, Inc.; Cochran Ag Services, Inc.; CorreiaXavier Incorporated; Edward, Lien & Toso, Inc.; Heartland Ag Group Ltd.; Arthur C. Bliss, Jr., Accredited Rural Appraiser; Lightle Appraisal Company; Lynn E. Rickard, ARA; and Saunders Appraisal Service LLC, given the authority of said firms as experts in appraising farmland.
The validity of the issuance of the common stock offered hereby and certain federal income tax matters will be passed upon for us by Goodwin Procter LLP. Certain legal matters relating to this offering will be passed upon for the underwriters by Freshfields Bruckhaus Deringer US LLP.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed a Registration Statement on Form S-11 with the SEC, including exhibits, schedules and amendments thereto, of which this prospectus is a part, under the Securities Act with respect to the shares of our common stock to be sold in this offering. This prospectus does not contain all of the information set forth in the registration statement and exhibits and schedules to the registration statement. For additional information relating to us and the shares of our common stock to be sold in this offering, we refer you to the registration statement, including the exhibits and schedules thereto. Statements contained in this prospectus as to the contents of any contract or other document referred to in this prospectus are necessarily summaries of such contract or other document and in each instance, if the contract or other document is filed as an exhibit to the registration statement, we refer you to the copy of the contract or other document filed as an exhibit to the registration statement. Copies of the registration statement, including the exhibits and schedules to the registration statement, may be examined without charge at the public reference room of the SEC, 100 F Street, N.E., Washington, D. C. 20549. Information about the operation of the public reference room may be obtained by calling the SEC at 1-800-SEC-0300. Copies of all or a portion of the registration statement can be obtained from the public reference room of the SEC upon payment of prescribed fees. Our SEC filings, including our registration statement, are also available to you, free of charge, on the SEC's website, www.sec.gov.
As a result of this offering, we will be subject to the information and reporting requirements of the Exchange Act and, in accordance with the Exchange Act, we will file annual, quarterly and periodic reports, proxy statements and other information with the SEC. These reports and other information will be available for inspection and copying at the SEC's public reference facilities and the website of the SEC referred to above.
We also maintain a website at www.americanfarmlandcompany.com at which there is additional information about us. Information contained on, or accessible through, our website is not incorporated by reference in and does not constitute a part of this prospectus or any other report or documents we file with or furnish to the SEC.
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INDEX TO FINANCIAL STATEMENTS SCHEDULES
F-1
American Farmland Company
Pro Forma Consolidated Financial Statements
The following discussion sets forth the unaudited pro forma consolidated balance sheet as of March 31, 2015 and the unaudited pro forma consolidated statements of operations for the three months ended March 31, 2015 and for the year ended December 31, 2014 for American Farmland Company (together with its consolidated subsidiaries, the "company," "we," "our" or "us"). The unaudited pro forma financial information is being presented as if this offering (including application of the net proceeds therefrom as set forth under "Use of Proceeds"), the Internalization and the redemption of our Series A Preferred Stock all had occurred on March 31, 2015 for balance sheet purposes and as of January 1, 2014 for the purposes of the statements of operations.
On November 25, 2014, we and American Farmland Company, L.P. (our "operating partnership") entered into a contribution agreement (the "Contribution Agreement") with American Farmland TRS LLC ("AFTRS") and each of the holders of equity ownership interests in American Farmland Advisor LLC, our external manager ("AFA"), pursuant to which, upon the completion of this offering, we will internalize the management functions historically provided by AFA. As consideration in the Internalization (as defined below), our operating partnership will issue units of limited partnership interest ("Common Units") with an aggregate value of $12 million to the members of AFA. The actual number of Common Units to be issued to each holder of equity ownership interests in AFA, with the exception of AFTRS, or Optima Group Holdings LLC ("Optima"), as applicable, will be determined upon the completion of this offering by dividing the value of the applicable consideration by the greater of (1) the public offering price of our common stock in this offering and (2) the net asset value per share of our common stock as of the end of the most recently completed fiscal quarter prior to the closing of this offering, determined in good faith by us in a manner consistent with past practice. Further, AFA has previously received performance allocations that are defined in, and pursuant to the terms of, our existing operating partnership agreement, which we refer to as performance fees. Under the terms of the Contribution Agreement, and upon the consummation of the Internalization, these fees will no longer be payable.
The above described transactions under the Contribution Agreement are collectively referred to as the Internalization. On December 15, 2014, we received the requisite consent from a majority of our disinterested stockholders approving the Internalization, and we expect that the Internalization will be completed simultaneously with, and conditioned upon, the completion of this offering.
Additionally, in connection with the Internalization, we, AFA and our operating partnership entered into an Amended and Restated Sub-Advisory Agreement with Prudential Mortgage Capital Company, LLC (collectively with Prudential Agricultural Investments, a unit of Prudential Mortgage Capital Company, LLC, our "Agricultural Sub-Adviser"), to provide us with certain agricultural investment, acquisition and property management services. Under the terms of the Amended and Restated Sub-Advisory Agreement, fees include an acquisition fee of 2% of the gross purchase price of farms acquired by or contributed to our operating partnership, which historically had been 1%, and a disposition fee of 1% of the gross sales price of farms sold by our operating partnership or its subsidiaries where Capital Agricultural Property Services, an affiliate of our Agricultural Sub-Adviser, is not used as the selling broker. Further, fees payable to our Agricultural Sub-Adviser include a quarterly management fee of 1% per annum payable in arrears based on the gross asset value of our operating partnership as of each calendar quarter end. Historically, this fee was equal to (i) one-quarter of 1% of the gross asset value of our operating partnership as of the end of the preceding quarter in respect of the partnership interests held by us and any other partners other than AFA, Optima and their respective owners, and (ii) one-quarter of 0.5% of the gross asset value of our operating partnership as of the end of the preceding quarter in respect of partnership interests held by AFA, Optima and their respective owners.
F-2
Accordingly, our historical financial statements have been adjusted in the unaudited pro forma consolidated financial statements to give effect to pro forma events that are (i) directly attributable to the Internalization, including the Amended and Restated Sub-Advisory Agreement and the redemption of our 8% Series A Cumulative Non-Voting Preferred Stock, (ii) factually supportable and (iii) with respect to the unaudited pro forma consolidated statement of operations, expected to have a continuing impact on our results. The unaudited pro forma financial information is being presented as if the Internalization, including the Amended and Restated Sub-Advisory Agreement, this offering, including the application of the net proceeds therefrom as set forth under "Use of Proceeds," and the redemption of our 8% Series A Cumulative Non-Voting Preferred Stock all had occurred on March 31, 2015 for balance sheet purposes and as of January 1, 2014 for the purposes of the statements of operations. The adjustments necessary to fairly present the unaudited pro forma consolidated financial statements have been made based on available information and, in the opinion of management, are reasonable. Assumptions underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with these unaudited pro forma consolidated financial statements.
The unaudited pro forma consolidated financial statements included in this prospectus are presented for informational purposes only and are based on available information and estimates that we believe are reasonable. This information includes various estimates and may not necessarily be indicative of the consolidated financial condition or results of operations that would have occurred and do not purport to project our future results of operations or financial position. The unaudited pro forma combined consolidated balance sheet and statements of operations and accompanying notes thereto should be read in conjunction with all other financial information and analysis presented in this prospectus, including "Structure of Our Company," "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
F-3
American Farmland Company
Pro Forma Consolidated Balance Sheet
(unaudited)
F-4
American Farmland Company
Pro Forma Consolidated Statement of Income
(unaudited)
F-5
American Farmland Company
Pro Forma Consolidated Statement of Operations
(unaudited)
F-6
American Farmland Company
Notes to Unaudited Pro Forma Consolidated Financial Statements
I. Adjustments to the Pro Forma Consolidated Balance Sheet and Income Statements
Gross proceeds of this offering |
$ | |||
Less: |
||||
Underwriting discount |
||||
Other costs |
||||
| | | | |
Net proceeds of this offering |
$ | |||
| | | | |
| | | | |
| | | | |
For purposes of this pro forma presentation, the net proceeds of this offering have been applied to the pro forma consolidated balance sheet assuming they had occurred on March 31, 2015. In addition, the pro forma consolidated balance sheet assumes that the subscription for shares in the Company effective January 1, 2015 of $5,250,000, the distribution to Founders effective January 1, 2015 of $150,146 and additional Founders' capital subscriptions of $ had occurred on March 31, 2015. This adjustment reflects the use of a portion of the net proceeds of this offering to repay outstanding indebtedness as set forth below:
Repayment of amounts drawn under original revolving credit facility |
$ |
In addition, the Second Amended and Restated Agreement of Limited Partnership of American Farmland Company L.P. removes the performance fees. AFA has historically been entitled to an amount at the end of each calendar year equal to the sum of (i) 15% of the contractual definition of FFO attributable to our operating partnership (which is comparable to "Core FFO attributable to the Company" after excluding certain adjustments for noncontrolling interests) for the calendar year attributable to the partnership interests held by us and any partners other than the Founders,
F-7
American Farmland Company
Notes to Unaudited Pro Forma Consolidated Financial Statements (Continued)
plus (ii) 10% of the contractual definition of FFO attributable to our operating partnership for the calendar year attributable to the partnership interests held by the Founders. Additionally, AFA has historically been entitled to an amount at the end of each calendar year equal to the sum of (i) 15% of two-thirds of the sum of (a) net realized capital appreciation in our operating partnership's fixed assets and (b) net unrealized capital appreciation in our operating partnership's fixed assets for such year that is attributable to the partnership interests held by us and any partners other than the Founders, (ii) 10% of two-thirds of the sum of (a) net realized capital appreciation in our operating partnership's fixed assets and (b) net unrealized capital appreciation in our operating partnership's fixed assets for such year that is attributable to the partnership interests held by the Founders, plus (iii) with respect to any net realized capital appreciation in our operating partnership's fixed assets for such calendar year, (a) 15% of one-third of the net realized capital appreciation attributable to the partnership interests held by us and any partners other than the Founders, and (b) 10% of one-third of the net realized capital appreciation attributable to the partnership interests held by the Founders. Upon the consummation of the Internalization, these fees will no longer be payable and accordingly have been removed from our expenses previously incurred in our historical financial statements.
F-8
American Farmland Company
Consolidated Balance Sheets
(Unaudited)
The accompanying notes are an integral part of these financial statements.
F-9
American Farmland Company
Consolidated Statements of Operations
(Unaudited)
The accompanying notes are an integral part of these financial statements.
F-10
American Farmland Company
Consolidated Statements of Changes in Equity
|
No. of
Shares |
Common
Stock |
Preferred
Stock |
Additional
Paid in Capital |
Treasury
Stock |
Accumulated
Deficit |
Non-
Controlling Interests |
Total Equity | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
BALANCEJanuary 1, 2014 |
10,444,584 | $ | 104,445 | $ | | $ | 105,407,077 | $ | (4,362,265 | ) | $ | (4,779,920 | ) | $ | 20,466,922 | $ | 116,836,259 | ||||||||
Retirement of treasury stock |
(405,200 | ) | (4,052 | ) | | (4,358,213 | ) | 4,362,265 | | | | ||||||||||||||
Issuance of stocksecurities sales |
366,768 | 3,668 | | 4,096,332 | | 4,100,000 | |||||||||||||||||||
Offering costs |
| | | (33,479 | ) | | | (7,115 | ) | (40,594 | ) | ||||||||||||||
Net income |
| | | | | 80,097 | 53,746 | 133,843 | |||||||||||||||||
Dividends and distributions |
| | | | | | (143,875 | ) | (143,875 | ) | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCEMarch 31, 2014 |
10,406,152 | $ | 104,061 | $ | | $ | 105,111,717 | $ | | $ | (4,699,823 | ) | $ | 20,369,678 | $ | 120,885,633 | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCEJanuary 1, 2015 |
10,436,902 |
$ |
104,369 |
$ |
|
$ |
105,445,855 |
$ |
|
$ |
(6,672,472 |
) |
$ |
20,561,963 |
$ |
119,439,715 |
|||||||||
Issuance of stocksecurities sales |
453,945 | 4,539 | | 5,245,461 | | | | 5,250,000 | |||||||||||||||||
Offering costs |
| | | (441 | ) | | | (91 | ) | (532 | ) | ||||||||||||||
Net income |
| | | | | 285,930 | 128,757 | 414,687 | |||||||||||||||||
Dividends and distributions |
| | | | | | (150,147 | ) | (150,147 | ) | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCEMarch 31, 2015 |
10,890,847 | $ | 108,908 | $ | | $ | 110,690,875 | $ | | $ | (6,386,542 | ) | $ | 20,540,482 | $ | 124,953,723 | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
F-11
American Farmland Company
Consolidated Statements of Cash Flows
(Unaudited)
The accompanying notes are an integral part of these financial statements.
F-12
American Farmland Company
Notes to Consolidated Financial Statements
(Unaudited)
1. ORGANIZATION
American Farmland Company (together with its subsidiaries, the "Company"), a Maryland corporation, was established on October 9, 2009, and commenced its operations on October 15, 2009, for purposes of investing in farmland principally located in the United States. The Company conducts all of its activities through American Farmland Company L.P. (the "Operating Partnership"), a Delaware limited partnership. The Company owned 82.0% and 80.8% of the common limited partnership interests in the Operating Partnership at March 31, 2015 and December 31, 2014, respectively.
The Company and American Farmland Advisors LLC ("AFA") are Co-General Partners of the Operating Partnership. Since inception, affiliates of the members of AFA (the "Founders") contributed $21,145,000 in capital to the Operating Partnership through March 31, 2015 and December 31, 2014, respectively, in addition to the capital provided to the Company from the proceeds of issuance of common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements are unaudited and include the accounts of the Company, the Operating Partnership and its wholly owned limited liability companies. All intercompany transactions and balances have been eliminated. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations and changes in cash flows have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of December 31, 2014 and 2013 and for the years then ended included elsewhere in this prospectus. We have made estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The results of operations for the three months ended March 31, 2015 and 2014 are not necessarily indicative of the operating results for the full year. Certain prior period balances have been reclassified in order to conform to current period presentation.
Cash and Cash Equivalents The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents include an investment in a commercial paper fund and a money market fund.
The Company maintains cash balances in major banks which, at times, may exceed the limits of amounts insured by the Federal Deposit Insurance Corporation (FDIC). The Company had funds on deposit in excess of amounts insured by the FDIC; however, the Company believes the credit risk related to these deposits is minimal.
Investments in Real Estate Investments in real estate consist of farmland and improvements made to the farmland, consisting of buildings; wells, irrigation and drain systems; and trees and vines acquired in connection with the land purchase. Investments in real estate are recorded at cost. Improvements, replacements and costs of development for new trees and vines or the repurposing of raw land are capitalized when they extend the useful life or improve the use of the asset. Costs of
F-13
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets. The estimated useful lives range from ten to fifteen years for land improvements, twenty-five years for buildings, one to thirty years for trees and vines, and five and eight years for fixtures and equipment.
In some cases, we acquire farmland without a lease in place, with newly-originated leases where the seller or related party is not the tenant or in sale-leaseback transactions with newly-originated leases. These transactions are accounted for as asset acquisitions under Accounting Standards Codification ("ASC") 360, "Property, Plant and Equipment." In the case of an asset acquisition, the transaction costs incurred are capitalized as part of the purchase price of the asset.
Other acquisitions involve the acquisition of farmland that is already being operated as rental property and has a lease in place that is assumed at the time of acquisition, which are considered to be business combinations under ASC 805 "Business Combinations." ASC 805 requires that all transaction costs related to the acquisition be expensed as incurred, rather than capitalized.
Whether an acquisition is treated as an asset acquisition under ASC 360 or a business combination under ASC 805, the purchase price must be allocated to the tangible assets acquired and liabilities assumed (if any) consisting of land, buildings, improvements, trees and vines, long-term debt (if any), and identifiable intangible assets and liabilities, typically the value of any in-place leases, as well as above-market and below-market leases, based in each case on their fair values.
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 an income capitalization approach (utilizing a 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 and the commodity prices for the crops grown and productivity on such properties, where the lease will include a participation in the gross revenues earned by the tenant. Management also considers information obtained about each property as a result of our pre-acquisition due diligence, 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 real estate taxes, insurance and other operating expenses and estimates of lost rental income at market rates during the hypothetical, expected lease-up periods, which primarily range from 3 to 12 months, depending on specific local market conditions. Management also estimates costs to execute similar leases, including 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. Management allocates 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 trees and vines based on management's determination of the fair values of these assets.
Above-market and below-market in-place lease values for acquired properties are recorded based on the present value (using an interest 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 leases 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. The total amount of other
F-14
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
intangible assets acquired will be further allocated to in-place lease values based on management's evaluation of the specific characteristics of each tenant's lease. When determining the non-cancelable term of the lease, fixed-rate renewal options, if any, are evaluated to see if they should be included. Prior to 2013, all acquired leases were determined to be at market. In connection with one of our 2013 acquisitions, we allocated $125,000 of the purchase price to a below-market lease, which terminated December 15, 2014. The fair value of capitalized below-market lease intangibles, included in the accompanying consolidated balance sheets as part of other liabilities, is amortized into rental income over the remaining, non-cancelable term of the lease. $27,778 was amortized during the three months ended March 31, 2014. In-place leases will be amortized over the remaining term of the lease. Should a tenant terminate its lease, the unamortized portion of any above-market and below-market lease values, in-place lease values and any associates intangibles will be immediately charged to the related income or expense.
We account for the impairment of real estate, including intangible assets, in accordance with ASC 360-10-35, "Property, Plant, and Equipment," which requires us to periodically review the carrying value of each property to determine whether circumstances indicate impairment of the carrying value of the investment exists or if depreciation periods should be modified. If circumstances support the possibility of impairment, we prepare a projection of the undiscounted future cash flows, without interest charges, of the specific property and determine whether the carrying value of the investment in such property is recoverable. In performing the analysis, we consider such factors as agricultural and business conditions in the regions in which our farms are located, and the development period (if applicable), and whether there are indications that the fair value of the real estate has decreased. If the carrying amount is more than the aggregate undiscounted future cash flows, we would recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the property.
We evaluate our entire property portfolio each quarter for any impairment indicators and perform an impairment analysis. We concluded that none of our properties were impaired as of March 31, 2015 or December 31, 2014 and we will continue to monitor our portfolio for any indicators of impairment. There have been no impairments recognized on real estate assets since our inception.
Stock There were 300,000,000 shares of common stock, par value $0.01 per share, authorized with 10,890,847 issued and outstanding as of March 31, 2015 and 10,436,902 shares issued and outstanding as of December 31, 2014. There were 35 8% Series A Cumulative Non-Voting Preferred Stock, par value $0.01 per share, authorized as of March 31, 2015 and December 31, 2014 with 29 issued and outstanding as of those dates.
Non-Controlling Interests Non-controlling interest is the portion of capital in the Operating Partnership not attributable to the Company. Our non-controlling interests relates to the Founders' capital accounts and the de minimis capital account of AFA in the Operating Partnership. Non-controlling interests are reported in equity on the consolidated balance sheets but separate from the Company's stockholders' equity. On the consolidated statements of operations, the Operating Partnership is reported at the consolidated amount, including both the amount attributable to the Company and non-controlling interests.
F-15
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Assets Other assets primarily comprise prepaid expenses, deposits on potential farm acquisitions, deposits on trees to be acquired for development purposes and other miscellaneous receivables.
We account for deferred offering costs in accordance with SEC Staff Accounting Bulletin ("SAB"), Topic 5.A, which states that incremental costs directly attributable to a proposed or actual offering of securities may properly be deferred and charged against the gross proceeds of the offering. Accordingly, we record costs incurred related to public offerings of equity securities on our consolidated balance sheet and pro-ratably apply these amounts to the proceeds of equity as stock is issued. The deferred offering costs on our consolidated balance sheet as of March 31, 2015 and December 31, 2014 will be applied to the proceeds of equity in connection with our initial public offering ("IPO") when received.
Fair value of financial instruments The fair value of the Company's assets and liabilities which qualify as financial instruments under ASC 825 "Financial Instruments" approximates the carrying amounts presented in the consolidated balance sheets.
Operating Revenues All leases on farms are classified as operating leases and the related base or fixed rental income from the farms is recognized on a straight-line basis commencing from the effective date of the lease or the acquisition date of the property in the case of in-place leases on properties acquired. Differences between rental income earned and amounts due per the respective lease agreements are capitalized or charged, as applicable, to accrued rent receivable. Participating rent is recorded when all contingencies have been resolved such that the tenant is entitled to gross revenues from a packing house, wine producer, shipper, huller processor or other marketing, processing or distributing entity which enables the Company to estimate and/or measure its share of such gross revenues. As a result, depending on the circumstances described above for a particular lease, in certain instances, participating rent will be recognized by the Company in the year the crop was harvested, and in other instances, participating rent will be either recognized partially in the year of the harvest and the balance in the year following the harvest or completely in the year following the harvest.
Recovery of expenses represents revenues from tenant leases that provide for the recovery of all or a portion of the real estate taxes of the respective property. The revenue is accrued in the same periods as the expense is incurred.
Income Taxes The Operating Partnership qualifies as a partnership for U.S. federal income tax purposes. No provision has been made in the accompanying financial statements for federal, state or local income taxes for the Operating Partnership, as each partner is individually responsible for reporting their share of the Operating Partnership's income or loss on their own tax returns. For taxable years ended December 31, 2009 through December 31, 2011, the Company was taxed as a regular "C" corporation. However, it did not incur any amount of federal income tax during those periods. The Company elected to be treated as a real estate investment trust ("REIT") for U.S. federal income tax purposes, commencing with and in connection with the filing of its federal income tax return for the taxable year ended December 31, 2012. The Company operates in a manner intended to enable it to qualify as a REIT under Sections 856-860 of the Internal Revenue Code. Under these sections, a real estate investment trust, which distributes at least 90% of its real estate investment trust taxable income (determined without regard to the deduction for dividends paid and excluding capital gains) to its stockholders each year and that meets certain other conditions, will not be subject to
F-16
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
federal income taxes on that portion of its taxable income that is distributed to its stockholders. To the extent that the Company satisfies its annual distribution requirement but distributes less than 100% of taxable income, it will be subject to an excise tax on distributed taxable income. The Company is subject to federal income taxation in the event it generates taxable income from prohibited transactions. The consolidated statement of operations for the three months ended March 31, 2015 includes $79,832 as a provision for income taxation resulting from prohibited transactions.
The Company accounts for certain tax positions in accordance with ASC 740 "Income Taxes." ASC No. 740-10-65 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC No. 740-10-65, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has greater than 50% likelihood of being realized upon ultimate settlement. ASC No. 740-10-65 also provides guidance on de-recognition, classification, interest and penalties on income taxes and accounting in interim periods and requires increased disclosures.
As of March 31, 2015 and December 31, 2014, the Company does not have a liability for uncertain tax positions. Potential interest and penalties associated with such uncertain tax positions would be recorded as a component of the income tax provision. As of March 31, 2015, the tax years ended December 31, 2011 through December 31, 2014 remain open for an audit by the Internal Revenue Service.
Management does not believe the Company has any tax positions for which it is reasonably possible that it will be required to record significant amounts of unrecognized tax benefits within the next twelve months.
New Accounting Pronouncements In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) ("ASU 2014-08"). ASU 2014-08 changes the criteria for a disposal to qualify as a discontinued operation and requires additional disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. ASU 2014-08 became effective for us on January 1, 2015 and has no significant impact on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). ASU 2014-09 provides additional guidance for management to reassess revenue recognition as it relates to: (1) transfer of control, (2) variable consideration, (3) allocation of transaction price based on relative standalone selling price, (4) licenses, (5) time value of money and (6) contract costs. Further disclosures will be required to provide a better understanding of revenue that has been recognized and revenue that is expected to be recognized in the future from existing contracts. ASU 2014-09 is effective for us on January 1, 2017, with no early adoption permitted. We are currently evaluating the impact ASU 2014-09 will have on our consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40) ("ASU 2014-15"). ASU 2014-15 requires management to assess an entity's
F-17
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ability to continue as a going concern by incorporating and expanding upon certain principles of current U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term "substantial doubt", (2) require an evaluation every reporting period, including interim periods, (3) provide principles for considering the mitigating effect of management's plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans, (5) require an express statement and other disclosures when substantial doubt is still present and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 is effective for us on January 1, 2017, with early adoption permitted. We do not believe that this pronouncement will have an impact on our consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis ("ASU 2015-02"). ASU 2015-02 significantly changes the consolidation analysis required under U.S. GAAP. ASU 2015-02 is effective for us on January 1, 2016, with early adoption permitted. We do not believe that this pronouncement will have a significant impact on our consolidated financial statements.
3. FAIR VALUE MEASUREMENTS
ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 establishes a hierarchy for inputs used in valuation techniques to measure fair value and prioritizes those inputs that are observable (inputs based on independent market data) and those inputs that are unobservable (inputs developed internally). Cash equivalents measured at fair value are classified in one of the following fair value hierarchy levels based on the lowest level of input that is significant to the fair value measurement. Availability of observable inputs can vary and is affected by a variety of factors. Management uses judgment in determining fair value of assets and liabilities; and Level 3 assets and liabilities involve greater judgment than Level 1 or Level 2 assets or liabilities:
Level 1unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2quoted prices in markets that are not active for identical or similar assets or liabilities, quoted prices in active markets for similar assets or liabilities, and inputs other than quoted prices that are observable or can be corroborated by observable market data;
Level 3inputs that are unobservable and significant to the fair value measurement, including inputs that are not derived from market data or cannot be corroborated by market data.
F-18
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
3. FAIR VALUE MEASUREMENTS (Continued)
The following tables summarize the levels within the fair value hierarchy in which the fair value measurements of the Company's assets and liabilities fall as of March 31, 2015 and December 31, 2014:
March 31, 2015
|
Level 1 | Level 2 | Level 3 | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS |
|||||||||||||
Cash equivalents |
$ | 2,292,680 | $ | | $ | | $ | 2,292,680 | |||||
| | | | | | | | | | | | | |
LIABILITIES |
|||||||||||||
Borrowings under credit facility |
$ | | $ | | $ | 20,400,000 | $ | 20,400,000 | |||||
| | | | | | | | | | | | | |
December 31, 2014
|
Level 1 | Level 2 | Level 3 | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS |
|||||||||||||
Cash equivalents |
$ | 842,305 | $ | | $ | | $ | 842,305 | |||||
| | | | | | | | | | | | | |
LIABILITIES |
|||||||||||||
Borrowings under credit facility |
$ | | $ | | $ | 20,400,000 | $ | 20,400,000 | |||||
| | | | | | | | | | | | | |
4. INVESTMENTS IN REAL ESTATE
Investments in real estate as of March 31, 2015 and December 31, 2014 are comprised of the following:
|
March 31,
2015 |
December 31,
2014 |
|||||
---|---|---|---|---|---|---|---|
Land |
$ | 98,568,755 | $ | 98,568,755 | |||
Land improvements |
2,624,185 | 2,518,785 | |||||
Buildings |
1,191,000 | 1,191,000 | |||||
Trees and vines |
23,967,899 | 23,967,899 | |||||
Development costs |
16,716,983 | 15,435,912 | |||||
Fixtures and equipment |
1,958,160 | 1,958,160 | |||||
| | | | | | | |
|
145,026,982 | 143,640,511 | |||||
Less accumulated depreciation |
(3,979,633 | ) | (3,535,653 | ) | |||
| | | | | | | |
Investments in real estate, net |
$ | 141,047,349 | $ | 140,104,858 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Depreciation expense for the three months ended March 31, 2015 and 2014 was $443,980 and $391,024, respectively.
In 2013, 79 of the gross 518 acres of our Macomb Farm property, a commodity row crop property in Illinois, were expropriated by the Illinois Department of Transportation for purposes of building a new state road. The State of Illinois paid the Operating Partnership a total of $1,723,800, of which $1,106,300 was attributable to the acreage expropriated and $617,500 was attributable to the diminished value of the remaining acreage. The Operating Partnership disputed the overall consideration paid by the State of Illinois. A settlement for additional compensation was reached in February 2014 with the State of Illinois, whereby the Operating Partnership received $257,675 in additional compensation, $61,700 of which related to the acreage expropriated and $183,650 of which related to the diminution
F-19
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
4. INVESTMENTS IN REAL ESTATE (Continued)
in value of the remaining acreage. The Company realized gains of $55,662 during the three months ended March 31, 2014 related to the Macomb Farm expropriation.
The Company has acquired the following properties as of March 31, 2015 and December 31, 2014:
Farm
|
Crops | Acquisition Date(s) |
Acreage
Gross/Tillable |
March 31, 2015
Net Book Value |
December 31, 2014
Net Book Value |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Permanent Crops |
|||||||||||||||
Kimberly Vineyard |
Wine grapes | Aug.10, 2010/ Dec. 9, 2014 | 260G / 245T | $ | 12,718,870 | $ | 12,753,834 | ||||||||
Golden Eagle Ranch |
Almonds | Mar.9, 2012/Aug.14, 2012 | 1,112G / 1,056T | 14,668,539 | 14,878,941 | ||||||||||
Quail Run Vineyard |
Wine grapes | Nov.16,2012 | 240G / 223T | 9,407,269 | 9,348,222 | ||||||||||
Blue Heron Farms |
Walnuts | Nov 1, 2013 | 430G / 380T | 13,721,957 | 13,745,511 | ||||||||||
Falcon Farms |
Pecans | Nov. 14, 2014 | 1,840G / 1,165 T | 8,121,519 | 8,122,301 | ||||||||||
| | | | | | | | | | | | | | | |
|
58,638,154 | 58,848,809 | |||||||||||||
| | | | | | | | | | | | | | | |
Commodity Row |
|||||||||||||||
Pleasant Plains Farm |
Corn, soybeans | Jul.9, 2010 | 1,199G /1,159T | $ | 8,750,000 | $ | 8,750,000 | ||||||||
Macomb Farm |
Corn, soybeans | Dec.16, 2010 | 434G / 422T | 2,547,230 | 2,547,230 | ||||||||||
Tillar Farm |
Cotton, soybeans, rice | May 4, 2011 | 1,444G / 1,248T | 4,093,406 | 4,093,873 | ||||||||||
Kane County Farms |
Corn, soybeans | Jun.28, 2011 | 1,652G / 1,617T | 17,164,500 | 17,164,800 | ||||||||||
| | | | | | | | | | | | | | | |
|
32,555,136 | 32,555,903 | |||||||||||||
| | | | | | | | | | | | | | | |
Specialty Vegetable Row |
|||||||||||||||
Sweetwater Farm |
Vegetables | Dec.30, 2010 | 1,624G /1,450T | $ | 5,118,054 | $ | 5,133,487 | ||||||||
Sandpiper Ranch |
Vegetables and berries | Dec.22, 2011/Apr.26, 2012 | 184G / 158T | 7,717,324 | 7,725,487 | ||||||||||
| | | | | | | | | | | | | | | |
|
12,835,378 | 12,858,974 | |||||||||||||
| | | | | | | | | | | | | | | |
Development |
|||||||||||||||
Roadrunner Ranch |
Seedless citrus | Apr.7, 2011/Sep.13, 2011 | 244G / 227T | $ | 6,767,766 | $ | 6,653,561 | ||||||||
Condor Ranch |
Lemons and avocados | Nov.30, 2011/Dec.16, 2011 | 786G / 261T | 9,024,398 | 8,858,347 | ||||||||||
Grassy Island Groves |
Citrus | Dec.27, 2012 | 623G / 451T | 3,907,612 | 3,737,256 | ||||||||||
Blue Cypress |
Vegetables | Feb.22, 2013 | 2,694G / 2,036T | 10,232,088 | 10,063,007 | ||||||||||
Hawk Creek Ranch |
Pistachios | Oct.14, 2013/Feb.25, 2014 | 524G / 425T | 5,816,123 | 5,482,429 | ||||||||||
Pintail Vineyards |
Wine grapes | Nov.5, 2013 | 91G/87T | 1,270,694 | 1,046,572 | ||||||||||
| | | | | | | | | | | | | | | |
|
37,018,681 | 35,841,172 | |||||||||||||
| | | | | | | | | | | | | | | |
Total |
$ | 141,047,349 | $ | 140,104,858 | |||||||||||
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
On February 25, 2014, the Company closed on a second tranche of a property for Hawk Creek Ranch located in Yolo County, California (aggregating 180 gross acres164 tillable) for the purchase consideration of $1,771,929. The property was farmed for row crops, but it is in the process of being cleared and leveled for development for pistachios together with the first tranche of the Hawk Creek property. The purchase of this property was treated as a business combination.
F-20
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
4. INVESTMENTS IN REAL ESTATE (Continued)
We determined the fair value of the assets acquired during the three months ended March 31, 2014 to be as follows:
Farm
|
Land |
Land
improvements |
Fixtures and
equipment |
Total purchase
price |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Hawk Creek Ranch II |
$ | 1,711,929 | $ | 40,000 | $ | 20,000 | $ | 1,771,929 |
5. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities as of March 31, 2015 and December 31, 2014 consisted of the following:
|
March 31,
2015 |
December 31,
2014 |
|||||
---|---|---|---|---|---|---|---|
Accrued dividends payable |
$ | 21,117 | $ | 197,380 | |||
Accrued accounting fees |
2,235,446 | 442,000 | |||||
Accrued real estate taxes |
353,620 | 142,436 | |||||
Accrued legal fees |
271,610 | 824,734 | |||||
Accrued interest payable |
2,875 | 11,702 | |||||
Accrued other |
516,099 | 1,238,328 | |||||
| | | | | | | |
Total |
$ | 3,400,767 | $ | 2,856,580 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
6. BORROWINGS UNDER CREDIT FACILITY
The Operating Partnership entered into a $25 million revolving credit facility on December 5, 2013 to provide funds for potential acquisitions, development of existing properties and other corporate purposes. The facility bears interest on the drawn amount at the rate of 130 basis points (1.3%) above the Three Month London Interbank Offered Rate (0.2742% and 0.2552% at March 31, 2015 and December 31, 2014, respectively). The Operating Partnership is required to pay any interest due quarterly in arrears beginning January 1, 2014 and any unpaid interest and drawn principal is due and payable in full on January 1, 2019 ("Maturity Date"). The minimum advance under the terms of the facility is $500,000 and may be repaid at any time prior to the Maturity Date. The credit facility is secured by a first mortgage over, and assignment of leases from, the Pleasant Plains, Macomb Farm, Kane County Farms, Sweetwater and Tillar properties. The Operating Partnership pays a 0.25% per annum non-usage fee. Pursuant to the terms of the credit facility, the properties securing the credit facility must have an aggregate appraised value such that the amount of the credit facility is 50% or less of the aggregate appraised value of such properties. The amount outstanding under this credit facility is $20,400,000 as of March 31, 2015. The fair value of the borrowings under the credit facility as of March 31, 2015 was approximately $20.4 million, comparable to our carrying value of $20.4 million.
On January 14, 2015, the Company entered into an additional $25 million revolving credit facility to provide funds for potential acquisitions, development of existing properties and other corporate purposes. The facility bears interest on the drawn amount at the rate of 130 basis points (1.3%) above the Three Month London Interbank Offered Rate. The Operating Partnership is required to pay any interest due quarterly in arrears beginning April 1, 2015 and any unpaid interest and drawn principal is
F-21
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
6. BORROWINGS UNDER CREDIT FACILITY (Continued)
due and payable in full on January 1, 2020 ("Second Maturity Date"). The minimum advance under the terms of the facility is $500,000 and may be repaid at any time prior to the Second Maturity Date. The credit facility is secured by a first mortgage over and assignment of leases from the Sandpiper, Quail Run, Golden Eagle and Blue Heron properties. The Operating Partnership pays a 0.25% per annum non-usage fee. Pursuant to the terms of the credit facility, the properties securing the credit facility must have an aggregate appraised value such that the amount of the credit facility is 50% or less of the aggregate appraised value of such properties.
We believe we are in compliance with the credit facility covenants.
The Operating Partnership incurred costs of $291,223 (inclusive of one-time 0.25% commitment fees) in arranging the two credit facilities. These costs are being amortized on a straight-line basis over the period of the agreements.
7. RELATED PARTY TRANSACTIONS
The limited partnership agreement of the Operating Partnership provides that the Operating Partnership shall pay AFA a management fee in arrears calculated at the annual rate of (i) 1% of the Company's share of the Gross Asset Value, as defined, of the Operating Partnership as of the end of the immediately preceding calendar quarter and (ii) 0.5% of the Founders' share of the Gross Asset Value of the Operating Partnership as of the end of the immediately preceding calendar quarter. The management fee for the three months ended March 31, 2015 and 2014 amounted to $412,287 and $314,446, respectively, all of which was payable as of March 31, 2015 and 2014, respectively.
AFA is entitled to a performance fee equal to 15% of the Funds From Operations (as defined) allocated to the capital account of the Company in the Operating Partnership each fiscal year. AFA is also entitled to 10% of the Funds From Operations allocated to each Founder's capital account in the Operating Partnership each fiscal year. The performance fee on Funds From Operations amounted to $232,353 and $92,832 for the three months ended March 31, 2015 and 2014, respectively, all of which was payable as of March 31, 2015 and 2014, respectively.
AFA is entitled to an additional performance fee equal to two-thirds of 15% of the net capital appreciation allocated to the capital account of the Company in the Operating Partnership each fiscal year. AFA is entitled to one-third of 15% of the net realized capital appreciation allocated to the capital account of the Company in the Operating Partnership each fiscal year. AFA is also entitled to two-thirds of 10% and one-third of 10% of net capital appreciation and net realized capital appreciation, respectively, allocated to each Founder's capital account in the Operating Partnership each fiscal year. The performance fee on net capital appreciation (realized and unrealized) amounted to $44,505 and $49,449 for the three months ended March 31, 2015 and 2014, respectively, all of which was payable as of March 31, 2015 and 2014, respectively.
These performance fees are reflected in management and performance fees related party on the consolidated statements of operations.
The Operating Partnership paid an affiliate of the Managing Member of AFA $7,500 and $7,500 for the three months ended March 31, 2015 and 2014, respectively, as a fee for providing administrative and accounting services to the Company and the Operating Partnership.
F-22
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
8. EARNINGS PER SHARE OF COMMON STOCK
The following tables set forth the computation of basic and diluted earnings per share for the three months ended March 31, 2015 and 2014, respectively:
|
For the three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
|
2015 | 2014 | |||||
Net income attributable to the Company |
$ | 285,930 | $ | 80,097 | |||
Denominator for basic & diluted weighted average shares |
10,890,847 | 10,369,475 | |||||
| | | | | | | |
Basic & diluted earnings per common share |
$ | 0.03 | $ | 0.01 |
The Company has no potentially dilutive securities outstanding.
9. LEASES
The Company's properties are leased to tenants under operating leases, which expire on various dates through 2019. Future minimum rents to be received from tenants under non-cancelable leases in effect at March 31, 2015, are as follows:
2015 (nine months) |
$ | 3,260,000 | ||
2016 |
2,357,000 | |||
2017 |
1,549,000 | |||
2018 |
1,171,000 | |||
2019 |
1,049,000 | |||
Thereafter |
| |||
| | | | |
|
$ | 9,386,000 | ||
| | | | |
| | | | |
| | | | |
In addition to the minimum lease payments described above, the Kimberly Vineyard, Golden Eagle Ranch, Condor Ranch, Quail Run Vineyard and Blue Heron Farms leases require the tenant to pay participating rent (in some cases above a threshold), based on a percentage of gross revenues, as defined, derived from the leased property. Participating rent was $822,061 and $638,212 for the three months ended March 31, 2015 and 2014, respectively.
10. SEGMENT INFORMATION
The Company has identified four reporting segments: commodity row crops, specialty/vegetable row crops, permanent crops and properties under development. Each of these segments has different return on capital expectations, may have different forms of revenue (fixed and/or participating) or require an extended number of years before they produce revenue from trees and/or vines as a result of a development or redevelopment program.
Below is a summary of the investment in real estate, net by segment as of March 31, 2015 and December 31, 2014, respectively.
|
Total |
Commodity
Row |
Specialty/
Vegetable Row |
Permanent | Development | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
March 31, 2015 |
$ | 141,047,349 | $ | 32,555,136 | $ | 12,835,378 | $ | 58,638,154 | $ | 37,018,681 | ||||||
December 31, 2014 |
$ | 140,104,858 | $ | 32,555,903 | $ | 12,858,974 | $ | 58,848,809 | $ | 35,841,172 |
F-23
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
10. SEGMENT INFORMATION (Continued)
Below is a summary of operating income by segment for the three months ended March 31, 2015 and 2014, respectively.
Three Months Ended March 31, 2015
|
Total |
Commodity
Row |
Specialty/
Vegetable Row |
Permanent | Development | Corporate | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
OPERATING REVENUES: |
|||||||||||||||||||
Fixed rent |
$ | 1,370,894 | $ | 398,694 | $ | 192,725 | $ | 558,615 | $ | 220,860 | $ | | |||||||
Participating rent |
822,061 | | | 823,983 | (1,922 | ) | | ||||||||||||
Recovery of real estate taxes |
116,391 | | 23,109 | 90,534 | 2,748 | | |||||||||||||
Other income |
18,050 | 300 | 17,750 | | | | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total operating revenues |
2,327,396 | 398,994 | 233,584 | 1,473,132 | 221,686 | | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
OPERATING EXPENSES: |
|||||||||||||||||||
Depreciation |
443,980 | 768 | 23,596 | 364,134 | 55,482 | | |||||||||||||
Management and performance fees-related party |
689,145 | | | | | 689,145 | |||||||||||||
Property operating expenses |
440,242 | 76,880 | 41,257 | 189,127 | 132,978 | | |||||||||||||
Professional fees |
99,181 | | 620 | 968 | 140 | 97,453 | |||||||||||||
General and administrative |
65,015 | | | | | 65,015 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total operating expenses |
1,737,563 | 77,648 | 65,473 | 554,229 | 188,600 | 851,613 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Operating income |
589,833 | $ | 321,346 | $ | 168,111 | $ | 918,903 | $ | 33,086 | $ | (851,613 | ) | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total other expense |
95,314 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Income before income taxes |
494,519 | ||||||||||||||||||
Income tax provision |
(79,832 | ) | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Net income |
414,687 | ||||||||||||||||||
Less net income attributable to non-controlling interests |
128,757 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Net income attributable to the Company |
$ | 285,930 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
F-24
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
10. SEGMENT INFORMATION (Continued)
Three Months Ended March 31, 2014
|
Total |
Commodity
Row |
Specialty/
Vegetable Row |
Permanent | Development | Other | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
OPERATING REVENUES: |
|||||||||||||||||||
Fixed rent |
$ | 814,737 | $ | 398,434 | $ | 192,725 | $ | 114,280 | $ | 109,298 | $ | | |||||||
Participating rent |
586,420 | | | 586,420 | | | |||||||||||||
Recovery of expenses |
81,019 | | 25,088 | 52,846 | 3,085 | | |||||||||||||
Other income |
6,079 | (2,675 | ) | 3,754 | | 5,000 | | ||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total operating revenues |
1,488,255 | 395,759 | 221,567 | 753,546 | 117,383 | | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
OPERATING EXPENSES: |
|||||||||||||||||||
Depreciation |
391,024 | 768 | 19,424 | 316,748 | 54,084 | | |||||||||||||
Management and performance fees-related party |
456,727 | | | | | 456,727 | |||||||||||||
Property operating expenses |
363,340 | 59,030 | 42,135 | 100,949 | 161,226 | | |||||||||||||
Acquisition-related expenses |
56,997 | | | 60 | 56,937 | | |||||||||||||
Professional fees |
78,626 | | 1,930 | 540 | | 76,156 | |||||||||||||
General and administrative |
47,087 | | | | | 47,087 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total operating expenses |
1,393,801 | 59,798 | 63,489 | 418,297 | 272,247 | 579,970 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Operating income (loss) |
94,454 | $ | 335,961 | $ | 158,078 | $ | 335,249 | $ | (154,864 | ) | $ | (579,970 | ) | ||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total other expense |
16,273 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Net income before gain on sale of land |
78,181 | ||||||||||||||||||
Gain on sale of land |
55,662 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Net income |
133,843 | ||||||||||||||||||
Less net income attributable to non-controlling interests |
53,746 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Net income attributable to the Company |
$ | 80,097 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
11. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through June 5, 2015, the date these consolidated financial statements were available to be issued. No material subsequent events have occurred since March 31, 2015 that required recognition or disclosure in financial statements, except as disclosed below.
On May 29, 2015, the Company executed a purchase and sale agreement to acquire 135 assessed acres of land planted with almonds located in Merced County, California for the purchase consideration of $5,332,500. The purchase is expected to close, subject to due diligence and certain other conditions precedent, by the earlier of (i) seven days after the completion of the 2015 almond harvest or (ii) September 30, 2015. There is no guarantee that this purchase will actually close. This transaction will be accounted for as an asset acquisition.
On June 3, 2015, the Company executed a purchase and sale agreement to acquire 619 assessed acres of land planted with pistachios located in Fresno County, California for the purchase consideration of $19,379,500. The purchase is expected to close, subject to due diligence and certain other conditions precedent, within 60 days of the effective date of the agreement. There is no guarantee that this purchase will actually close. This transaction will be accounted for as an asset acquisition.
F-25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
American Farmland Company
New York, New York
We have audited the accompanying consolidated balance sheets of American Farmland Company and subsidiaries (the "Company") as of December 31, 2014 and 2013, and the related consolidated statements of operations, changes in equity, and cash flows for the years then ended. Our audits also included the financial statement Schedule III. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of American Farmland Company and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
New
York, New York
March 19, 2015
F-26
American Farmland Company
Consolidated Balance Sheets
See notes to consolidated financial statements.
F-27
American Farmland Company
Consolidated Statements of Operations
See notes to consolidated financial statements.
F-28
American Farmland Company
Consolidated Statements of Changes in Equity
|
No. of
Shares |
Common
Stock |
Preferred
Stock |
Additional
Paid in Capital |
Treasury
Stock |
Accumulated
Deficit |
Non-Controlling
Interests |
Total
Equity |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
BALANCEJanuary 1, 2013 |
10,256,069 | $ | 102,560 | $ | | $ | 103,392,141 | $ | | $ | (3,073,846 | ) | $ | 20,448,075 | $ | 120,868,930 | |||||||||
Issuance of stocksecurities sales |
154,710 | 1,547 | | 1,687,453 | | | 61,813 | 1,750,813 | |||||||||||||||||
Repurchases of stock |
| | | | (4,362,265 | ) | | | (4,362,265 | ) | |||||||||||||||
Issuance of stockreinvestment of dividends |
33,805 | 338 | | 370,000 | | | | 370,338 | |||||||||||||||||
Offering costs |
| | | (42,517 | ) | | | (9,192 | ) | (51,709 | ) | ||||||||||||||
Net income |
| | | | | 553,451 | 280,226 | 833,677 | |||||||||||||||||
Dividends and distributions |
| | | | | (2,259,525 | ) | (314,000 | ) | (2,573,525 | ) | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCEDecember 31, 2013 |
10,444,584 | 104,445 | | 105,407,077 | (4,362,265 | ) | (4,779,920 | ) | 20,466,922 | 116,836,259 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Retirement of treasury stock |
(405,200 | ) | (4,052 | ) | | (4,358,213 | ) | 4,362,265 | | | | ||||||||||||||
Issuance of stocksecurities sales |
366,768 | 3,668 | | 4,096,332 | | | 60,000 | 4,160,000 | |||||||||||||||||
Issuance of stockreinvestment of dividends |
30,750 | 308 | | 350,890 | | | | 351,198 | |||||||||||||||||
Offering costs |
| | | (50,231 | ) | | | (10,707 | ) | (60,938 | ) | ||||||||||||||
Net income |
| | | | | 710,717 | 346,071 | 1,056,788 | |||||||||||||||||
Dividends and distributions |
| | | | | (2,603,269 | ) | (300,323 | ) | (2,903,592 | ) | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCEDecember 31, 2014 |
10,436,902 | $ | 104,369 | $ | | $ | 105,445,855 | $ | | $ | (6,672,472 | ) | $ | 20,561,963 | $ | 119,439,715 | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
See notes to consolidated financial statements.
F-29
American Farmland Company
Consolidated Statements of Cash Flows
See notes to consolidated financial statements.
F-30
American Farmland Company
Notes to Consolidated Financial Statements
1. ORGANIZATION
American Farmland Company (together with its subsidiaries, the "Company"), a Maryland corporation, was established on October 9, 2009, and commenced its operations on October 15, 2009, for purposes of investing in farmland principally located in the United States. The Company conducts all of its activities through American Farmland Company L.P. (the "Operating Partnership"), a Delaware limited partnership. The Company owned 80.8% and 80.9% of the common limited partnership interests in the Operating Partnership at December 31, 2014 and 2013, respectively, including the Co-General Partnership interest.
The Company and American Farmland Advisors LLC ("AFA") are Co-General Partners of the Operating Partnership. Since inception, affiliates of the members of AFA (the "Founders") contributed $21,145,000 and $21,085,000 in capital to the Operating Partnership through December 31, 2014 and 2013, respectively, in addition to the capital provided to the Company from the proceeds of issuance of common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of the Company, the Operating Partnership and its wholly owned limited liability companies. All intercompany transactions and balances have been eliminated. Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents includes an investment in a commercial paper fund and a money market fund.
The Company maintains cash balances in major banks which, at times, may exceed the limits of amounts insured by the Federal Deposit Insurance Corporation (FDIC). The Company had funds on deposit in excess of amounts insured by the FDIC; however, the Company believes the credit risk related to these deposits is minimal.
Investments in Real Estate Investments in real estate consist of farmland and improvements made to the farmland, consisting of buildings; wells, irrigation and drain systems; and trees and vines acquired in connection with the land purchase. Investments in real estate are recorded at cost. Improvements, replacements and costs of development for new trees and vines or the repurposing of raw land are capitalized when they extend the useful life or improve the use of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets. The estimated useful lives range from ten to fifteen years for land improvements, twenty-five years for buildings, one to thirty years for trees and vines, and five and eight years for fixtures and equipment.
In some cases we acquire farmland without a lease in place, with newly-originated leases where the seller or related party is not the tenant, or in sale-leaseback transactions with newly-originated leases. These transactions are accounted for as asset acquisitions under Accounting Standards Codification
F-31
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
("ASC") 360, "Property, Plant and Equipment." In the case of an asset acquisition, the transaction costs incurred are capitalized as part of the purchase price of the asset.
Other acquisitions involve the acquisition of farmland that is already being operated as rental property and has a lease in place that is assumed at the time of acquisition, which are considered to be business combinations under ASC 805 "Business Combinations." ASC 805 requires that all transaction costs related to the acquisition be expensed as incurred, rather than capitalized.
Whether an acquisition is treated as an asset acquisition under ASC 360 or a business combination under ASC 805, the purchase price must be allocated to the tangible assets acquired and liabilities assumed (if any) consisting of land, buildings, improvements, trees and vines, long-term debt (if any), and identifiable intangible assets and liabilities, typically the value of any in-place leases, as well as above-market and below-market leases, based in each case on their fair values.
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 an income capitalization approach (utilizing a 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 and the commodity prices for the crops grown and productivity on such properties, where the lease will include a participation in the gross revenues earned by the tenant. Management also considers information obtained about each property as a result of our pre-acquisition due diligence, 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 real estate taxes, insurance and other operating expenses and estimates of lost rental income at market rates during the hypothetical, expected lease-up periods, which primarily range from 3 to 12 months, depending on specific local market conditions. Management also estimates costs to execute similar leases, including 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. Management allocates 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 trees and vines based on management's determination of the fair values of these assets.
Above-market and below-market in-place lease values for acquired properties are recorded based on the present value (using an interest 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 leases 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. The total amount of other intangible assets acquired will be further allocated to in-place lease values based on management's evaluation of the specific characteristics of each tenant's lease. When determining the non-cancelable term of the lease, fixed-rate renewal options, if any, are evaluated to see if they should be included. Prior to 2013, all acquired leases were determined to be at market. In connection with one of our 2013 acquisitions, we allocated $125,000 of the purchase price to a below-market lease, which terminated December 15, 2014. The fair value of capitalized below-market lease intangibles, included in the accompanying consolidated balance sheets as part of other liabilities, is amortized into rental income over the remaining, non-cancelable term of the lease. $18,519 was amortized in 2013 and the balance in 2014 in respect of this below-market lease. In-place leases will be amortized over the remaining term of
F-32
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
the lease. Should a tenant terminate its lease, the unamortized portion of any above-market and below-market lease values, in-place lease values and any associates intangibles will be immediately charged to the related income or expense.
We account for the impairment of real estate, including intangible assets, in accordance with ASC 360-10-35, "Property, Plant, and Equipment," which requires us to periodically review the carrying value of each property to determine whether circumstances indicate impairment of the carrying value of the investment exists or if depreciation periods should be modified. If circumstances support the possibility of impairment, we prepare a projection of the undiscounted future cash flows, without interest charges, of the specific property and determine whether the carrying value of the investment in such property is recoverable. In performing the analysis, we consider such factors as agricultural and business conditions in the regions in which our farms are located, and the development period (if applicable), and whether there are indications that the fair value of the real estate has decreased. If the carrying amount is more than the aggregate undiscounted future cash flows, we would recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the property.
We evaluate our entire property portfolio each quarter for any impairment indicators and perform an impairment analysis. We concluded that none of our properties were impaired as of December 31, 2014 or 2013 and we will continue to monitor our portfolio for any indicators of impairment. There have been no impairments recognized on real estate assets since our inception.
Stock There were 300,000,000 shares of common stock, par value $0.01 per share, authorized with 10,436,902 issued and outstanding as of December 31, 2014 and 10,444,584 shares issued and 10,039,384 shares outstanding as of December 31, 2013. There were 35 8% Series A Cumulative Non-Voting Preferred Stock, par value $0.01 per share, authorized as of December 31, 2014 and December 31, 2013 with 29 issued and outstanding as of those dates.
Non-Controlling Interests Non-controlling interest is the portion of capital in the Operating Partnership not attributable to the Company. Our non-controlling interests relates to the Founders' capital accounts and the de minimis capital account of AFA in the Operating Partnership. Non-controlling interests are reported in equity on the consolidated balance sheets but separate from the Company's stockholders' equity. On the consolidated statements of operations, the Operating Partnership is reported at the consolidated amount, including both the amount attributable to the Company and non-controlling interests.
Other Assets Other assets primarily comprise unamortized deferred financing costs being amortized over the life of the credit facility of five years, prepaid expenses, deposits on potential farm acquisitions, deposits on trees to be acquired for development purposes and other miscellaneous receivables.
We account for deferred offering costs in accordance with SEC Staff Accounting Bulletin ("SAB"), Topic 5.A, which states that incremental costs directly attributable to a proposed or actual offering of securities may properly be deferred and charged against the gross proceeds of the offering. Accordingly, we record costs incurred related to public offerings of equity securities on our consolidated balance sheet and pro-ratably apply these amounts to the proceeds of equity as stock is issued. The deferred offering costs on our consolidated balance sheet as of December 31, 2014 will be applied to the proceeds of equity in connection with our initial public offering ("IPO") in 2015.
F-33
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair value of financial instruments The fair value of the Company's assets and liabilities which qualify as financial instruments under ASC 825 "Financial Instruments" approximates the carrying amounts presented in the consolidated balance sheets.
Operating Revenues All leases on farms are classified as operating leases and the related base or fixed rental income from the farms is recognized on a straight-line basis commencing from the effective date of the lease or the acquisition date of the property in the case of in-place leases on properties acquired. Differences between rental income earned and amounts due per the respective lease agreements are capitalized or charged, as applicable, to accrued rent receivable. Participating rent is recorded when all contingencies have been resolved such that the tenant is entitled to gross revenues from a packing house, wine producer, shipper, huller processor or other marketing, processing or distributing entity which enables the Company to estimate and/or measure its share of such gross revenues. As a result, depending on the circumstances described above for a particular lease, in certain instances, participating rent will be recognized by the Company in the year the crop was harvested, and in other instances, participating rent will be recognized partially in the year of the harvest and the balance in the year following the harvest.
Recovery of expenses represents revenues from tenant leases that provide for the recovery of all or a portion of the real estate taxes of the respective property. The revenue is accrued in the same periods as the expense is incurred.
Income Taxes The Operating Partnership qualifies as a partnership for U.S. federal income tax purposes. No provision has been made in the accompanying financial statements for federal, state or local income taxes for the Operating Partnership, as each partner is individually responsible for reporting their share of the Partnership's income or loss on their own tax returns. For taxable years ended December 31, 2009 through December 31, 2011, the Company was taxed as a regular "C" corporation. However, it did not incur any amount of federal income tax during those periods. The Company elected to be treated as a real estate investment trust ("REIT") for U.S. federal income tax purposes, commencing with and in connection with the filing of its federal income tax return for the taxable year ended December 31, 2012. The Company operates in a manner intended to enable it to qualify as a REIT under Sections 856-860 of the Internal Revenue Code. Under these sections, a real estate investment trust, which distributes at least 90% of its real estate investment trust taxable income (determined without regard to the deduction for dividends paid and excluding capital gains) to its stockholders each year and that meets certain other conditions, will not be subject to federal income taxes on that portion of its taxable income that is distributed to its stockholders. To the extent that the Company satisfies its annual distribution requirement but distributes less than 100% of taxable income, it will be subject to an excise tax on distributed taxable income.
The Company paid distributions of $0.25 per share in calendar year 2014, of which 74% was ordinary income and 26% was a return of capital for U.S. federal income tax purposes. The Company paid distributions of $0.225 per share in calendar year 2013, of which 42% was ordinary income and 58% was a return of capital for U.S. federal income tax purposes.
The Company accounts for certain tax positions in accordance with ASC 740 "Income Taxes." ASC No. 740-10-65 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC No. 740-10-65, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not
F-34
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
that the tax position will be sustained on examination by the taxing authorities based on technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has greater than 50% likelihood of being realized upon ultimate settlement. ASC No. 740-10-65 also provides guidance on de-recognition, classification, interest and penalties on income taxes and accounting in interim periods and requires increased disclosures.
As of December 31, 2014 and 2013, the Company does not have a liability for uncertain tax positions. Potential interest and penalties associated with such uncertain tax positions would be recorded as a component of the income tax provision. As of December 31, 2014, the tax years ended December 31, 2011 through December 31, 2014 remain open for an audit by the Internal Revenue Service.
Management does not believe the Company has any tax positions for which it is reasonably possible that it will be required to record significant amounts of unrecognized tax benefits within the next twelve months.
New Accounting Pronouncements In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) ("ASU 2014-08"). ASU 2014-08 changes the criteria for a disposal to qualify as a discontinued operation and requires additional disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. ASU 2014-08 is effective for us on January 1, 2015. We do not expect this pronouncement will have a significant impact on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). ASU 2014-09 provides additional guidance for management to reassess revenue recognition as it relates to: (1) transfer of control, (2) variable consideration, (3) allocation of transaction price based on relative standalone selling price, (3) licenses, (4) time value of money and (5) contract costs. Further disclosures will be required to provide a better understanding of revenue that has been recognized and revenue that is expected to be recognized in the future from existing contracts. ASU 2014-09 is effective for us on January 1, 2017, with no early adoption permitted. We are currently evaluating the impact ASU 2014-09 will have on our consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40) ("ASU 2014-15"). ASU 2014-15 requires management to assess an entity's ability to continue as a going concern by incorporating and expanding upon certain principles of current U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term "substantial doubt", (2) require an evaluation every reporting period, including interim periods, (3) provide principles for considering the mitigating effect of management's plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans, (5) require an express statement and other disclosures when substantial doubt is still present and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 is effective for us on January 1, 2017, with early adoption permitted. We do not believe that this pronouncement will have an impact on our consolidated financial statements.
F-35
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis ("ASU 2015-02"). ASU 2015-02 significantly changes the consolidation analysis required under U.S. GAAP. ASU 2015-02 is effective for us on January 1, 2016, with early adoption permitted. We do not believe that this pronouncement will have a significant impact on our consolidated financial statements.
3. FAIR VALUE MEASUREMENTS
ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 establishes a hierarchy for inputs used in valuation techniques to measure fair value and prioritizes those inputs that are observable (inputs based on independent market data) and those inputs that are unobservable (inputs developed internally). Cash equivalents measured at fair value are classified in one of the following fair value hierarchy levels based on the lowest level of input that is significant to the fair value measurement. Availability of observable inputs can vary and is affected by a variety of factors. Management uses judgment in determining fair value of assets and liabilities; and Level 3 assets and liabilities involve greater judgment than Level 1 or Level 2 assets or liabilities:
Level 1unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2quoted prices in markets that are not active for identical or similar assets or liabilities, quoted prices in active markets for similar assets or liabilities, and inputs other than quoted prices that are observable or can be corroborated by observable market data;
Level 3inputs that are unobservable and significant to the fair value measurement, including inputs that are not derived from market data or cannot be corroborated by market data.
The following tables summarize the levels within the fair value hierarchy in which the fair value measurements of the Company's assets and liabilities fall as of December 31, 2014 and 2013:
2014
|
Level 1 | Level 2 | Level 3 | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS |
|||||||||||||
Cash equivalents |
$ | 842,305 | $ | | $ | | $ | 842,305 | |||||
| | | | | | | | | | | | | |
LIABILITIES |
|||||||||||||
Borrowings under credit facility |
$ | | $ | | $ | 20,400,000 | $ | 20,400,000 | |||||
| | | | | | | | | | | | | |
2013
|
Level 1 | Level 2 | Level 3 | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS |
|||||||||||||
Cash equivalents |
$ | 746,579 | $ | | $ | | $ | 746,579 | |||||
| | | | | | | | | | | | | |
F-36
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
4. INVESTMENTS IN REAL ESTATE
Investments in real estate as of December 31, 2014 and 2013 are comprised of the following:
|
2014 | 2013 | |||||
---|---|---|---|---|---|---|---|
Land |
$ | 98,568,755 | $ | 84,300,894 | |||
Land improvements |
2,518,785 | 2,255,794 | |||||
Buildings |
1,191,000 | 1,011,000 | |||||
Trees and vines |
23,967,899 | 18,338,811 | |||||
Development costs |
15,435,912 | 9,240,438 | |||||
Fixtures and equipment |
1,958,160 | 1,668,853 | |||||
| | | | | | | |
|
143,640,511 | 116,815,790 | |||||
Less accumulated depreciation |
(3,535,653 | ) | (2,013,075 | ) | |||
| | | | | | | |
Investments in real estate, net |
$ | 140,104,858 | $ | 114,802,715 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Depreciation expense for the years ended December 31, 2014 and 2013 was $1,530,911, and $1,265,275, respectively.
In 2013, 79 of the gross 518 acres of our Macomb Farm property, a commodity row crop property in Illinois, were expropriated by the Illinois Department of Transportation for purposes of building a new state road. The State of Illinois paid the Operating Partnership a total of $1,723,800, of which $1,106,300 was attributable to the acreage expropriated and $617,500 was attributable to the diminished value of the remaining acreage. The Operating Partnership disputed the overall consideration paid by the State of Illinois. A settlement for additional compensation was reached in February 2014 with the State of Illinois, whereby the Operating Partnership received $257,675 in additional compensation, $61,700 of which related to the acreage expropriated and $183,650 of which related to the diminution in value of the remaining acreage. The Company realized gains of $47,701 and $463,478 during the years ended December 31, 2014 and 2013, respectively, related to the Macomb Farm expropriation.
F-37
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
4. INVESTMENTS IN REAL ESTATE (Continued)
The Company has acquired the following properties as of December 31, 2014 and 2013:
Farm
|
Crops | Acquisition Date(s) |
Acreage
Gross/Tillable |
2014
Net Book Value |
2013
Net Book Value |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Permanent Crops |
|||||||||||||||
Kimberly Vineyard |
Wine grapes | Aug.10, 2010/ Dec. 9, 2014 | 260G / 245T | $ | 12,753,834 | $ | 2,853,611 | ||||||||
Golden Eagle Ranch |
Almonds | Mar.9, 2012/Aug.14, 2012 | 1,112G / 1,056T | 14,878,941 | 15,608,401 | ||||||||||
Quail Run Vineyard |
Wine grapes | Nov.16,2012 | 240G / 223T | 9,348,222 | 8,264,719 | ||||||||||
Blue Heron Farms |
Walnuts | Nov 1, 2013 | 430G / 380T | 13,745,511 | 14,003,426 | ||||||||||
Falcon Farms |
Pecans | Nov. 14, 2014 | 1,840G / 1,165 T | 8,122,301 | | ||||||||||
| | | | | | | | | | | | | | | |
|
58,848,809 | 40,730,157 | |||||||||||||
| | | | | | | | | | | | | | | |
Commodity Row |
|||||||||||||||
Pleasant Plains Farm |
Corn, soybeans | Jul.9, 2010 | 1,196G /1,159T | $ | 8,750,000 | $ | 8,750,000 | ||||||||
Macomb Farm |
Corn, soybeans | Dec.16, 2010 | 434G / 422T | 2,547,230 | 2,730,880 | ||||||||||
Tillar Farm |
Cotton, soybeans, rice | May 4, 2011 | 1,444G / 1,248T | 4,093,873 | 4,095,744 | ||||||||||
Kane County Farms |
Corn, soybeans | Jun.28, 2011 | 1,652G / 1,617T | 17,164,800 | 17,166,000 | ||||||||||
| | | | | | | | | | | | | | | |
|
32,555,903 | 32,742,624 | |||||||||||||
| | | | | | | | | | | | | | | |
Specialty Vegetable Row |
|||||||||||||||
Sweetwater Farm |
Vegetables | Dec.30, 2010 | 1,624G /1,450T | $ | 5,133,487 | $ | 5,057,522 | ||||||||
Sandpiper Ranch |
Vegetables and berries | Dec.22, 2011/Apr.26, 2012 | 184G / 158T | 7,725,487 | 7,758,140 | ||||||||||
| | | | | | | | | | | | | | | |
|
12,858,974 | 12,815,662 | |||||||||||||
| | | | | | | | | | | | | | | |
Development |
|||||||||||||||
Roadrunner Ranch |
Seedless citrus | Apr.7, 2011/Sep.13, 2011 | 244G / 227T | $ | 6,653,561 | $ | 6,056,340 | ||||||||
Condor Ranch |
Lemons and avocados | Nov.30, 2011/Dec.16, 2011 | 786G / 261T | 8,858,347 | 7,742,374 | ||||||||||
Grassy Island Groves |
Citrus | Dec.27, 2012 | 623G / 451T | 3,737,256 | 2,753,660 | ||||||||||
Blue Cypress |
Vegetables | Feb.22, 2013 | 2,694G / 2,036T | 10,063,007 | 7,688,259 | ||||||||||
Hawk Creek Ranch |
Pistachios | Oct.14, 2013/Feb.25, 2014 | 524G / 425T | 5,482,429 | 3,229,167 | ||||||||||
Pintail Vineyards |
Wine grapes | Nov.5, 2013 | 91G/87T | 1,046,572 | 1,044,472 | ||||||||||
| | | | | | | | | | | | | | | |
|
35,841,172 | 28,514,272 | |||||||||||||
| | | | | | | | | | | | | | | |
Total |
$ | 140,104,858 | $ | 114,802,715 | |||||||||||
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
On February 25, 2014, the Company closed on a second tranche of a property for Hawk Creek Ranch located in Yolo County, California (aggregating 180 gross acres164 tillable) for the purchase consideration of $1,771,929. The property was farmed for row crops, but it is in the process of being cleared and leveled for development for pistachios together with the first tranche of the Hawk Creek property. The purchase of this property was treated as a business combination.
On November 14, 2014, the Company closed on Falcon Farms, comprising two properties located in Dougherty County, Georgia and Lowndes County, Alabama (aggregating 1,840 gross acres1,165 tillable) for the combined purchase consideration of $8,000,000. The properties are currently farmed for pecans. The purchase of these properties was treated as an asset acquisition.
On December 9, 2014, the Company closed on a vineyard adjacent to, and aggregated with, Kimberly Vineyard in Monterey County, California (175 gross acres164 tillable) for the consideration of $9,800,000. The vineyard is currently planted with pinot noir and chardonnay grapes. The purchase of this property was treated as an asset acquisition.
F-38
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
4. INVESTMENTS IN REAL ESTATE (Continued)
We determined the fair value of the assets acquired during the year ended December 31, 2014 to be as follows:
Farm
|
Land |
Land
improvements |
Buildings |
Trees and
vines |
Fixtures and
equipment |
Total purchase
price |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Hawk Creek Ranch II |
$ | 1,711,929 | $ | 40,000 | $ | | $ | | $ | 20,000 | $ | 1,771,929 | |||||||
Falcon Farms |
5,239,600 | 187,500 | 180,000 | 2,310,400 | 82,500 | 8,000,000 | |||||||||||||
Kimberly Vineyard II |
7,216,000 | | | 2,584,000 | | 9,800,000 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
|
$ | 14,167,529 | $ | 227,500 | $ | 180,000 | $ | 4,894,400 | $ | 102,500 | $ | 19,571,929 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
On November 5, 2013, the Company closed on Pintail Vineyards located in Yolo County, California (aggregating 91 gross acres87 tillable) for the purchase consideration of $1,045,000. The property was farmed for row crops, but it is in the process of being cleared and leveled for development for Pinot Grigio and Petite Syrah grapes. The purchase of this property was treated as a business combination.
On November 1, 2013, the Company closed on Blue Heron Farms located in Kings County, California (430 gross acres380 tillable) for the consideration of $13,875,000. The property is currently farmed for walnuts. The purchase of this property was treated as a business combination.
On October 14, 2013, the Company closed on the first tranche of a property for Hawk Creek Ranch located in Yolo County, California (aggregating 344 gross acres261 tillable) for the purchase consideration of $3,230,000. The property was farmed for row crops, but it is in the process of being cleared and leveled for development for pistachios. The purchase of this property was treated as a business combination.
On February 22, 2013, the Company closed on Blue Cypress Farm, a defunct citrus orchard located in Brevard County, Florida (aggregating 2,694 gross acres2,036 tillable) for the purchase consideration of $7,183,450. The property in the process of being developed for varied vegetable row crops. The purchase of this property was treated as a business combination.
We determined the fair value of the assets acquired net of liabilities assumed during the year ended December 31, 2013 to be as follows:
Farm
|
Land |
Land
improvements |
Buildings |
Trees and
vines |
Fixtures and
equipment |
Development
costs |
Below-
market lease |
Total
purchase price |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Blue Cypress Farm |
$ | 6,828,050 | $ | 234,600 | $ | 15,000 | $ | | $ | 105,800 | $ | | $ | | $ | 7,183,450 | |||||||||
Hawk Creek Ranch I |
3,195,000 | 20,000 | | | 15,000 | | | 3,230,000 | |||||||||||||||||
Blue Heron Farms |
6,285,000 | 850,000 | 426,000 | 4,396,500 | 7,500 | 2,035,000 | (125,000 | ) | 13,875,000 | ||||||||||||||||
Pintail Vineyards |
945,000 | 35,000 | 60,000 | | 5,000 | | | 1,045,000 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
|
$ | 17,253,050 | $ | 1,139,600 | $ | 501,000 | $ | 4,396,500 | $ | 133,300 | $ | 2,035,000 | $ | (125,000 | ) | $ | 25,333,450 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
We acquired one farm during the year ended December 31, 2014 in a transaction that qualified as a business combination. We do not present pro forma financial information for the year ended December 31, 2014 as the total revenues and income from the acquisition are not material to the Company's consolidated statement of operations.
F-39
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
4. INVESTMENTS IN REAL ESTATE (Continued)
We acquired four farms during the year ended December 31, 2013 in transactions that qualified as business combinations. The total revenues and losses from the acquisitions through December 31, 2013 included in the consolidated statement of operations were $22,069 and $(44,234). If the acquisitions had occurred as of the beginning of the period, the Company's results of operations would be shown as in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the period.
Pro-Forma Financial Information (Unaudited)
|
For the Year
Ended December 31, 2013 |
|||
---|---|---|---|---|
Operating Data: |
||||
Total operating revenue |
$ | 6,538,390 | ||
Total operating expenses |
5,716,574 | |||
| | | | |
Operating income |
821,816 | |||
Other expenses (income) |
(13,101 | ) | ||
| | | | |
Income before gain on sale of land |
834,917 | |||
Gain on sale of land |
463,478 | |||
| | | | |
Net income |
1,298,395 | |||
Net income attributable to non-controlling interests |
425,113 | |||
| | | | |
Net income attributable to the Company |
$ | 873,282 | ||
| | | | |
| | | | |
| | | | |
Share and Per Share Data: |
||||
Weighted Average Shares of Common Stock Outstanding-basic & diluted |
10,039,722 | |||
Basic & diluted earnings per common share |
$ | 0.09 |
5. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities as of December 31, 2014 and 2013 consisted of the following:
|
2014 | 2013 | |||||
---|---|---|---|---|---|---|---|
Accrued dividends payable |
$ | 197,380 | $ | 197,457 | |||
Accrued accounting fees |
442,000 | 170,000 | |||||
Accrued real estate taxes |
142,436 | 129,360 | |||||
Accrued legal fees |
824,734 | 4,994 | |||||
Accrued interest payable |
11,702 | 5,208 | |||||
Accrued other |
1,238,328 | 745,243 | |||||
| | | | | | | |
Total |
$ | 2,856,580 | $ | 1,252,262 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
6. BORROWINGS UNDER CREDIT FACILITY
The Operating Partnership entered into a $25 million revolving credit facility on December 5, 2013 to provide funds for potential acquisitions, development of existing properties and other corporate
F-40
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
6. BORROWINGS UNDER CREDIT FACILITY (Continued)
purposes. The facility bears interest on the drawn amount at the rate of 130 basis points (1.3%) above the Three Month London Interbank Offered Rate (0.2552% at December 31, 2014). The Operating Partnership is required to pay any interest due quarterly in arrears beginning January 1, 2014 and any unpaid interest and drawn principal is due and payable in full on January 1, 2019 ("Maturity Date"). The minimum advance under the terms of the facility is $500,000 and may be repaid at any time prior to the Maturity Date. The credit facility is secured by a first mortgage over, and assignment of leases from, the Pleasant Plains, Macomb Farm, Kane County Farms, Sweetwater and Tillar properties. The Operating Partnership pays a 0.25% per annum non usage fee. Pursuant to the terms of the credit facility, the properties securing the credit facility must have an aggregate appraised value such that the amount of the credit facility is 50% or less of the aggregate appraised value of such properties. The amount outstanding under this credit facility is $20,400,000 as of December 31, 2014. We believe we are in compliance with the credit facility covenants. The fair value of the borrowings under the credit facility as of December 31, 2014 was approximately $20.4 million, comparable to our carrying value of $20.4 million.
The Operating Partnership incurred costs of $181,682 (inclusive of a one-time 0.25% commitment fee) in arranging the credit facility. These costs are being amortized on a straight-line basis over the period of the agreement.
On January 14, 2015, the Company entered into an additional $25 million revolving credit facility to provide funds for potential acquisitions, development of existing properties and other corporate purposes. The facility bears interest on the drawn amount at the rate of 130 basis points (1.3%) above the Three Month London Interbank Offered Rate. The Operating Partnership is required to pay any interest due quarterly in arrears beginning April 1, 2015 and any unpaid interest and drawn principal is due and payable in full on January 1, 2020 ("Second Maturity Date"). The minimum advance under the terms of the facility is $500,000 and may be repaid at any time prior to the Second Maturity Date. The credit facility is secured by a first mortgage over and assignment of leases from the Sandpiper, Quail Run, Golden Eagle and Blue Heron properties. The Operating Partnership pays a 0.25% per annum non-usage fee. Pursuant to the terms of the credit facility, the properties securing the credit facility must have an aggregate appraised value such that the amount of the credit facility is 50% or less of the aggregate appraised value of such properties.
7. RELATED PARTY TRANSACTIONS
The limited partnership agreement of the Operating Partnership provides that the Operating Partnership shall pay AFA a management fee in arrears calculated at the annual rate of (i) 1% of the Company's share of the Gross Asset Value, as defined, of the Operating Partnership as of the end of the immediately preceding calendar quarter and (ii) 0.5% of the Founders' share of the Gross Asset Value of the Operating Partnership as of the end of the immediately preceding calendar quarter. The management fee for the years ended December 31, 2014 and 2013 amounted to $1,296,857 and $1,211,390, respectively, of which $331,143 and $310,130 was payable on December 31, 2014 and 2013, respectively.
F-41
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
7. RELATED PARTY TRANSACTIONS (Continued)
AFA is entitled to a performance fee equal to 15% of the Funds From Operations (as defined) allocated to the capital account of the Company in the Operating Partnership each fiscal year. AFA is also entitled to 10% of the Funds From Operations allocated to each Founder's capital account in the Operating Partnership each fiscal year. The performance fee on Funds From Operations amounted to $531,905 and $405,851 for the years ended December 31, 2014 and 2013, respectively, all of which was payable on December 31, 2014 and 2013.
AFA is entitled to an additional performance fee equal to two-thirds of 15% of the net capital appreciation allocated to the capital account of the Company in the Operating Partnership each fiscal year. AFA is entitled to one-third of 15% of the net realized capital appreciation allocated to the capital account of the Company in the Operating Partnership each fiscal year. AFA is also entitled to two-thirds of 10% and one-third of 10% of net capital appreciation and net realized capital appreciation, respectively, allocated to each Founder's capital account in the Operating Partnership each fiscal year. The performance fee on net capital appreciation (realized and unrealized) amounted to $699,493 and $443,500 for the years ended December 31, 2014 and 2013, respectively, all of which is payable on December 31, 2014 and 2013.
These performance fees are reflected in management and performance fees related party on the statements of operations.
The Operating Partnership paid an affiliate of the Managing Member of AFA $30,000 and $21,000 for the years ended December 31, 2014 and 2013, respectively, as a fee for providing administrative and accounting services to the Company and the Operating Partnership.
8. EARNINGS PER SHARE OF COMMON STOCK
The following tables set forth the computation of basic and diluted earnings per share for the years ended December 31, 2014 and 2013, respectively:
|
For the Years Ended
December 31, |
||||||
---|---|---|---|---|---|---|---|
|
2014 | 2013 | |||||
Net income attributable to the Company |
$ | 710,717 | $ | 553,451 | |||
Denominator for basic & diluted weighted average shares |
10,404,087 | 10,039,722 | |||||
| | | | | | | |
Basic & diluted earnings per common share |
$ | 0.07 | $ | 0.06 |
The Company has no potentially dilutive securities outstanding.
F-42
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
9. LEASES
The Company's properties are leased to tenants under operating leases, which expire on various dates through 2019. Future minimum rents to be received from tenants under non-cancelable leases in effect at December 31, 2014, are as follows:
2015 |
$ | 4,346,000 | ||
2016 |
2,357,000 | |||
2017 |
1,549,000 | |||
2018 |
1,171,000 | |||
2019 |
1,049,000 | |||
Thereafter |
| |||
| | | | |
|
$ | 10,472,000 | ||
| | | | |
| | | | |
| | | | |
In addition to the minimum lease payments described above, the Kimberly Vineyard, Golden Eagle Ranch, Condor Ranch, Quail Run Vineyard and Blue Heron Farms leases require the tenant to pay participating rent (in some cases above a threshold), based on a percentage of gross revenues, as defined, derived from the leased property. Participating rent was $3,608,309 and $2,070,989 for the years ended December 31, 2014 and 2013, respectively.
10. SEGMENT INFORMATION
The Company has identified four reporting segments: commodity row crops, specialty/vegetable row crops, permanent crops and properties under development. Each of these segments has different return on capital expectations, may have different forms of revenue (fixed and/or participating) or require an extended number of years before they produce revenue from trees and/or vines as a result of a development or redevelopment program.
Below is a summary of the investment in real estate, net by segment as of December 31, 2014 and 2013, respectively.
|
Total |
Commodity
Row |
Specialty/
Vegetable Row |
Permanent | Development | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2014 |
$ | 140,104,858 | $ | 32,555,903 | $ | 12,858,974 | $ | 58,848,809 | $ | 35,841,172 | ||||||
December 31, 2013 |
$ | 114,802,715 | $ | 32,742,624 | $ | 12,815,662 | $ | 40,730,157 | $ | 28,514,272 |
F-43
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
10. SEGMENT INFORMATION (Continued)
Below is a summary of operating income by segment for the years ended December 31, 2014 and 2013, respectively.
Year Ended December 31, 2014
|
Total |
Commodity
Row |
Specialty/
Vegetable Row |
Permanent | Development | Corporate | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
OPERATING REVENUES: |
|||||||||||||||||||
Fixed rent |
$ | 3,289,130 | $ | 1,593,738 | $ | 785,904 | $ | 546,638 | $ | 362,850 | $ | | |||||||
Participating rent |
3,608,309 | | | 3,476,103 | 132,206 | | |||||||||||||
Recovery of real estate taxes |
310,643 | | 96,394 | 201,469 | 12,780 | | |||||||||||||
Other income |
52,981 | 13,371 | 10 | 39,600 | | ||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total operating revenues |
7,261,063 | 1,607,109 | 882,298 | 4,224,220 | 547,436 | | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
OPERATING EXPENSES: |
|||||||||||||||||||
Depreciation |
1,530,911 | 3,071 | 90,213 | 1,217,095 | 220,532 | | |||||||||||||
Management and performance fees-related party |
2,528,255 | | | | | 2,528,255 | |||||||||||||
Property operating expenses |
1,351,655 | 266,559 | 164,877 | 457,886 | 462,333 | | |||||||||||||
Acquisition-related expenses |
44,712 | | | 220 | 44,492 | | |||||||||||||
Professional fees |
406,008 | 2,166 | 14,182 | 3,424 | 386,236 | ||||||||||||||
General and administrative |
273,321 | | | | | 273,321 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total operating expenses |
6,134,862 | 269,630 | 257,256 | 1,689,383 | 730,781 | 3,187,812 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Operating income |
1,126,201 | $ | 1,337,479 | $ | 625,042 | $ | 2,534,837 | $ | (183,345 | ) | $ | (3,187,812 | ) | ||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total other expense |
117,114 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Net income before gain on sale of land |
1,009,087 | ||||||||||||||||||
Gain on sale of land |
47,701 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Net income |
1,056,788 | ||||||||||||||||||
Less net income attributable to non-controlling interests |
346,071 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Net income attributable to the Company |
$ | 710,717 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
F-44
American Farmland Company
Notes to Consolidated Financial Statements (Continued)
10. SEGMENT INFORMATION (Continued)
Year Ended December 31, 2013
|
Total |
Commodity
Row |
Specialty/
Vegetable Row |
Permanent | Development | Other | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
OPERATING REVENUES: |
|||||||||||||||||||
Fixed rent |
$ | 3,191,581 | $ | 1,615,224 | $ | 681,860 | $ | 700,499 | $ | 193,998 | $ | | |||||||
Participating rent |
2,070,989 | | | 2,071,158 | (169 | ) | | ||||||||||||
Recovery of expenses |
317,561 | | 100,625 | 197,309 | 19,627 | | |||||||||||||
Other income |
135,803 | 96,497 | | | 39,306 | | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total operating revenues |
5,715,934 | 1,711,721 | 782,485 | 2,968,966 | 252,762 | | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
OPERATING EXPENSES: |
|||||||||||||||||||
Depreciation |
1,265,275 | 3,070 | 77,695 | 1,053,829 | 130,681 | | |||||||||||||
Management and performance fees-related party |
2,060,741 | | | | | 2,060,741 | |||||||||||||
Property operating expenses |
1,083,729 | 261,739 | 165,804 | 429,373 | 226,813 | | |||||||||||||
Acquisition-related expenses |
431,309 | | | 187,872 | 243,437 | | |||||||||||||
Professional fees |
342,291 | | 3,103 | 3,039 | 1,290 | 334,859 | |||||||||||||
General and administrative |
175,491 | | | | | 175,491 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total operating expenses |
5,358,836 | 264,809 | 246,602 | 1,674,113 | 602,221 | 2,571,091 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Operating income |
357,098 | $ | 1,446,912 | $ | 535,883 | $ | 1,294,853 | $ | (349,459 | ) | $ | (2,571,091 | ) | ||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total other income |
13,101 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Net income before gain on sale of land |
370,199 | ||||||||||||||||||
Gain on sale of land |
463,478 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Net income |
833,677 | ||||||||||||||||||
Less net income attributable to non-controlling interests |
280,226 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Net income attributable to the Company |
$ | 553,451 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
11. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through March 19, 2015, the date these consolidated financial statements were available to be issued. No material subsequent events have occurred since December 31, 2014 that required recognition or disclosure in financial statements, except as disclosed in footnote 6 and below.
The Founders withdrew $150,146 (akin to the dividend paid to shareholders) from their capital accounts in the Operating Partnership effective January 1, 2015. The Company received a subscription of $5,250,000 in December 2014 from an existing shareholder effective on January 1, 2015 and issued 453,945 shares in respect of the subscription.
******
F-45
Schedule IIIReal estate and accumulated depreciation
December 31, 2014
(All Numbers in Thousands)
|
|
|
|
|
Cost
Capitalized Subsequent to Acquisition |
|
|
|
|
|
Life on Which
Depreciation in Latest Income Statements is Computed |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
|
|
Gross Amount at Which
Carried at Close of Period |
|
|
|||||||||||||||||||||||
|
|
Initial Cost to Company |
|
|
||||||||||||||||||||||||||
|
|
Accumulated
Depreciation |
Date
Acquired |
|||||||||||||||||||||||||||
Farms
|
Encumbrances | Land | Improvements | Total | Improvements | Land | Improvements | Total | ||||||||||||||||||||||
Kimberly Vineyard (Monterey, CA) |
$ | 9,199 | $ | 3,788 | $ | 12,987 | $ | | $ | 9,199 | $ | 3,788 | $ | 12,987 | $ | 233 | 08/10/2010 & 12/9/2014 | 8 - 30 years | ||||||||||||
Condor Ranch (Ventura, CA) |
3,333 | 1,520 | 4,853 | 4,182 | 3,333 | 5,702 | 9,035 | 177 | 11/30/2011 & 12/16/2011 | 8 - 30 years | ||||||||||||||||||||
Golden Eagle Ranch (Stanislaus, CA) |
(2) | 6,682 | 10,118 | 16,800 | 211 | 6,682 | 10,329 | 17,011 | 2,132 | 03/09/2012 & 08/14/2012 | 5 - 25 years | |||||||||||||||||||
Quail Run Vineyard (Monterey, CA) |
(2) | 6,499 | 1,377 | 7,876 | 1,673 | 6,499 | 3,050 | 9,549 | 201 | 11/16/2012 | 8 - 30 years | |||||||||||||||||||
Blue Heron (Kings, CA) |
(2) | 6,285 | 7,715 | 14,000 | 8 | 6,285 | 7,723 | 14,008 | 263 | 11/01/2013 | 7 - 30 years | |||||||||||||||||||
Falcon Farms (Dougherty, GA; Lowndes, AL) |
5,370 | 2,761 | 8,131 | | 5,370 | 2,761 | 8,131 | 9 | 11/14/2014 | 8 - 30 years | ||||||||||||||||||||
Sandpiper Ranch (Santa Cruz, CA) |
(2) | 7,399 | 406 | 7,805 | 12 | 7,399 | 418 | 7,817 | 92 | 12/22/2011 & 4/2620/12 | 5 - 25 years | |||||||||||||||||||
Sweetwater Farm (Jackson, FL) |
(1) | 4,796 | 329 | 5,125 | 193 | 4,796 | 522 | 5,318 | 185 | 12/30/2010 | 8 - 15 years | |||||||||||||||||||
Blue Cypress (Brevard, FL) |
6,828 | 355 | 7,183 | 2,934 | 6,828 | 3,289 | 10,117 | 54 | 02/22/2013 | 8 - 25 years | ||||||||||||||||||||
Pleasant Plains (Douglas, McLean, Cass, Morgan & Sangamon, IL) |
(1) | 8,750 | | 8,750 | | 8,750 | 0 | 8,750 | | 07/09/2010 | ||||||||||||||||||||
Macomb Farm (McDonough, IL) |
(1) | 2,547 | | 2,547 | | 2,547 | 0 | 2,547 | | 12/16/2010 | ||||||||||||||||||||
Kane County Farm (Kane, IL) |
(1) | 17,139 | 30 | 17,169 | | 17,139 | 30 | 17,169 | 4 | 06/28/2011 | 25 years | |||||||||||||||||||
Tillar Farm (Drew, AR) |
(1) | 4,080 | | 4,080 | 19 | 4,080 | 19 | 4,099 | 5 | 05/04/2011 | 10 years | |||||||||||||||||||
Roadrunner Ranch (Tulare, CA) |
2,414 | | 2,414 | 4,313 | 2,414 | 4,313 | 6,727 | 73 | 04/07/2011 & 09/13/2011 | 8 years | ||||||||||||||||||||
Grassy Island Groves (Okeechobee, FL) |
1,396 | 906 | 2,302 | 1,526 | 1,396 | 2,432 | 3,828 | 91 | 12/17/2012 | 20 years | ||||||||||||||||||||
Pintail Vineyard (Yolo, CA) |
945 | 100 | 1,045 | 8 | 945 | 108 | 1,053 | 7 | 11/05/2013 | 5 - 20 years | ||||||||||||||||||||
Hawk Creek Ranch (Yolo, CA) |
4,907 | 95 | 5,002 | 491 | 4,907 | 586 | 5,493 | 10 | 10/14/2013 & 02/26/2014 | 5 - 15 years | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Totals |
$ | 98,569 | $ | 29,500 | $ | 128,069 | $ | 15,570 | $ | 98,569 | $ | 45,070 | $ | 143,639 | $ | 3,536 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The net basis of the Company's assets and liabilities for U.S. federal income tax purposes is approximately $998,000 lower than the amount reported for financial statement purposes.
F-46
Reconciliation of "Real estate and accumulated depreciation"
(In Thousands)
|
Year Ended December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2014 | 2013 | |||||
Real estate: |
|||||||
Balance at beginning of year |
$ | 116,815,790 | $ | 88,095,301 | |||
Additions during period |
19,855,912 | 25,458,450 | |||||
Development costs and other expenditures |
7,172,459 | 4,481,159 | |||||
Payment for diminished remaining acreage of Macomb Farms |
(183,650 | ) | (617,500 | ) | |||
Cost associated with expropriated acreage from Macomb Farms property |
(601,620 | ) | |||||
Cost related to scrapped asset |
(20,000 | ) | | ||||
| | | | | | | |
Balance at end of year |
$ | 143,640,511 | $ | 116,815,790 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Accumulated depreciation: |
|||||||
Balance at beginning of year |
$ | 2,013,075 | $ | 747,800 | |||
Additions charged to costs and expenses |
1,530,911 | 1,265,275 | |||||
Reduction related to scrapped asset |
(8,333 | ) | | ||||
| | | | | | | |
Balance at end of year |
$ | 3,535,653 | $ | 2,013,075 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
F-47
Until , 2015, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
Shares
American Farmland Company
Common Stock
PROSPECTUS
Deutsche Bank Securities
Raymond James
FBR
Janney Montgomery Scott
, 2015
Item 31.
Other Expenses of Issuance and Distribution.
The expenses expected to be incurred by us in connection with the registration and distribution of the securities being registered under this registration statement are as follows (all amounts are estimates other than the SEC and FINRA filing fees):
SEC registration fee |
$ | 11,620 | ||
FINRA filing fees |
15,500 | |||
NYSE listing fees* |
||||
Printing expenses* |
||||
Legal fees and expenses* |
||||
Accounting fees and expenses* |
||||
Transfer agent and registrar fees* |
||||
Miscellaneous expenses* |
||||
| | | | |
Total* |
$ | |||
| | | | |
| | | | |
| | | | |
Item 32.
Sales to Special Parties.
See Item 33.
Item 33.
Recent Sales of Unregistered Securities.
The following table summarizes certain information relating to all of our securities sold by us, and all of the Common Units of our operating partnership sold by our operating partnership, in private placements within the past three years that were not registered under the Securities Act:
Type of Security
|
Offering Period |
Number of
Purchasers |
Shares or
Units Sold |
Total
Proceeds |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Common Stock |
March 1, 2012 - June 30, 2012 | 12 | 635,343 | $ | 6,462,096 | |||||||
Common Stock |
August 31, 2012 - October 1, 2012 | 12 | 1,413,825 | $ | 15,041,690 | |||||||
Common Units |
September 28, 2012 | 1 | 93,301 | $ | 1,000,000 | |||||||
Common Stock |
January 1, 2013 | 20 | 17,858 | $ | 190,331 | |||||||
Series A Preferred Stock |
December 12, 2012 | 29 | 29 | $ | 29,000 | |||||||
Common Stock |
January 2, 2013 | 1 | 18,797 | $ | 200,000 | |||||||
Common Stock |
April 1, 2013 | 6 | 1,906 | $ | 20,563 | |||||||
Common Stock |
June 30, 2013 | 20 | 17,963 | $ | 195,537 | |||||||
Common Units |
July 12, 2013 | 1 | 5,303 | $ | 60,000 | |||||||
Common Stock |
July 12, 2013 | 3 | 135,913 | $ | 1,460,000 | |||||||
Common Stock |
December 28, 2013 | 19 | 13,935 | $ | 154,238 | |||||||
Common Stock |
January 10, 2014 | 4 | 366,768 | $ | 4,100,000 | |||||||
Common Units |
April 1, 2014 | 1 | 5,095 | $ | 60,000 | |||||||
Common Stock |
June 30, 2014 | 19 | 13,844 | $ | 155,681 | |||||||
Common Stock |
December 30, 2014 | 19 | 16,905 | $ | 195,517 | |||||||
Common Stock |
January 1, 2015 | 1 | 453,945 | $ | 5,250,000 |
All of persons who purchased securities in the private placements listed above were, at the time of purchase, "accredited investors" as defined under Regulation D of the Securities Act. The issuance of such shares and units was effected in reliance upon exemptions from registration provided by
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Section 4(2) of the Securities Act and Regulation D of the Securities Act. There were no underwriters involved in any of the private placements.
The table above includes an aggregate of 65,507 shares of Common Stock that were issued to "accredited investors" as defined under Regulation D of the Securities Act pursuant to our distribution reinvestment program, which we intend to terminate prior to the commencement of this offering.
In connection with the Internalization, an aggregate of Common Units with an aggregate value of $12.0 million, based on the mid-point of the price range on the cover of the prospectus, will be issued to certain persons owning interests in AFA as consideration in the Internalization. All such persons had a substantive, pre-existing relationship with us and entered into the Contribution Agreement with AFA, AFTRS and our operating partnership, which provided for the issuance of such Common Units, prior to the filing of this registration statement with the SEC. All of such persons are "accredited investors" as defined under Regulation D of the Securities Act. The issuance of such shares and units will be effected in reliance upon exemptions from registration provided by Section 4(2) of the Securities Act and Regulation D of the Securities Act.
Item 34.
Indemnification of Directors and Officers
.
Maryland law permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except to the extent that (a) it is proved that the person actually received an improper benefit or profit in money, property or services for the amount of the benefit or profit in money, property or services actually received; or (b) a judgment or other final adjudication adverse to the person is entered in a proceeding based on a finding in the proceeding that the person's action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. Our charter contains a provision that eliminates such liability of our directors and authorizes us to eliminate such liability of our officers, to the maximum extent permitted by Maryland law.
The MGCL requires a corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made or threatened to be made a party by reason of his or her service in that capacity, or in the defense of any claim, issue or matter in the proceeding, against reasonable expenses incurred by the director or officer in connection with the proceeding, claim, issue or matter. The MGCL permits a Maryland corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or are threatened to be made a party by reason of their service in those or other capacities unless it is established that:
Under the MGCL, a Maryland corporation may not, however, indemnify a director or officer for an adverse judgment in a suit by or in the right of the corporation or if the director or officer was
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adjudged liable on the basis that personal benefit was improperly received. Notwithstanding the foregoing, unless limited by the charter (which our charter does not), a court of appropriate jurisdiction, upon application of a director or officer, may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not the director or officer met the standards of conduct described above or has been adjudged liable on the basis that a personal benefit was improperly received, but such indemnification shall be limited to expenses.
In addition, the MGCL permits a Maryland corporation to advance reasonable expenses to a director or officer, without requiring a preliminary determination of the director's or officer's ultimate entitlement to indemnification, upon the corporation's receipt of:
Our charter authorizes us to, and our bylaws obligate us with respect to directors only, to the fullest extent permitted by Maryland law in effect from time to time, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding, without requiring a preliminary determination of the director's ultimate entitlement to indemnification, to:
Our charter and bylaws also permit us to indemnify and advance expenses to (a) any person who served a predecessor of ours in any of the capacities described above (b) any officer, employee or agent of our company or a predecessor of our company or (c) any officer, employee or agent who, at our request, serves or has served as a director, officer, partner, member, manager, trustee, employee or agent of another corporation, real estate investment trust, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise. Furthermore, our officers and directors are indemnified against specified liabilities by the underwriters, and the underwriters are indemnified against certain liabilities by us, under the underwriting agreement relating to this offering. See "Underwriting."
We expect to enter into indemnification agreements with each of our executive officers, directors and director nominees, whereby we indemnify such executive officers, directors and director nominees and pay or reimburse reasonable expenses in advance of final disposition of a proceeding if such executive officer or director is made or threatened to be made a party to the proceeding by reason of his or her service in that capacity to the fullest extent permitted by Maryland law against all expenses and liabilities, subject to limited exceptions. These indemnification agreements also provide that upon an application for indemnity by an executive officer or director to a court of appropriate jurisdiction, such court may order us to indemnify such executive officer or director.
The amended partnership agreement also provides that our company, as general partner, is indemnified to the extent provided therein. The amended partnership agreement further provides that
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our directors, director nominees, officers, employees, agents and designees are indemnified to the extent provided therein.
Insofar as the foregoing provisions permit indemnification of directors, director nominees, officers or persons controlling us for liability arising under the Securities Act, we have been informed that in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
We expect to obtain an insurance policy under which our directors, director nominees and executive officers will be insured, subject to the limits of the policy, against certain losses arising from claims made against such directors and officers by reason of any acts or omissions covered under such policy in their respective capacities as directors or officers, including certain liabilities under the Securities Act.
Item 35.
Treatment of Proceeds from Stock Being Registered.
None.
Item 36.
Financial Statements and Exhibits.
(a) Financial Statements. See page F-1 of the prospectus that forms a part of this Registration Statement for an index to the financial statements included in the prospectus.
(b) Exhibits. The list of exhibits filed with or incorporated by reference in this Registration Statement is set forth in the Exhibit Index following the signature page herein.
(a) The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933 the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or Rule 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of 1933 each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
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Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-11 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on June 26, 2015.
AMERICAN FARMLAND COMPANY | ||||
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By: |
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/s/ THOMAS S.T. GIMBEL Thomas S.T. Gimbel Authorized Officer |
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Thomas S.T. Gimbel or Geoffrey M. Lewis and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this registration statement (including post-effective amendments to the registration statement), and to file the same, with all exhibits thereto, and any other documents in connection therewith, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933 this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Name
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Capacity
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Date
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/s/ ROBERT L. COWAN
Robert L. Cowan |
President (principal executive officer) | June 26, 2015 | ||
/s/ GEOFFREY M. LEWIS Geoffrey M. Lewis |
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Treasurer and Director (principal financial and accounting officer) |
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June 26, 2015 |
/s/ D. DIXON BOARDMAN D. Dixon Boardman |
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Chairman of the Board of Directors |
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June 26, 2015 |
/s/ THOMAS S.T. GIMBEL Thomas S.T. Gimbel |
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Director |
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June 26, 2015 |
/s/ JAMES B. HOOVER James B. Hoover |
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Director |
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June 26, 2015 |
/s/ HARRISON T. LEFRAK Harrison T. LeFrak |
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Director |
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June 26, 2015 |
/s/ MARK WILKINSON Mark Wilkinson |
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Director |
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June 26, 2015 |
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The following exhibits are included, or incorporated by reference, in this registration statement on Form S-11 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit No. | Description | ||
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1.1 | * | Form of Underwriting Agreement. | |
3.1 | * | Articles of Amendment and Restatement. | |
3.2 | * | Amended and Restated Bylaws. | |
4.1 | * | Specimen Certificate of Common Stock of American Farmland Company. | |
5.1 | * | Opinion of Goodwin Procter LLP. | |
8.1 | * | Opinion of Goodwin Procter LLP as to tax matters. | |
10.1 | * | Second Amended and Restated Agreement of Limited Partnership of American Farmland Company L.P. | |
10.2 | * | American Farmland Company 2014 Equity Incentive Plan. | |
10.3 | * | Form of Restricted Stock Award Agreement. | |
10.4 | * | Form of Restricted Stock Award Agreement for Directors. | |
10.5 | * | Indemnification Agreement by and between American Farmland Company and each of its directors and officers listed on Schedule A thereto. | |
10.6 | * | Registration Rights Agreement by and between American Farmland Company and the holders named therein. | |
10.7 | Amended and Restated Sub-Advisory Agreement, by and among American Farmland Advisor LLC, Prudential Mortgage Capital Company, LLC, and for the purposes of certain sections specified therein, American Farmland Company and American Farmland Company L.P. | ||
10.8 | * | Advisory Agreement by and between American Farmland Advisor LLC and American Farmland Company. | |
10.9 | Form of Transitional Services Agreement. | ||
10.10 | * | Employment Agreement for Thomas S.T. Gimbel | |
10.11 | * | Employment Agreement for Robert L. Cowan | |
10.12 | * | Employment Agreement for Geoffrey M. Lewis | |
10.13 | * | Employment Agreement for Lindsey B. Sichel | |
21.1 | List of subsidiaries. | ||
23.1 | Consent of Deloitte & Touche LLP. | ||
23.2 | * | Consent of Goodwin Procter LLP (included in Exhibit 5.1). | |
23.3 | * | Consent of Goodwin Procter LLP (included in Exhibit 8.1). | |
23.4 | Consent of American AgAppraisal. | ||
23.5 | Consent of Angus Investments Inc. | ||
23.6 | Consent of Brigantino & Company. | ||
23.7 | Consent of Central Coast AgAppraisal, Inc. | ||
23.8 | Consent of Cochran Ag Services, Inc. | ||
23.9 | Consent of CorreiaXavier Incorporated. | ||
23.10 | Consent of Edward, Lien & Toso, Inc. | ||
23.11 | Consent of Heartland Ag Group Ltd. | ||
23.12 | Consent of Arthur C. Bliss, Jr., Accredited Rural Appraiser. |
Exhibit No. | Description | ||
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23.13 | Consent of Lightle Appraisal Company. | ||
23.14 | Consent of Lynn E. Rickard, ARA. | ||
23.15 | Consent of Saunders Appraisal Service LLC. | ||
24.1 | Power of Attorney (included in the signature page to this registration statement). | ||
99.1 | Consent of Morton Allan Cohn. | ||
99.2 | Consent of Roberto A. de Guardiola. | ||
99.3 | Consent of Terry Allen Kramer. |
Exhibit 10.7
AMENDED AND RESTATED SUB-ADVISORY AGREEMENT
This AMENDED AND RESTATED SUB-ADVISORY AGREEMENT (the Agreement ) is effective as of the IPO Date (as hereinafter defined), by and among American Farmland Advisor LLC ( AFA ), a Delaware limited liability company, Prudential Mortgage Capital Company, LLC ( Agricultural Sub-Adviser ), a Delaware limited liability company, and for the purposes of Sections 9(d) ( Prudential Name ), 10 ( Confidentiality ), 17 ( REIT Status ), 18 ( Indemnification ), 23 ( Non-Solicitation ), 25(o) ( No Fiduciary Relationship ) and 27 ( Guarantee) only, American Farmland Company, a Maryland corporation (the Company ), and for the purposes of Sections 1 ( Appointment of Agricultural Sub-Adviser ), 3 ( Authority, Instructions and Decisions ), 4 ( Services ), 5 ( Compensation) , 7 ( Other Services ), 9(d) ( Prudential Name ), 10 ( Confidentiality ), 18 ( Indemnification ), 19 ( Expenses, Reimbursement ), 23 ( Non-Solicitation ), 25(n) ( Not a Partnership or Joint Venture ), 25(o) ( No Fiduciary Relationship ) and 27 ( Guarantee) only, American Farmland Company L.P., a Delaware limited partnership (collectively, the Partnership ). Terms used herein and not otherwise defined shall have the meanings ascribed to them in Section 26 of this Agreement.
WHEREAS , the Company was organized to invest primarily in farmland property located in the United States;
WHEREAS , the Company conducts substantially all of its business through the Partnership, and the Company is a co-general partner of the Partnership and AFA is a co-general partner of the Partnership until the IPO Date, at which point the Company will be the sole general partner of the Partnership;
WHEREAS , pursuant to the Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of October 9, 2009 (the Partnership Agreement ), AFA currently renders investment advisory and management services to the Company and the Partnership, and, as of the IPO Date, AFA will render such services pursuant to an Advisory Agreement, dated in 2015, between the Partnership and AFA (the Advisory Agreement );
WHEREAS , AFA is desirous of appointing Agricultural Sub-Adviser as a sub-adviser to assist AFA with the Partnerships farmland investments and investment portfolio and Agricultural Sub-Adviser has agreed to provide the asset acquisition, asset management, portfolio management, and other services set forth in this Agreement;
WHEREAS , pursuant to the Advisory Agreement, AFA has been granted the authority to retain and delegate to Agricultural Sub-Adviser the authority and responsibility set forth in this Agreement;
WHEREAS , the Company intends to become a public reporting company subject to the provisions of the Securities Exchange Act of 1934, as amended, and make an initial public offering ( IPO ) of its shares (the closing date of such IPO, the IPO Date ); for the avoidance of doubt, the Agreement will not be effective until and unless the IPO Date occurs;
WHEREAS , contemporaneously with the IPO, the Partnership will acquire all of the interests in AFA from the current owners of AFA and AFA will become a wholly owned direct and indirect subsidiary of the Partnership on such date;
WHEREAS , Agricultural Sub-Adviser will receive a copy of the amended and restated Partnership Agreement for the Partnership that will be in effect as of and after the IPO Date and any registration statement or other placement memorandum of the Company, as they may be amended or supplemented from time to time (collectively, the Offering Materials ), pursuant to which the Company is offering its securities, including shares of its common stock (each, an Offering ); and
WHEREAS , the parties entered an original advisory agreement on September 8, 2009, as later amended on September 8, 2009, April 6, 2012 and December 1, 2013 (collectively referred to as the Original Agreement ), and the parties now desire to amend and restate the Original Agreement in its entirety.
NOW THEREFORE , in consideration of the mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as set forth below.
1. Appointment of Agricultural Sub-Adviser .
(a) AFA hereby retains Agricultural Sub-Adviser to act as agricultural sub-adviser of AFA and to perform the services as set forth in Section 4 of this Agreement (the Services ). Agricultural Sub-Adviser undertakes to provide Services hereunder in a manner consistent with (i) any provisions of applicable law; (ii) the policies of the Company established from time to time, provided such policies are provided to Agricultural Sub-Adviser in writing with no less than 30 days notice prior to their effectiveness; and (iii) the Investment Guidelines (as defined below).
(b) Agricultural Sub-Adviser hereby accepts such appointment and shall provide the Services.
(c) During the term of this Agreement, AFA will rely on the Agricultural Sub-Adviser to perform all of the Services. For the avoidance of doubt, the scope and nature of the Services and the fees outlined in Exhibit C of this Agreement shall apply to all farmland properties for the term of this Agreement pursuant to Section 22 of this Agreement.
2. Performance . Agricultural Sub-Adviser undertakes to use its commercially reasonable efforts to present to AFA potential investment opportunities and to provide AFA with a continuing and suitable investment program consistent with the Investment Guidelines and other written instructions provided by AFA from time to time.
3. Authority, Instructions and Decisions . AFA retains full authority and discretion for making decisions on all recommendations of Agricultural Sub-Adviser. Except as expressly provided herein, AFA or the Partnership shall execute all contracts (including, without limitation, Acquisition Contracts), and other documents with respect to investment transactions,
deliveries, custodianship of documentation, and final accounting. Agricultural Sub-Adviser may rely on any written statement of the Partnership or an officer of the Company to the effect that a particular Acquisition Contract, conveyance, lease, encumbrance, contract, agreement, document and/or transaction has received any required approval from the board of directors of the Company (the Board ) or the Partnership. As required from time to time and upon the written request from Agricultural Sub-Adviser to the Partnership, to facilitate the acquisition of property to be acquired, the sale of property to be sold, the discharge of Agricultural Sub-Advisers duties hereunder, or the conduct of the ordinary course of business with respect to any property, all in accordance with the provisions of this Agreement, the Partnership will provide Agricultural Sub-Adviser and third parties involved in the foregoing, commercially reasonable and commercially acceptable evidence of (i) the authorization of the subject Acquisition Contract, conveyance, lease, encumbrance, contract, document, and/or transaction; (ii) the authorization of the execution of the subject Acquisition Contract, conveyance, lease, encumbrance, contract, agreement and/or document by (x) the Partnership, (y) Agricultural Sub-Adviser, in its own name or as agent for the Partnership or as agent for any existing Asset Owning Subsidiary or as agent for any entity to be formed, and/or (z) the Asset Owning Subsidiary; and (iii) the authorization of the signatories of the subject Acquisition Contract, conveyance, lease, encumbrance, contract, agreement and/or document. Except as contemplated by Sections 4(c), 4(e)(v), 4(e)(xii), 4(f) and 4(i) below, neither Agricultural Sub-Adviser nor the Asset Owning Subsidiary, shall execute any documents or effect any transactions on behalf of the Company, the Partnership or any Asset Owning Subsidiary, without the express prior written authorization of the Partnership.
4. Services . Agricultural Sub-Adviser shall periodically, or as necessary, or as directed by AFA, provide the following Services, unless otherwise agreed to by AFA and Agricultural Sub-Adviser.
(a) Identify Opportunities . Subject to the Allocation Procedure (defined below), identify real estate investment acquisition opportunities for AFAs consideration consistent with the Investment Guidelines set forth in Exhibit A attached hereto as may be amended from time to time by providing written notice to Agricultural Sub-Adviser with no less than thirty (30) days notice prior to their effectiveness (the Investment Guidelines ).
(b) Prepare Acquisition Package . Following the identification of an investment opportunity to be presented to AFA under the Allocation Procedure, Agricultural Sub-Adviser shall prepare a detailed acquisition package covering a proposed investment acquisition (the Acquisition Package ). The Acquisition Package shall include, but not be limited to, the following:
(i) a purchase proposal memorandum, in narrative form summarizing:
(a) the proposed transaction;
(b) portfolio considerations, including:
(1) investment strategy, including capital improvements;
(2) investment risks; and
(3) exit strategy.
(c) the property, including:
(1) location;
(2) acreage;
(3) soils;
(4) improvements, including irrigation and drainage, if any;
(5) source, quality, and quantity of irrigation water, if any;
(6) any personal property associated with the property; and
(7) a proposed allocation of purchase price (and any contractual provisions regarding purchase price allocation).
(d) operation, leasing, and management strategy;
(e) the proposed lessee of the property and the proposed lease agreement and a summary of the material terms of such proposed lease and a 10 year projection of the expected rent under such lease terms;
(f) the proposed property manager for the property and the proposed compensation for such manager;
(g) 10 year projection of net operating income, including projected 10 year average annual total return; and
(h) positives/negatives of the property and/or the investment.
(ii) Agricultural Sub-Advisers estimate of the investments value, using the market and income approaches, with comparable sale analysis;
(iii) legal description;
(iv) state, county, and area maps, and a plot map of the property;
(v) soil maps and summary;
(vi) detailed yield calculations, including assumption summary;
(vii) irrigation and drainage report;
(viii) photographs;
(ix) leases agreements, if any;
(x) analysis of the credit worthiness of the proposed lessee or other financial analysis reasonably requested by AFA for accounting or legal reasons as may be required for REIT purposes, if any;
(xi) a recommendation summary and signature page by which the investment is formally authorized by the Partnership or AFA; and
(xii) other due diligence as Agricultural Sub-Adviser deems reasonably necessary to substantiate the propertys unique attributes.
Within seven (7) Business Days of AFAs receipt of the Acquisition Package, AFA shall either: (i) direct Agricultural Sub-Adviser to proceed to closing by providing authorization in the form of Exhibit B ; or (ii) reject the investment. In the event AFA does not respond within seven (7) Business Days or in the event AFA rejects the investment, Agricultural Sub-Adviser shall discontinue its efforts with respect to the proposed investment on behalf of AFA and shall provide AFA with an invoice itemizing the third party expenses related to the investment in accordance with Section 19. The seven (7) Business Day period referred to herein can be extended by AFA for one additional five (5) Business Day period if responses are needed from Agricultural Sub-Adviser to AFA for related questions on a particular Acquisition Package.
(c) Asset Acquisition Services.
(i) Subject to the provisions of Section 19 (b) herein, to perform commercially reasonable due diligence (including, without limitation, boundary or other land surveys, environmental testing/assessments, soil testing, water testing, water, drainage, wetlands, conservation, endangered species and other studies and vineyard reports) associated with (x) the identification of real estate investment acquisition opportunities pursuant to Section 4 (a), (y) providing the due diligence materials for the Acquisition Package, and (z) inspection period tests, studies and due diligence under any Acquisition Contract.
(ii) Unless, directed by AFA in writing to Agricultural Sub-Adviser, Acquisition Contracts and all other closing documents and closing related documents pertaining thereto shall be in the name of the Asset Owning Subsidiary and shall be executed by an officer or member of the Asset Owning Subsidiary designated by AFA who is not an officer of Agricultural Sub-Adviser. In the anticipated rare instances in which an officer or member of the Asset Owning Subsidiary designated by AFA who is not an officer of Agricultural Sub-Adviser is not available to execute the Acquisition Contract and/or all other closing documents and closing related documents pertaining thereto, the same shall be executed by Agricultural Sub-Adviser, as
attorney in fact, for the Asset Owning Subsidiary under an irrevocable limited power of attorney from the Asset Owning Subsidiary to the Agricultural Sub-Adviser. Said limited power of attorney shall be in recordable form, in compliance with the law of the state in which the property is located, and contain a complete legal description of the subject property.
(iii) Unless, directed by the Partnership in a writing to Agricultural Sub-Adviser, buyer broker contracts in connection with proposed real estate investment opportunities under Section 4 (a) and/or with respect to Acquisition Contracts, shall be negotiated by Agricultural Sub-Adviser and executed by Agricultural Sub-Adviser as agent for the Partnership, as agent for any existing Asset Owning Subsidiary, or as agent for any Asset Owning Subsidiary to be formed; which said buyer broker contracts shall be with the seller of the subject property and/or the sellers broker and shall provide that such seller and/or the sellers broker pay said buyers broker a commercially reasonable commission at the closing of the sale of the subject property. AFA and the Partnership recognize that in most, if not all cases, Agricultural Sub-Adviser will contract with Capital Agricultural Property Services, Inc. ( CAPS ), an affiliate of Agricultural Sub-Adviser, for buyer broker services.
(d) Portfolio Management Services.
(i) Review planning horizon, risk and volatility preferences, portfolio return objectives, and desired contributions and distributions communicated to the Partnership by the Board.
(ii) Annually analyze portfolio-level performance.
(iii) Examine macroeconomic trends and overall investment outlook.
(iv) Review portfolio completion strategy in light of then-current market conditions and trends.
(v) Review asset managers recommendations, and recommend to AFA properties to hold, sell or improve.
(vi) List sale properties with reputable, qualified brokers, and monitor the sales program. AFA and the Partnership recognize that in most, if not all cases, Agricultural Sub-Adviser will recommend CAPS. Agricultural Sub-Adviser will make reasonable efforts to determine that CAPS fees are commercially reasonably as compared to third party brokers providing comparable services and of comparable size, quality, expertise and ability.
(vii) Produce portfolio income projections for the yearly budget period and assess options to improve return.
(viii) Provide oversight and direction to property management firm or firms.
(ix) Prepare and submit quarterly reports and year end reports to the Partnership within 30 calendar days after the end of each quarter or within 45 calendar days after the end of the year and provide reasonable assistance, upon the reasonable request of the Partnership, in preparing reports (including assisting the Partnership in its preparation of tax returns) to be sent to stockholders of the Company and partners of the Partnership.
(x) Ensure that title to all properties is recorded in the name of the Partnership or a wholly owned entity of the Partnership as directed by the Partnership.
(xi) Conduct annual meetings with the Board and the Partnership, or more frequent meetings with the Board and the Partnership, as the Board or the Partnership may reasonably request to discuss, among other things, the appraisal process and summaries of property appraisals.
(e) Asset Management Services .
(i) Evaluate economic and investment factors affecting each property.
(ii) Prepare revenue, operating expense, and capital expenditure budgets for all properties.
(iii) Evaluate income projections for each property for the upcoming budgeting period and analyze alternatives to enhance returns.
(iv) Analyze, identify and recommend to AFA properties to be held, sold or improved.
(v) Close property sales approved by the Partnership and in connection therewith, unless otherwise directed by the Partnership in writing to Agricultural Sub-Adviser, the sale contract (the Sale Contract ), deed or instrument of conveyance of properties in the name of the Asset Owning Subsidiary and all other closing documents and closing related documents pertaining thereto shall be in the name of the Asset Owning Subsidiary and shall be executed by an officer or member of the Asset Owning Subsidiary designated by AFA who is not an officer of Agricultural Sub-Adviser. In the anticipated rare instances in which an officer or member of the Asset Owning Subsidiary designated by AFA who is not an officer of Agricultural Sub-Adviser is not available to execute the Sale Contract, the deed or instrument of conveyance and/or all other closing documents and closing related documents pertaining thereto, the same shall be executed by Agricultural Sub-Adviser, as attorney in fact, for the Asset Owning Subsidiary under an irrevocable limited power of attorney from the Asset Owning Subsidiary to the Agricultural Sub-Adviser. Said limited power of attorney shall be in recordable form, in compliance with the law of the state in which the property is located, and contain a complete legal description of the subject property.
(vi) Negotiate prices and terms of property sales and submit sale recommendations to AFA for authorization. Recommendations are to include, at a minimum:
(a) pertinent information on the property;
(b) terms and provisions of the transaction; and
(c) historic yield, before and after fees, provided by the investment upon its sale at the recommended price and terms.
(vii) Review and negotiate property leases and management contracts.
(viii) Initiate and monitor approved capital improvement projects.
(ix) Engage independent appraisers.
(x) Monitor property condition, operator performance and environmental adherence.
(xi) Thoroughly survey the local market of the proposed investment and identify a reputable, qualified property management firm ( Property Manager ). Agricultural Sub-Adviser shall provide a written recommendation to AFA proposing a firm to provide on-site property management services. The Partnership and AFA recognize that in most, if not all cases, Agricultural Sub-Adviser will recommend CAPS. In those cases when CAPS is not the recommended Property Manager, Agricultural Sub-Adviser shall use commercially reasonable efforts to identify existing or potential conflicts of interest the Property Manager might have which would or could affect the Partnerships interests in the proposed investment. Agricultural Sub-Adviser will make reasonable efforts to determine that CAPS fees are commercially reasonably as compared to third party property managers providing comparable services and of comparable size, quality, expertise and ability.
(xii) Execute (x) on behalf of the Asset Owning Subsidiary and as agent thereof, property management agreements with property managers, including compensation terms, which have been approved by the Partnership as part of the Acquisition Package or otherwise by the Partnership in writing and to execute on behalf of the Partnership and as agent thereof, a Master Property Management Agreement with CAPS containing general terms and conditions of the property management agreement to be applied to a particular property when CAPS or other property manager approved by the Partnership and the Asset Owning Subsidiary owning the subject property execute a Master Property Management Agreement Addendum ( Master Property Management Agreement Addendum ) subjecting the subject Asset Owning Subsidiary and the property it owns to the terms and provisions of the Master Property
Management Agreement as supplemented and/or modified in the Master Property Management Agreement Addendum; which said Master Property Management Agreement Addendum shall be executed by Agricultural Sub-Adviser on behalf of and as agent for the Asset Owning Subsidiary; provided however, the Master Property Management Agreement and the Master Property Management Agreement Addendum, including compensation terms therein, have been approved by the Partnership as part of the Acquisition Package or otherwise by the Partnership in writing and (y) on behalf of the Asset Owning Subsidiary and as agent thereof, such leases authorized by the Partnership as part of the Acquisition Package or otherwise by the Partnership in writing; provided however, the property management agreements may authorize the property manager to execute on behalf of the Asset Owning Subsidiary and as agent thereof, such leases authorized by the Partnership as part of the Acquisition Package or otherwise by the Partnership in writing as long as such property manager has Agricultural Sub-Advisers prior written confirmation that the subject lease has been authorized by the Partnership as part of the Acquisition Package or otherwise by the Partnership in writing and that Agricultural Sub-Adviser gives its consent to the property manager so executing the lease. Said property management agreements may authorize the property manager on behalf of the Asset Owning Subsidiary and as agent thereof, to execute (1) lease renewals permitted to be executed by Agricultural Sub-Adviser under Subsection 4 (e) (xiii) herein as long as such property manager has Agricultural Sub-Advisers prior written confirmation that the subject lease renewal is in compliance with the Sub-Advisory Agreement or has been otherwise authorized by the Partnership in writing and that Agricultural Sub-Adviser gives its consent to the property manager so executing the lease renewal and (2) contracts, agreements and documents relating to the operation of the subject property and such property managers duties under the subject property management agreement.
(xiii) Unless the Partnership delivers to Agricultural Sub-Adviser written notice to the contrary with respect to a lease, execute on behalf of the Asset Owning Subsidiary lease renewals with lessees provided (i) such leases are for a duration of no more than twelve months and (ii) the economic terms of such leases are substantially the same (and provide for the same percentage rent formula, if any) as those contained in the expiring lease.
(f) Third Party Service Providers . Agricultural Sub-Adviser will use commercially reasonable efforts to control costs and minimize expenditures associated with asset acquisition activities and asset management activities. With respect to products and services not customarily performed or directly provided by acquisition and/or asset managers and /or portfolio managers, Agricultural Sub-Adviser shall contract with and compensate third parties to provide products and services for the benefit of the farmland properties (whether acquired or to be acquired) of the Partnership or Asset Owning Subsidiaries, as the case may be, to carry out the asset acquisition, asset management and portfolio management activities authorized hereunder and to otherwise administer, oversee and conduct the day-to-day administration and management of the properties.
Except as expressly requested in writing by the Partnership, Agricultural Sub-Adviser shall negotiate for such products and services, terms and fees, and contract, in its own name, in the name of any existing Asset Owning Subsidiary and as agent thereof, in its own name as agent for an entity to be formed and assignable to said entity (an Asset Owning Subsidiary to be formed) without the consent of the other party, or in the name of the Partnership and as agent thereof. Notwithstanding the foregoing, unless expressly permitted by this Agreement, Agricultural Sub-Adviser may not sub-contract or delegate any of its responsibilities under this Agreement to an unaffiliated third party or agent without the prior written consent of the Partnership.
(g) Experience . Agricultural Sub-Adviser shall use commercially reasonable efforts to ensure that all parties who provide portfolio and asset management services to the Partnership are experienced and qualified to perform such services.
(h) Insurance . Agricultural Sub-Adviser shall require that not less than $1,000,000 of insurance is carried by any third party service provider to protect Agricultural Sub-Adviser, the Partnership and the Company from liability and/or damages resulting from the actions of such service provider.
(i) Bank Accounts . Agricultural Sub-Adviser and CAPS, to the extent it provides services to the Partnership as contemplated by this Agreement, may establish and maintain one or more bank accounts in its own name for the account of, or in the name of, the Partnership and its subsidiaries, and may collect and deposit into any such account or accounts, and disburse from any such account or accounts, any money on behalf of the Partnership, under such terms and conditions as the Partnership may provide to Agricultural Sub-Adviser in writing. For the avoidance of doubt, such funds shall continue to be the property of the Partnership and will be returned to the Partnership upon its request.
5. Compensation . The compensation for the Services to be rendered by Agricultural Sub-Adviser hereunder shall be in accordance with Exhibit C hereto; and such fees shall be paid by the Partnership and AFA to Agricultural Sub-Adviser. The Partnership and AFA shall be obligated to pay to Agricultural Sub-Adviser the fees set forth on Exhibit C . In the event this Agreement is terminated or its term expires without renewal, the fees payable to Agricultural Sub-Adviser will be paid pursuant to Section 22.
6. Guarantees . In the performance of its duties hereunder, the actions of Agricultural Sub-Adviser shall be based on its professional judgment and experience, but in no way shall the undertakings or recommendations of Agricultural Sub-Adviser be considered or construed to be a financial guarantee of investment results.
7. Other Services . Should AFA request that Agricultural Sub- render services for the Partnership, the Company or AFA other than the Services set forth in Section 4, such services shall be separately compensated at such rates and in such amounts as are agreed by Agricultural Sub-Adviser and AFA, and shall not be deemed to be Services pursuant to the terms of this Agreement.
8. Representations and Warranties of Agricultural Sub-Adviser . Agricultural Sub-Adviser represents and warrants that:
(a) Due Organization . Agricultural Sub-Adviser is a Delaware limited liability company duly organized and validly existing under the laws of the State of Delaware and in good standing under the laws of the State of Delaware.
(b) Power and Authority . Agricultural Sub-Adviser has the power and authority to enter into this Agreement and to carry out its duties and obligations hereunder. The execution of this Agreement has been duly authorized by Agricultural Sub-Adviser and no other proceedings on the part of Agricultural Sub-Adviser are necessary to authorize this Agreement. This Agreement is and shall be binding and enforceable upon Agricultural Sub-Adviser in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, reorganization, insolvency, moratorium or other similar laws from time to time in effect affecting creditors rights generally or by principles governing the availability of equitable remedies.
(c) Authorization . Agricultural Sub-Adviser is authorized, registered and licensed to do business, as contemplated in this Agreement, in each jurisdiction in which the nature of its business makes such registration or licensing necessary.
(d) No Violation . Neither the execution of this Agreement nor the acts contemplated hereby nor compliance by Agricultural Sub-Adviser with any provisions hereof will:
(i) violate any provision of the charter documents of Agricultural Sub-Adviser.
(ii) violate any statute or law or any judgment, decree, order, regulation or rule of any court or governmental authority applicable to Agricultural Sub-Adviser; or
(iii) violate, or be in conflict with, or constitute a default under or permit the termination of, or require the consent of any Person under any agreement to which Agricultural Sub-Adviser may be bound, which violation, conflict, default termination or failure to obtain consent would, individually or in the aggregate, have a material adverse affect on the properties, business, prospects, earnings, assets, liabilities or condition (financial or otherwise) of Agricultural Sub-Adviser ( Agricultural Sub-Adviser Material Adverse Effect ).
(e) Authorizations . Agricultural Sub-Adviser and its personnel have completed, obtained and performed all registrations, filings, approvals, licenses, authorizations, consents or examinations required by any government or governmental authority for its acts contemplated by this Agreement.
(f) Personnel . The personnel of Agricultural Sub-Adviser responsible for discharging Agricultural Sub-Advisers duties and obligations under this Agreement are
or will be individuals experienced in the performance of the various functions contemplated by this Agreement.
9. Representations, Warranties and Covenants of AFA . AFA hereby represents and warrants as follows:
(a) Due Organization . AFA is a Delaware limited liability company duly organized and validly existing under the laws of the State of Delaware and in good standing under the laws of the State of Delaware.
(b) Power and Authority . AFA has the power and authority to enter into this Agreement and to carry out its obligations hereunder. The execution of this Agreement has been duly authorized by AFA and no other proceedings on the part of AFA are necessary to authorize this Agreement. This Agreement is and shall be binding and enforceable upon AFA in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, reorganization, insolvency, moratorium or other similar laws from time to time in effect affecting creditors rights generally or by principles governing the availability of equitable remedies.
(c) No Violation . Neither the execution of this Agreement nor the acts contemplated hereby nor compliance by AFA with any provisions hereof will:
(i) violate any provision of the charter documents of AFA; or
(ii) violate, or be in conflict with, or constitute a default under or permit the termination of, or require the consent of any person under any agreement to which AFA may be bound, which violation, conflict, default, termination or failure to obtain consent would, individually or in the aggregate, have a material adverse affect on the properties, business, prospects, earnings, assets, liabilities or condition (financial or otherwise) of AFA.
(d) Prudential Name . AFA agrees that the name Prudential is the property of Agricultural Sub-Adviser and its Affiliates and any derivative or logo or trademark or service mark or trade name and any other logo, trademark, service mark or trade name used by Agricultural Sub-Adviser are the valuable property of Agricultural Sub-Adviser and its Affiliates and may not be used be AFA, the Company or the Partnership without Agricultural Sub-Advisers prior written approval. In addition, AFA acknowledges that certain territorial restrictions apply to the use of the name Prudential Financial, Inc. or the name of its Affiliates. As a result, AFA agrees to provide Agricultural Sub-Adviser fourteen (14) days advance written notice before marketing the Offering outside of the following territories (collectively, the Territories ): (i) North America, Central America, South America, Japan, North Korea, South Korea and Taiwan; (ii) the following US territories: American Samoa, Baker Island, Guam, Howland Island, Jarvis Island, Johnston Atoll, Kingman Reef, Midway, Navasa Island, Northern Mariana Islands, Palmyra Atoll, Puerto Rico, US Virgin Islands and Wake Island; and (iii) the following Caribbean Islands: Antigua and Barbuda, Bahamas, Barbados, Cuba, Dominica, Dominican Republic, Haiti, Jamaica, St. Kitts & Nevis, St.
Lucia and Trinidad & Tobago. AFA may proceed with marketing the Offering outside the Territories only after receiving, and consistent with, written guidance provided by Agricultural Sub-Adviser. Agricultural Sub-Advisers consent in allowing the marketing of the Offering to proceed outside of the Territories will only relate to the use of the name Prudential Financial, Inc. or the name of its Affiliates in marketing the Offering. Any use of the name Prudential Financial, Inc., or the name of its Affiliates outside of the Territories not specifically granted by Agricultural Sub-Adviser pursuant to this Section 9(d) is prohibited. The parties acknowledge and agree that the registration of the Companys shares in various jurisdictions and the marketing and licensing of the Offering remains the responsibility of AFA and the Company.
(e) Advisory Agreement. Upon the effectiveness of this Agreement, AFA will deliver to Agricultural Sub-Adviser a fully-executed copy of the Partnership Agreement and Advisory Agreement currently in effect. AFA will also promptly deliver to Agricultural Sub-Adviser a copy of any amendments to the Advisory Agreement entered into during the term of this Agreement. Subject to the confidentiality provisions of Section 10, AFA further agrees to furnish Agricultural Sub-Adviser with any materials or information about AFA, the Company or the Partnership that Agricultural Sub-Adviser may reasonably request and that are necessary to enable it to perform the Services hereunder.
(f) Public Reports. If the Company becomes a public reporting company subject to the provisions of the Securities Exchange Act of 1934, as amended, AFA will furnish to Agricultural Sub-Adviser, prior to their filing or delivery, any reports regarding the Company that mention Agricultural Sub-Adviser or its Affiliates to be filed with or delivered to the Securities and Exchange Commission, and AFA agrees that no information about Agricultural Sub-Adviser, its Affiliates or their personnel will be included in any such reports without the advance written approval of Agricultural Sub-Adviser, which shall not be unreasonably withheld, conditioned or delayed (other than to the extent that AFA is advised by counsel that such reports are required to be filed or delivered under applicable law). The Agricultural Sub-Adviser hereby agrees that any review of such reports will be conducted in a timely manner in order to meet any filing or reporting deadlines. Notwithstanding the foregoing, if the Agricultural Sub-Adviser has not expressly approved or disapproved any such reports within seven calendar days, such reports shall have been deemed to be approved.
(g) Offering Materials. AFA shall deliver promptly to Agricultural Sub-Adviser any Offering Materials used in connection with any Offering and notify promptly Agricultural Sub-Adviser when the IPO Date is known. AFA shall notify Agricultural Sub-Advisor of any planned Offerings and shall provide Agricultural Sub-Advisor reasonable updates regarding the registration process of any such Offerings.
(h) Adviser . AFA renders investment advisory and management services to the Company and the Partnership. Five business days prior to the completion and execution of any new or amended documentation describing AFAs advisor role and/or the investment advisory and management services AFA provides to the Company and the Partnership, AFA shall deliver to Agricultural Sub-Advisor the proposed new and/or
amended documentation. In addition, AFA shall provide Agricultural Sub-Advisor an executed copy of any such documentation promptly following the completion or execution thereof. AFA shall notify Agricultural Sub-Adviser within 3 days of the date that AFA is no longer the advisor for the Company or the Partnership.
(i) AFA Sourced Acquisition Opportunities . AFA agrees that to the extent AFA, the Partnership or the Company source a potential acquisition opportunity, such opportunity will be subject to the Client Sourced Transactions Procedure attached hereto as Exhibit F .
10. Confidentiality . Except as may be required by applicable laws or governmental regulations governing a party to this Agreement that is the recipient of Confidential Information (defined below) ( Recipient ), Recipient shall maintain, and shall cause its Affiliates, employees and agents to maintain, strict confidence with respect to any and all information of a confidential proprietary or secret nature which is or may be either applicable to, or related in any way to the Partnership, the Company, AFA, Agricultural Sub-Advisor or their respective Affiliates, the acquired investments or related to the Services contemplated hereby, including all financial records (the Confidential Information ). The term Confidential Information does not include information (a) which was publicly known, or otherwise known to Recipient or any of its Affiliates at the time of disclosure, (b) which subsequently becomes publicly known through no act or omission by Recipient or any of its Affiliates, (c) which otherwise becomes known to Recipient or any of its Affiliates, other than through disclosure (i) by or at the request of the disclosing party or (ii) from a source actually known by Recipient or any of its Affiliates to be bound by a confidentiality agreement with respect to such information. Recipient agrees that it will not directly or indirectly use the Confidential Information other than in the course of performing its obligations under this Agreement, nor will Recipient directly or indirectly disclose any Confidential Information to any Person except in the course of performing its obligations pursuant to this Agreement, except (v) with the written permission of the party whose Confidential Information is in question, (w) as may be required by law, rule, regulation or court order, (x) to officers, directors and employees of Recipient and its Affiliates who have been informed of the confidential information provided to them and have agreed to keep such information confidential, (y) to representatives of Recipient and its Affiliates who have been informed of the confidential nature of the information provided to them and have agreed to keep such information confidential provided that Agricultural Sub-Adviser and its Affiliates will be free, after notice to, and consultation with, AFA, to correct any false or misleading information which may become public concerning their relationship to the Company, the Partnership or AFA, and (z) Agricultural Sub-Adviser may share with other Persons investment information in a format that does not identify the Company, the Partnership or AFA, their respective Affiliates or their involvement with any specific investment. Recipient agrees to be responsible for any breaches of any of the provisions of this Section by any of its Affiliates and their officers, directors and employees. Upon termination of this Agreement, Recipient shall promptly return to the disclosing party any documents, memoranda or other writings (and copies thereof) that constitute Confidential Information, except to the extent (i) electronic records and files are retained pursuant to automated electronic archiving, back-up or internal disaster recovery procedures or which are difficult to extract and (ii) back-up copies of Confidential Information are retained pursuant to Recipients document retention policies consistently applied or any regulatory or investigatory requirements of any governmental or regulatory authority. The
obligations set forth in this Section 10 shall expire eighteen months from the termination or expiration of this Agreement.
11. Notice of Breach . Each party shall promptly, and in any case within five (5) calendar days, notify the other party in writing if any of the representations and warranties of set forth in this Agreement shall cease to be true at any time during the term of this Agreement.
12. Change of Control; Key Personnel
(a) Change of Control . Agricultural Sub-Adviser shall promptly, and in any case within five (5) calendar days, notify AFA in writing of any change in control of Agricultural Sub-Adviser, or of any other material change in Agricultural Sub-Advisers business or corporate organization adversely effecting the Services provided hereunder.
(b) Key Personnel . The individuals set forth on Exhibit D hereto, as may be amended pursuant to this Section 12(b), are the Key Personnel . In the event of any proposed change to such Key Personnel, Agricultural Sub-Adviser shall provide written notice regarding such proposed change to AFA and such additional information as may be reasonably requested by AFA. Agricultural Sub-Adviser shall provide AFA the opportunity to discuss any proposed replacement with Agricultural Sub-Adviser. Any change by Agricultural Sub-Adviser to the Key Personnel shall be deemed a change of Exhibit D for the purposes of this Agreement.
13. Conflicts . Other than the fees provided for herein, and/or the use of Affiliates as provided for in Section 17, Agricultural Sub-Adviser shall disclose to AFA any direct or indirect economic interest of Agricultural Sub-Adviser, any Key Personnel or CAPS that may be enhanced by the recommendations made to AFA or any conflict of interest that may reasonably arise in connection with such recommendation.
14. Notice of Proceeding . Agricultural Sub-Adviser shall promptly advise, and in any case, within five (5) calendar days, AFA in writing of any investigation, examination or other proceeding involving Agricultural Sub-Adviser commenced by any regulatory agency which is (i) not conducted in the ordinary course of Agricultural Sub-Advisers business or (ii) could reasonably be expected to have a Agricultural Sub-Adviser Material Adverse Effect.
15. Insurance . Agricultural Sub-Adviser shall obtain and maintain Errors and Omissions Insurance of $1,000,000 covering all officers, agents and employees of Agricultural Sub-Adviser, including, without limitation, the Key Personnel. The Errors and Omissions Insurance shall protect the assets of the Company and Partnership against losses from the negligent acts, errors and omissions of such persons. Agricultural Sub-Adviser shall also maintain Workers Compensation Insurance in amounts equal to all statutory requirements and $1,000,000 of Employer Liability Insurance. Agricultural Sub-Adviser shall also carry Commercial General Liability (with broad form endorsement) of at least $10,000,000 combined single limit per occurrence for bodily injury, death and property damage and Automobile Liability Insurance with at least $5,000,000 combined single limit per accident and such other insurance as shall be deemed reasonably necessary from time to time by the Company and the Partnership to protect against liabilities attributable to the acts or omissions of Agricultural Sub-
Adviser. All insurance carriers shall be rated an A or above by the Bests Insurance Rating Service or rated A by Moodys Investors Service or rated A by Standard and Poors Insurance Rating Service. Agricultural Sub-Adviser shall provide notice of material change or cancellation within 15 days to AFA. A true and correct copy of a certificate of the insurer certifying that such policy has been issued will be delivered to AFA upon written request. The cost of the above insurance coverage and deductibles shall be the responsibility of Agricultural Sub-Adviser. AFA agrees that Agricultural Sub-Adviser shall be able to provide the coverage set forth in this Section 15 using a combination of commercial insurance and self-insurance.
16. Fidelity Bond . Agricultural Sub-Adviser shall obtain and maintain a fidelity bond in the amount of at least $2,000,000, covering those employees of Agricultural Sub-Adviser with responsibility for handling the funds and other property of the Partnership. Coverage will be extended to include losses sustained by the Partnership due to dishonest acts by such employees. A certificate to evidence the fidelity bond will be delivered to AFA upon written request. The cost of this coverage and deductibles shall be the responsibility of Agricultural Sub-Adviser. AFA agrees that Agricultural Sub-Adviser shall be able to provide the coverage set forth in this Section 16 using a combination of commercial and self-insurance.
17. Covenants of Agricultural Sub-Adviser .
(a) Affiliate Agreements . Other than the use of CAPS, as set forth in Section 4 of this Agreement, Agricultural Sub-Adviser will not enter into agreements with its Affiliates, employees, managers or members related to the Services provided hereunder without the prior written consent of AFA.
(b) Allocation Procedure .
(i) AFA acknowledges that other clients of Agricultural Sub-Adviser may be interested in acquiring real estate investments that may also be suitable for acquisition by the Company or the Partnership. Agricultural Sub-Adviser has established an allocation procedure, a copy of which is attached as Exhibit E to this Agreement (as amended from time to time, the Allocation Procedure ) that seeks to allocate fairly investment opportunities among its advisory clients. Agricultural Sub-Adviser shall offer investment opportunities to AFA for the benefit of the Company or the Partnership in accordance with the Allocation Procedure.
(ii) Agricultural Sub-Adviser agrees (A) to provide AFA with written confirmation and (B) to demonstrate to AFA on an annual basis (or upon reasonable request) that it is in compliance with the Allocation Procedure. Agricultural Sub-Adviser agrees to provide AFA upon written request with a list of the Accounts (as defined in the Allocation Procedure) by client type (i.e., REIT, pension plan, ERISA), size of available capital and any affiliations with Agricultural Sub-Adviser.
(iii) Upon request by AFA, Agricultural Sub-Adviser shall inform AFA of its place in each Queue (as defined in the Allocation Procedure) and documentation of the allocations (with redacted client names) under the last 12 months under the Allocation Procedure for the Queues where AFA receives an allocation, and will inform AFA when
its placement changes along with the reasoning behind the change of placement (i.e. property allocation or new Account).
(iv) Agricultural Sub-Advisor shall comply with the Client Sourced Transactions Procedure attached as Exhibit F .
(v) Within thirty (30) days after the date on which Agricultural Sub-Adviser executes a final written definitive agreement to provide advisory services with respect to the purchase of farmland ( Farmland Purchase Advisory Agreements ) to a third party, Agricultural Sub-Adviser agrees to provide notice (pursuant to Section 25(a) hereof) of such Farmland Purchase Advisory Agreement as well as the broad details as to the type of mandate, including client type (i.e., REIT, pension plan, ERISA), size of available capital, queues in which such account will be participating, and any affiliations with Agricultural Sub-Adviser, to AFA.
(c) Acquisition Pipeline . Agricultural Sub-Adviser will maintain and provide at least monthly to AFA a pipeline report (the Acquisition Pipeline ) that summarizes: (i) all properties under various stages of review for each Queue (as defined in the Allocation Procedure) that includes AFA, (ii) AFAs placement in each such Queue relative to the other accounts, and (iii) for each such property, summary details including its gross / net acreage, approximate purchase price, crops planted, status ( i.e. , under LOI, PSA or what stage of due diligence if not under agreement), and state in which property is located.
(d) Compliance with Applicable Law . Agricultural Sub-Adviser shall carry out its duties and responsibilities hereunder in accordance with, and be limited in the exercise of its rights by, the provisions of all applicable federal, state, county and city statutes, ordinances and regulations.
(e) REIT Status . Agricultural Sub-Adviser acknowledges that the Company intends to qualify as a real estate investment trust under Section 856 through 860 of the Internal Revenue Code of 1986, as amended (the REIT Compliance Rules ). Accordingly, in exercising its authority under this Agreement and under the Advisory Agreement, including in respect of accepting or rejecting prospective investments, lease terms and related matters and providing oversight and direction to Agricultural Sub-Adviser, AFA intends to comply with the REIT Compliance Rules for so long as the Company determines, in its sole discretion, to qualify as a REIT. Agricultural Sub-Adviser has no responsibility for monitoring the REIT Compliance Rules as they apply or relate to the Company.
18. Indemnification .
(a) The Company, the Partnership and AFA shall jointly and severally indemnify, defend and save harmless Agricultural Sub-Adviser and its members, partners, officers, employees and Affiliates (the Indemnitees and each an Indemnitee ) from and against any and all losses, claims, costs, liabilities, damages or deficiencies, including interest, penalties and reasonable attorneys fees (collectively, the
Losses ), by reason of, resulting from or arising (i) in connection with any Indemnitees duties hereunder or in connection with AFAs duties under the Advisory Agreement except to the extent that such Losses are caused by an act or failure to act which was a result of bad faith, fraud, willful misconduct, gross negligence or reckless disregard of duties by any Indemnitee, (ii) from any breaches of AFAs representations, warranties or covenants under this Agreement, (iii) out of any untrue statement or any alleged untrue statement of a material fact contained in any Offering Materials; or (iv) out of the omission or alleged omission to state a material fact required to be stated in any Offering Materials, or necessary to make the statements therein not misleading; provided, however, that in the case of Section 18(a)(iii) and (iv) above, no indemnity shall be provided with respect to any untrue statement contained in the any Offering Materials made in reliance upon and in conformity with written information furnished by Agricultural Sub-Adviser expressly for use in any Offering Materials. The Company, the Partnership and AFA will reimburse the aforesaid parties in connection with investigation or defense of any Losses to the extent it is finally determined that expenses of such investigation or defense are related to Losses that are indemnifiable under this Section 18(a). This indemnity agreement will be in addition to any liability which the Company, the Partnership or AFA may otherwise have.
(b) Agricultural Sub-Adviser shall indemnify, defend and save harmless the Company, the Partnership, AFA and their respective members, directors, officers, employees and Affiliates from and against any and all Losses, to the extent that such Losses are not fully reimbursed by insurance and are incurred by reason of Agricultural Sub-Advisers bad faith, fraud, willful misconduct, gross negligence or reckless disregard of its duties or from any breaches of its representations, warranties or covenants pursuant to this Agreement; provided, however, that Agricultural Sub-Adviser shall not be held responsible for any action of AFA, the Company or the Partnership in following or declining to follow any advice or recommendation given by Agricultural Sub-Adviser where Agricultural Sub-Advisers actions or omissions do not otherwise result from Agricultural Sub-Advisers bad faith, fraud, willful misconduct, gross negligence or reckless disregard of its duties. Agricultural Sub-Adviser will reimburse the aforesaid parties in connection with investigation or defense of any Losses to the extent it is finally determined that expenses of such investigation or defense are incurred by reason of Agricultural Sub-Advisers, bad faith, fraud, willful misconduct, gross negligence or reckless disregard of duty. This indemnity agreement will be in addition to any liability which Agricultural Sub-Adviser may otherwise have.
19. Expenses, Reimbursement .
(a) Reimbursable Expenditures . AFA shall reimburse Agricultural Sub-Adviser (or cause to be paid to the party contracted with when incurred in the name of the Partnership, Company, any existing Asset Owning Subsidiary, or any entity to be formed) for all reasonable and necessary out of pocket costs and expenses of providing Services in accordance with the provisions hereof which are reasonably incurred for the benefit of AFA, the Partnership, Company, any existing Asset Owning Subsidiary, or any entity to be formed, (whether contracted for by Agricultural Sub-Adviser as agent thereof or not, in the name of Agricultural Sub-Adviser, or otherwise). Such
reimbursable costs and expenses hereunder shall not exceed the actual costs for such services incurred. Such reasonable costs include, but are not limited to:
(i) the cost of architects, engineers, environmental consultants, soil testing, inspection, attorneys (including Agricultural Sub-Advisers own legal department), appraisers, and other third party professionals and services customarily utilized in the analysis of real estate;
(ii) taxes and assessments on income of the investments, taxes as an expense of doing business and any other taxes otherwise imposed on the Company, the Partnership and their business, assets or income;
(iii) interest and other costs for borrowed money, including discounts, points and other similar fees;
(iv) costs associated with insurance required in connection with the investments;
(v) expenses of managing, improving, developing, operating, financing and selling investments; and
(vi) audit, accounting and legal fees and other fees for professional services relating to the operations of the Company and the Partnership and all such fees incurred at the request, or on behalf of, AFA.
(b) Non-Reimbursable Expenditures .
(i) Except as set forth in Section 19(a), Agricultural Sub-Adviser shall not be reimbursed for any costs or expenses associated with their efforts in identifying investments for AFAs consideration (due diligence costs or expenses authorized in Section 4 (c) (i) are not considered costs or expenses in identifying investments) and, if approved, any subsequent acquisition. Expenses connected with the aforementioned efforts such as travel, lodging, meals, entertainment, copying, materials or document purchases, etc. are the responsibility of Agricultural Sub-Adviser.
(ii) Except as set forth in Section 19(a), Agricultural Sub-Adviser shall pay all expenses incurred by it in connection with providing the Services under this Agreement. Agricultural Sub-Adviser shall not be reimbursed for any costs and expenses relating to the general operation of its business including, but not limited to, travel expenses, administrative expenses including employment expenses, legal fees, insurance of Agricultural Sub-Adviser and its employees, rent, telephone, utilities and other expenses.
20. Audit Review . AFA shall have the absolute right to undertake, at its expense, an audit review of the cost and fees payable hereunder and Agricultural Sub-Advisers compliance with the provisions hereof. Such audit review may be undertaken directly by AFA or by third parties engaged by AFA including accountants, consultants and appraisers. Agricultural Sub-
Adviser shall cooperate fully with AFA or any such third party in connection with such audit review including, without limitation, by providing AFA or any such third party with reasonable access during regular business hours to the premises of Agricultural Sub-Adviser.
21. Changes in Agricultural Sub-Advisers Condition . Agricultural Sub-Adviser shall promptly notify AFA if Agricultural Sub-Adviser reasonably expects any of the events listed below to occur or if any of the events specified below shall occur, Agricultural Sub-Adviser shall give prompt written notice thereof to AFA, but in any case within five (5) calendar days after the occurrence of such event:
(a) If Agricultural Sub-Adviser shall fail to perform its covenants herein contained at the time and in the manner herein provided.
(b) If Agricultural Sub-Adviser shall be declared bankrupt or insolvent by a court of competent jurisdiction, or any order shall be made by a court of competent jurisdiction for the appointment of a receiver, liquidator or trustee of Agricultural Sub-Adviser or of all or substantially all of its property by reason of the foregoing or approving any petition filed against Agricultural Sub-Adviser for its reorganization and such adjudication, order or petition has not been stayed or discharged pending appeal within sixty (60) calendar days of its entry.
(c) If Agricultural Sub-Adviser shall institute proceedings for voluntary bankruptcy or shall file a petition seeking reorganization under the federal bankruptcy laws, or for relief under any law for the relief of debtors, or shall consent to the appointment of a receiver, or shall make a general assignment for the benefit of its creditors, or shall admit in writing its inability to pay its debts generally as they become due.
(d) If any governmental authority, court or self-regulatory authority shall withdraw, suspend or revoke or declare invalid any license, charter, authorization or registration required or necessary for the conduct by Agricultural Sub-Adviser of any material portion of its business and such action has not been stayed or discharged pending appeal within sixty (60) calendar days of its entry
(e) If any event or circumstance shall occur which materially impairs the ability of Agricultural Sub-Adviser to perform its obligations hereunder.
22. Term .
(a) General . This Agreement shall continue in full force and effect for a period of four years commencing with the IPO Date unless sooner terminated (i) as provided in the immediately following sentence in this Section 22 (a) or (ii) pursuant to Sections 22(b) or 22(c). This Agreement may be terminated by either party, with or without cause and without penalty (except for the fees contemplated in Exhibit C ) as of December 31 of a calendar year by providing written notice to the other party on or before June 30 of such calendar year. The parties hereby agree to discuss the renewal of the Agreement two years following the IPO Date and every two years thereafter, but neither party is obligated to renew this agreement.
(b) Termination by AFA . AFA may terminate this Agreement on written notice to Agricultural Sub-Adviser without penalty:
(i) immediately if Agricultural Sub-Adviser fails to offer investment opportunities to AFA for the benefit of the Partnership in accordance with the Allocation Procedure;
(ii) immediately upon the occurrence of any of the events set forth in Sections 21(b), (c), (d) or (e) of this Agreement;
(iii) immediately if any three of the Key Personnel are no longer providing Services under this Agreement and have not been replaced in accordance in Section 12(b) of this Agreement in any six month period of time on behalf of Agricultural Sub-Adviser;
(iv) upon determination by a court of competent jurisdiction that Agricultural Sub-Adviser engaged in actions or omitted to take actions in connection with providing Services that were the result of fraud, gross negligence or willful misconduct; or
(v) if Agricultural Sub-Adviser commits a material violation of this Agreement and, if such violation shall be capable of remedy, Agricultural Sub-Adviser does not remedy such violation within 30 calendar days of written notice by AFA of such violation.
(c) Termination by Agricultural Sub-Adviser . Agricultural Sub-Adviser may terminate this Agreement immediately on written notice to AFA without penalty:
(i) if AFA, the Partnership or the Company commits a material violation of this Agreement and, if such violation shall be capable of remedy, AFA, the Partnership or the Company, as the case may be, does not remedy such violation within 30 calendar days of written notice by Agricultural Sub-Adviser of such violation; for the avoidance of doubt, the prompt payment of the fees and expenses to Agricultural Sub-Adviser in accordance with this Agreement shall constitute a material violation;
(ii) if AFA (or one or more of its Affiliates) no longer is the advisor to the Partnership; or
(iii) if AFA, the Partnership or the Company reallocates all or substantially all of the Partnerships or the Companys assets under management from Agricultural Sub-Adviser to another third party investment advisor.
(d) Compensation Following Termination . From and after the effective date of termination of this Agreement, (i) AFA shall reimburse Agricultural Sub-Adviser for all expenses incurred through the date of termination and (ii) Agricultural Sub-Adviser shall not be entitled to compensation for further services hereunder except as set forth in Exhibit C .
(e) Continued Provision of Services . After termination of this Agreement for any reason, Agricultural Sub-Adviser shall, on written request by AFA, continue to furnish the services to AFA on the same terms for up to an additional 90 calendar days from the date of termination (in which event Agricultural Sub-Adviser shall be compensated as provided in this Agreement) and shall assist with the transfer of the Services to a new sub-adviser or to AFA (or one or more of its Affiliates). In such circumstances, (i) Agricultural Sub-Adviser shall cooperate with the reasonable requests of AFA in order facilitate the transition of the Services and (ii) Agricultural Sub-Adviser shall be compensated for such Services notwithstanding the provisions of Section 22(d) above.
(f) Remedies . The right to terminate this Agreement as provided herein is not exclusive of any rights or remedies that AFA or Agricultural Sub-Adviser may otherwise have at law or in equity, whether for indemnification or otherwise.
23. Non-Solicitation . During the period commencing on the date on which this Agreement is entered into and ending one year following the termination or expiration of this Agreement, no party to this Agreement shall, without the other partys prior written consent, directly or indirectly, solicit or encourage any person who is known to perform services relating to the Partnerships business to leave the employment or other service of such employing party; provided that the foregoing shall not prohibit (a) general solicitations or advertisements of employment (or hiring as a result thereof) not specifically directed at such persons, (b) hiring any person who contacts the hiring party on their own initiative without any solicitation from the hiring or on its behalf or (c) soliciting individuals who are no longer employed by such employing party at that time.
24. Disputes; Governing Law; Jurisdiction .
(a) Disputes. Should any dispute between the parties arise relating to this Agreement (including any dispute related to the existence, validity, interpretation, performance, breach or termination thereof) (a Dispute ), the claimant party shall provide a written notice of the Dispute (a Notice of Dispute ) to the other party, which shall contain a reasonably detailed statement of the nature of the Dispute and the relief requested. Within thirty (30) days of the delivery of the Notice of Dispute, senior executives of each party, each with the authority necessary to settle the Dispute, shall meet at a place agreed by them to attempt, in good faith, to settle the Dispute. Such negotiations shall be without prejudice, for settlement purposes only and shall not be referred to by either party in any judicial or arbitration proceedings. The terms of any agreed upon settlement (whether of the whole or any part of the issues the subject of the Dispute) shall be recorded in writing and signed by both parties. If the negotiations do not result in a written settlement by the end of the thirty (30) day period from the receipt of the Notice of Dispute, the parties shall not be precluded from initiating litigation relating to the Dispute.
(b) Governing Law; Jurisdiction . All Disputes shall be governed by and construed in accordance with the laws of the State of Delaware. The parties hereby agree and consent to be subject to the exclusive jurisdiction of the United States District Court
for the District of Delaware. If jurisdiction is not present in federal court, then the parties hereby agree and consent to the exclusive jurisdiction of the state courts of New Castle County, Delaware. Each party hereby irrevocably waives, and agrees not to assert, to the fullest extent permitted by Law, (a) any objection that it may now or hereafter have to laying venue of any suit, action or proceeding brought in such court, (b) any claim that any suit, action or proceeding brought in such court has been brought in an inconvenient forum, and (c) any defense that it may now or hereafter have based on lack of personal jurisdiction in such forum. Each of the parties hereby consent to and grant any such court jurisdiction over the person of such parties and over the subject matter of any such Dispute and agree that mailing of process or other papers in connection with any such action or proceeding in the manner provided in Section 24 or in such other manner as may be permitted by Law, shall be valid and sufficient service thereof.
25. Miscellaneous .
(a) Notices . Any notice or other communication required or which may be given hereunder shall be in writing and shall be delivered personally, telegraphed or telexed, or sent by certified, registered or express mail, postage prepaid, and shall be deemed given when so delivered personally, telegraphed or telexed, or if mailed, five (5) calendar days after the date of mailing to the following addresses:
To Agricultural Sub-Adviser:
Prudential Mortgage Capital Company, LLC
3560 Lenox Road
Suite 1400
Atlanta, Georgia 30326
Attention: Jess Jarratt
Prudential Mortgage Capital Company, LLC
801 Warrenville Road
Suite 150
Lisle, Illinois 60532
Attention: Christopher Jay
Copies to (which shall not constitute notice):
Prudential Mortgage Capital Company, LLC
100 Mulberry Street
Four Gateway Center - 8th Floor
Newark, New Jersey 07102
Attention: General Counsel
and
Prudential Mortgage Capital Company, LLC
2100 Ross Avenue, Suite 2500
Dallas, Texas 75201
Attention: Law Department
To the Company and AFA:
10 East 53 rd Street
29 th Floor
New York, NY 10022
Copies to (which shall not constitute notice):
Goodwin Procter LLP
Exchange Place
Boston, MA 02109
Attention: Gilbert G. Menna
Either party hereto may from time to time by notice in writing served upon the other as aforesaid designate a different mailing address or a different or additional person to which all such notices or demands thereafter are to be addressed.
(b) Waivers and Amendments . This Agreement may be amended, modified, superseded, cancelled, renewed or extended, and the terms and conditions hereof may be waived only by a written instrument signed by AFA and Agricultural Sub-Adviser or in the case of a waiver the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any right, power or privilege hereunder, nor any single or partial exercise of any right, power or privilege hereunder, preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder.
(c) Cumulative Remedies . The rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies which any party may otherwise have at law or in equity. The rights and remedies of any party arising out of or otherwise in respect of any inaccuracy in or breach of any representation, warranty, covenant or agreement contained in this Agreement shall in no way be limited by the fact that the act, omission, occurrence or other state of facts upon which any claim of any such inaccuracy or breach is based may also be the subject matter of any other representation, warranty, covenant or agreement contained in this Agreement (or in any other agreement between the parties) as to which there is no inaccuracy or breach.
(d) Binding Effect . This Agreement and the rights, covenants, conditions and obligations of the respective parties hereto and any instrument or agreement executed pursuant hereto shall be binding upon the parties and be binding upon the successors, assignees and legal representatives of the respective parties hereto. Any Person that is not a signatory to this Agreement but is nevertheless conferred any rights or benefits hereunder ( e.g ., Persons who are entitled to indemnification hereunder) shall be entitled to such rights and benefits as if such Person were a signatory hereto, and the rights and
benefits of such Person hereunder shall not be impaired without such Persons written consent.
(e) Further Assurance . Each of the parties hereto shall execute such further documents and other papers and perform such further acts as may be reasonably required or desirable to carry out the provisions hereof.
(f) Publicity . No publicity release or announcement, or other public communication concerning AFA, the Company, the Partnership, their respective Affiliates, this Agreement or the transactions contemplated herein shall be issued by Agricultural Sub-Adviser, including without limitation in connection with promotional schemes or advertisements, without the prior written consent of AFA provided; however, such restrictions shall not apply to any disclosure required by regulatory authorities, applicable law or the rules of any securities exchange which may be applicable. No publicity release or announcement, or other public communication concerning Agricultural Sub-Adviser or its Affiliates, this Agreement or the transactions contemplated herein shall be issued by AFA, including without limitation in connection with promotional schemes or advertisements, without the prior written consent of Agricultural Sub-Adviser provided; however, such restrictions shall not apply to any disclosure required by regulatory authorities, applicable law or the rules of any securities exchange which may be applicable.
(g) Incorporation of Amendments to Applicable Law . Any references to a law or to any regulations or administrative pronouncements thereunder shall be deemed to include a reference to any amendments thereof and any successor provisions thereto.
(h) Assignment . Neither this Agreement nor any rights or obligations hereunder may be assigned by either party without the prior written consent of AFA or Agricultural Sub-Adviser as appropriate, provided, however, that subject to Section 12(b) services to be performed hereunder may be performed by Affiliates of Agricultural Sub-Adviser or the employees of such Affiliates and AFA may assign its rights and obligations under this Agreement to one or more of its Affiliates with the prior written consent of the Agricultural Sub-Adviser which may not be unreasonably withheld.
(i) Counterparts . This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument
(j) Section Headings . The section headings of this Agreement are for convenience of reference only and shall not be deemed to alter or affect any provision hereof.
(k) Survival . The provisions of Sections 5 and 19 (solely with respect to any items accrued prior to termination of this Agreement) and Sections 8, 9, 10 (solely for the period set forth therein), 18, 22(d), 22(e), 23 (solely for the period set forth therein), 24 and 25 hereof shall survive the termination of the Agreement.
(l) Severability . Should one or more provisions of this Agreement be held by any court to be invalid, void or unenforceable, the remaining provisions shall nevertheless continue in full force.
(m) Independent Contractor . In the performance of this Agreement, Agricultural Sub-Adviser and its employees and agents shall, for all purposes herein, be deemed to be acting as independent contractors and not as officers, or employees of AFA.
(n) Not a Partnership or Joint Venture . Agricultural Sub-Adviser, on the one hand, and AFA, the Partnership and the Company, on the other hand, are not partners or joint venturers with each other, and nothing herein shall be construed so as to make them such partners or joint venturers or impose any liability as such on either of them.
(o) No Fiduciary Relationship . The parties agree that Agricultural Sub-Adviser is not a fiduciary to AFA, the Partnership or its partners, or the Company or its stockholders by virtue of this Agreement or by Agricultural Sub-Adviser providing Services pursuant hereto since, among other reasons, Agricultural Sub-Adviser has no decision-making authority with respect to whether the Partnership acquires or sells investments. The foregoing language shall not alter or diminish Agricultural Sub-Advisers contractual obligation to use commercially reasonable efforts to provide the Services hereunder.
(p) Entire Agreement . This Agreement (including Schedules attached hereto and incorporated herein by reference) embodies the entire understanding of the parties, supersedes any prior agreements or understandings with respect to the subject matter hereof, and cannot be altered, amended, supplemented, or abridged, or any provisions waived except by written consent of the parties.
(q) Non-Exclusive Activities . AFA acknowledges that Agricultural Sub-Adviser may earn fees and provide investment advisory and asset management services to a variety of corporate, government, quasi-government and other clients, including with its affiliated insurance companies. This Agreement shall not limit or restrict the right of any director, officer, member, partner, employee, or stockholder of Agricultural Sub-Adviser or its Affiliates from engaging in or earning fees from any other business or to render services of any kind to any other Person and earn fees for rendering such services. AFA acknowledges and agrees that advice given or recommendations made by Agricultural Sub-Adviser with respect to investments for the Partnership may differ from that given or made by Agricultural Sub-Adviser with respect to its other clients, or by Agricultural Sub-Adviser with respect to its Affiliates, even though the investment objectives of such parties may be the same or similar. If one of the investments constitutes a co-investment, it is understood that Agricultural Sub-Adviser may also be earning fees and rendering services similar to those services being rendered under this Agreement to those clients co-investing with the Partnership in the investment.
(r) Effective Date . This Agreement shall be effective as of the IPO Date.
(s) Material Non-Public Information . The Agricultural Sub-Adviser expects to come into possession of material non-public information related to the Partnership and the Company ( MNPI ) in connection with providing the Services. The Agricultural Sub-Adviser agrees to adhere to the Agricultural Sub-Advisers policies and procedures regarding MNPI. If requested by AFA, the Agricultural Sub-Adviser agrees to furnish AFA with written copies of its policies and procedures regarding MNPI. The Agricultural Sub-Adviser acknowledges its awareness that the United States securities laws restrict any person who has MNPI about a company from purchasing or selling any securities of such company while in possession of such information.
26. Miscellaneous .
Definitions . The terms used in this Agreement and not defined have the meanings set forth below:
Acquisition Contract (s) means any contract or contracts for the acquisition of property to be acquired pursuant to the provisions of this Agreement.
Affiliate means, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with such Person. For purposes of this definition, control, when used with respect to any Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms controlling and controlled have meanings correlative to the foregoing.
Asset Owning Subsidiary or Asset Owning Subsidiaries means any Subsidiary or Subsidiaries of the Partnership contracting for the acquisition of a property or owning any property as permitted under the provisions of the Agreement, provided however, in the instances where the Partnership is the record title holder to any acquired property, such term shall mean the Partnership.
Business Day means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day of which banking institutions in New York City are authorized or required by law, regulation or executive order to close.
Person means a natural person, corporation, partnership (whether general or limited), limited liability company, trust, estate, unincorporated organization, association, custodian, nominee or any other individual or entity in its own or any representative capacity.
Subsidiary or Subsidiaries means with respect to any Person(s), and corporation(s), partnership(s), limited liability company or companies or other entity or entities of which a majority of (i) the voting power of the voting equity securities or (ii) the outstanding equity interests is owned, directly or indirectly, by such Person(s).
27. Guarantee . The Company and the Partnership will in all respects guarantee the due and proper performance of the obligations of AFA under this Agreement, which guarantee shall extend to include any renewal of or amendment to this Agreement. If AFA fails to perform all or any of its obligations, duties, undertakings and covenants (collectively, the Guaranteed
Obligations ) under this Agreement (unless relieved from the performance of any part of this Agreement by statute, by the decision of a court or tribunal of competent jurisdiction or by waiver of Agricultural Sub-Adviser), upon written notice from Agricultural Sub-Adviser, the Company and the Partnership shall perform or cause to be performed such Guaranteed Obligations. This guarantee is a guarantee of performance and payment. The termination of this Agreement shall constitute a termination of this guarantee. This guarantee will be applicable to and binding upon the successors and assigns of the Company and the Partnership.
Executed as of June 18, 2015.
[Signatures on next page.]
IN WITNESS WHEREOF, the parties have caused this Sub-Advisory Agreement to be executed and to be effective as of the date first written above.
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American Farmland Advisor LLC (AFA) |
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/s/ Thomas S. T. Gimbel |
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Name: Thomas S.T. Gimbel |
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Title: Executive Managing Director |
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Date: 6/19/15 |
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Prudential Mortgage Capital Company, LLC (Agricultural Sub-Adviser) |
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/s/ Jess Jarratt |
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Name: Jess Jarratt |
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Title: Managing Director |
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Date: 6/23/15 |
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American Farmland Company (Company), solely for the purposes of the Sections set forth in the opening paragraph of this Agreement |
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/s/ Thomas S. T. Gimbel |
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Name: Thomas S. T. Gimbel |
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Title: Vice President and Director |
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Date: 6/19/15 |
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American Farmland Company, L.P. (Partnership), solely for the purposes of the Sections set forth in the opening paragraph of this Agreement |
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/s/ Thomas S. T. Gimbel |
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Name: Thomas S. T. Gimbel |
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Title: Vice President of Co-General Partner |
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Date:6/19/15 |
Exhibit A
Investment Guidelines
The Company and the Partnership have provided the Agricultural Sub-Adviser with the following investment guidelines governing its services under this Agreement (as in effect from time to time, the Investment Guidelines ).
1. The Partnership desires to acquire properties diversified by crop type within the below Tactical Ranges:
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Tactical |
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Property Type |
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Range |
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Commodity Row Crops |
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10 - 30% |
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Vegetable Row Crops |
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15 - 35% |
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Mature Permanent Crops |
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35 - 55% |
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Permanent Crop Development |
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10 - 30% |
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Allocations are generally expected to remain within the ranges specified to maintain diversification of the portfolio. Permanent Crop Development properties may not generate lease income for a number of years. Due to this consideration, the Tactical Range for Permanent Crop Development properties may be more variable. Furthermore, acquisition opportunities may arise which, due to relatively larger size or particular characteristics, deemed suitable by management will take property type weightings outside of the Tactical Ranges shown above.
2. The Partnership generally desires to acquire properties wherein the fair market value of any one property (as measured at the time of making such investment) would represent less than 35% of the Partnerships Gross Asset Value (as measured at the time of making such investment and including such new investment). In the event that two or more assets or properties are acquired simultaneously as a portfolio purchase or otherwise (including, without limitation, the acquisition of an entity, whether by merger, consolidation, stock purchase or otherwise, that holds two or more assets or properties), the foregoing restriction shall apply separately to each asset or property so acquired. Furthermore, acquisition opportunities may arise which, due to relatively larger size or particular characteristics (such as planted with a variety of crop types), deemed suitable by management will take property type weightings outside the above-stated percentage allocation.
3. The Partnership desires to acquire properties so as to maintain geographic diversification across the broad USDA regions, and within each USDA region, across varied microclimatic regions, to the extent applicable. The USDA breaks the country into 10 broad regions. Each region consists of multiple states, and many are large enough to include a number of microclimatic regions suitable for multiple crop types. AFC seeks farms only in the prime growing and weather regions. Further, certain regions lend themselves to certain crop types. As an example, the majority of commodity row crops are grown in the Midwest, Plains and Delta
regions whereas the majority of permanent crops and specialty/vegetable row crops are grown in the Pacific, Southeast and parts of the Mountain regions.
4. The Partnership generally desires to acquire properties so as to limit investments in real property located outside the United States to 20% of its Gross Asset Value as measured at the time of such investment.
5. The Partnership does not desire to acquire properties or investments in livestock farms or dairy farms, excluding investments that are incidental to an acquisition of one or more other assets.
Annually, the Board of the Company will review the Investment Guidelines, and, subject to approval of the Board, the Company and Partnership will implement any changes that Board believes necessary or appropriate. The Partnership may make temporary deviations from the Investment Guidelines without the need for Board consent if the Company determines it to be in the best interest of the Partnership.
As it relates to this Agreement, temporary modifications to the Investment Guidelines may be presented from time to time by AFA in writing to Agricultural Sub-Adviser that will be reflective of AFA, the Partnership and the Companys focus at such time.
Exhibit B
Form of authorization to direct Agricultural Sub-Adviser to proceed to closing
[ Date ]
Prudential Mortgage Capital Company, LLC
801 Warrenville Road, Suite 150
Lisle, Illinois 60532
Attention: Christopher Jay
RECOMMENDATION
It is recommended that XYZ Farm (AFA XX), presented by Prudential Mortgage Capital Company, LLC (Sub-adviser), be acquired by American Farmland Company, L.P. (AFC), or an entity as directed by AFC, according to the terms as outlined in this Proposal, and subject to final due diligence and legal documentation.
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Recommended: |
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Authorized: |
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AFC Acquisition Committee |
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Exhibit C
Fees Payable to Agricultural Sub-Adviser
By the Partnership
a) Acquisition Fees
Two percent (2%) acquisition fee based on the gross purchase price found in the purchase and sale agreement or closing statement in respect of each property acquired by the Partnership or its subsidiary and two percent (2%) of the appraised market value of each property contributed to the Partnership or its subsidiary.
b) Disposition Fees
One percent (1%) disposition fee based on the gross sales price found in the purchase and sale agreement or closing statement in respect of each property sold by the Partnership or its subsidiary if CAPS is not the broker or if no broker is used, and zero (0%), meaning no disposition fee payable, if CAPS is the selling broker.
By AFA
a) Quarterly Management Fee
100 basis points per annum payable in arrears based on the Gross Asset Value (defined below) of the Partnership as of each calendar quarter end. If properties are purchased or sold throughout the quarter other than on the first day of a calendar quarter, the additional acquisition or disposition, as the case may be, will be pro-rated to the day for the relevant time period for purposes of calculating the Management Fee due to Agricultural Sub-Adviser. The Management Fee shall be paid to Agricultural Sub-Adviser within 45 days of each calendar quarter end.
Gross Asset Value means the most recent appraised value of the property, or in the absence of an appraisal, the cost of the real estate assets held, including capital expenditures or a mutually agreed upon value. For avoidance of doubt, Gross Asset Value includes, inter alia, land, land improvements, buildings, permanent crops/vines/trees, and furniture, fixtures and equipment, is not decreased by any debt obligations of the Partnership and excludes cash and cash equivalents owned by the Partnership.
b) IPO Capital Compensation
If t he outcome of the Capital Raised in the IPO, as defined below, is less in total than $90 million gross of expenses, Make-whole Payments are due to the Agricultural Sub-Adviser calculated as follows:
(1) [$90 million * 2%] less [Capital Raised * 2%] times [Purchase Prices of Acquisitions, net of indebtedness /Capital Raised]. Amounts are payable when acquisitions are made and continue until all Capital Raised is used for Acquisitions, plus (2) [$90 million * 1%] less [Capital Raised
* 1%] times [Purchase Prices of Acquisitions, net of indebtedness/Capital Raised]. The amounts due under this Section (b)(2) are payable annually until such date they are no longer due as per the applicable definitions.
Capital Raised is defined as capital contributions made to the Partnership received either in cash or the fair market value of any properties contributed, net of indebtedness, during the period of time commencing October 31, 2014 and ending 6 months after the IPO Date.
c) Legacy Performance Fees
All performance fees due under the Original Agreement ( Legacy Performance Fees ) shall be considered earned and payable to the Agricultural Sub-Adviser in equal amounts in each year of the initial term of the Agreement over the next four years. Payments will be made within the last 10 business days of each calendar year starting in 2015. Upon termination of the Agreement by either party, for cause or otherwise, any unpaid Legacy Performance Fees are due within 30 days of termination of the Agreement. Interest shall accrue at the simple rate of interest of 5% on unpaid balances beginning at the commencement of this Agreement.
Agricultural Sub-Adviser will provide Partnership a written statement that documents the calculation of the Legacy Performance. Such statement will be delivered 30 days following the IPO Date.
d) Termination Fees
In all instances where the Agreement is terminated, except if the Agricultural Sub-Adviser is terminated for cause, AFA shall pay the Agricultural Sub-Adviser:
i) a termination fee based on the present value of the Agricultural Sub-Advisers Quarterly Management Fees (as set forth in Section (a) above) from the termination date of the Agreement to the end of the term of the Agreement, including any extensions to the Agreement. Future cash flows will be based on the Gross Asset Values at the date of termination and calculated on a prorated, daily basis. The Discount Rate to be used to calculate the termination fee is 5%.
ii) fees as set forth in Section (a) above on any transactions that the Partnership closes after the termination date that were sourced by the Agricultural Sub-Adviser. Such fees will be paid upon the closing of those transactions.
For the avoidance of doubt, should the Agricultural Sub-Adviser terminate without cause, the Agricultural Sub-Adviser will not be entitled to such termination fee.
If the parties are unable to agree on the Agricultural Sub-Advisers Quarterly Management Fees which are based on the Gross Asset Value, the parties will within thirty (30) days engage an independent, third party appraisal firm to calculate such amounts within sixty (60) days from its engagement, and the costs of such appraisal firm shall be paid by AFA. The determination of the third party independent appraisal firm will be binding on the parties. Agricultural Sub-Adviser shall forthwith upon such termination but in no event later than ten (10) calendar days following such termination:
(i) pay over to the Partnership all money collected and held for the account of the Partnership pursuant to this Agreement;
(ii) deliver to AFA a full accounting, including a statement showing all payments collected by it and a statement of all money held by it. covering the period following the date of the last accounting furnished to the Partnership; and
(iii) deliver to AFA all property and documents of the Company and the Partnership then in the custody of Agricultural Sub-Adviser.
Exhibit D
Key Personnel
Jess Jarratt
Matt Ciaschini
Christopher Jay
Ed Lassiter
Jon Mark Erstine
Steve Fessler
Exhibit E
Allocation Procedure
PRUDENTIAL AGRICULTURAL INVESTMENTS
INVESTMENT ALLOCATION POLICY
As of June 23, 2015
I. Objectives
This Investment Allocation Policy (this Policy ) of Prudential Agricultural Investments ( PAI ) is established to:
A. Assure multiple entities of fair and reasonable access to agricultural real property investments sourced by PAI ( Investments ); and
B. Provide a clear process for allocating Investments that meet the investment criteria of multiple investment accounts and funds managed by PAI.
II. Eligible Accounts
PAI operates an agricultural real estate advisory business involving multiple accounts (each, an Account ) for which it manages Investments. A list of each Account that participates in this Policy (each, an Eligible Account ) shall be maintained by PAI. Accounts may be become Eligible Accounts or removed as Eligible Accounts by PAIs Allocation Committee (the Committee ), which is comprised of the President of PAI; Chief Investment Officer of PAI Equity, a division of PAI ( CIO ); and Chief Financial Officer of PAI. It is expected that participation in the allocation of Investments pursuant to this Policy will be limited to Accounts that have entered into written agreements granting PAI discretion to invest the Accounts funds or instructing PAI to generate investment opportunities for the Accounts review and potential acceptance. Accounts that do not meet this criteria will only be offered investment opportunities that have not been placed with an Eligible Account in accordance with the terms of this Policy.
III. Allocation Process
Investments shall be allocated in the following manner:
A. Investment Guidelines / Investment Appetite
The CIO and each Eligible Account have established an investment strategy and investment guidelines for that Eligible Account (the Investment Guidelines ). The CIO, along with representatives of an Eligible Account, will typically establish an Eligible Accounts investment appetite for each calendar year at the beginning of such year, taking into consideration funds anticipated to be available to such Eligible Account, as well as the Eligible Accounts investment needs. Depending on a variety of conditions, the CIO, along with representatives of an Eligible Account, may need to update such Eligible Accounts Investment Guidelines and/or its investment appetite from time to time during the course of a year. If an Eligible Account has no investment appetite, it will not be included in a Queue (defined below).
B. Queues
PAI has established the following allocation queues (each, a Queue ): a Row Crop Queue; a Permanent Mature Crop Queue; and a Permanent Development Crop Queue. PAI has the right to amend or change the Queues. Each Queue is defined as follows:
· Row Crop Queue: Annual row crops are mostly planted and harvested in one calendar year. This Queue includes commodity row crops including, but not limited to: wheat, corn, soybeans, rice, and cotton. This Queue also includes vegetable/specialty row crops including, but not limited to: potatoes, strawberries, lettuce, peppers, and cabbage. Alfalfa, artichokes, and sugar cane would be included in the Row Crop Queue as well.
· Permanent Mature Crop Queue: Permanent crops are long lived trees or vines that produce crops on an annual basis. This Queue includes mature property that is already producing commodities in commercial quantities. Crops include, but are not limited to: almonds, pistachios, walnuts, pecans, citrus, avocados, apples, cherries, pears, stone fruit, blueberries, and raspberries.
· Permanent Development Crop Queue: Permanent crops are long lived trees or vines that produce crops on an annual basis. This Queue includes development land that is intended to be planted to new trees/vines or planted land that is not yet producing in commercial quantities. Crops include, but are not limited to: almonds, pistachios, walnuts, pecans, citrus, avocados, apples, cherries, pears, stone fruit, blueberries, and raspberries.
Mixed use properties will be placed in the Queue that represents the largest portion of value. For example, a property has both row crops and permanent mature crops, with 60% of the value of the property being row crops, would be placed in the Row Crop Queue.
The CIO, based on up-to-date Investment Guidelines of participants, shall identify one or more Queues within which each Eligible Account will seek an allocation of Investments.
C. Allocations
1. The allocation of Investments takes place when an Investment has been sourced by PAIs Senior Asset Managers ( SAMs ) who have provided the CIO with a written Initial Property Review. In order to complete an Initial Property Review, the SAMs or member of their staff will need to have done the following:
a) Visited the property;
b) Spoken to the seller about the price and started soft negotiations; and
c) Gather enough information in order to complete the Initial Property Review; this will include without limitation, transaction size, location, commodity type, return ranges, water and soil quality, and any additional deal constraints, if any.
2. The allocation of Investments would generally be determined through a rotational process, with the applicable Investment generally being first offered to the Eligible Account that is in the highest position in the relevant Queue relative to the other Eligible Accounts in that Queue (i.e., to the Eligible Account in such Queue for which the longest period of time has passed since it
received an allocation from that Queue) (the First Account ). As noted hereafter in Section IV(B), a new entrant to a Queue is initially placed last in such Queue.
3. As Investments are allocated, Eligible Accounts that receive an allocation will be moved to the end of the relevant Queue, thereby enhancing the relative position of Eligible Accounts that have not received such allocation.
4. Subject to Section IV below, Investments will be allocated as follows:
a) Each decision to allocate an Investment to an Eligible Account shall be approved by at least two members of the Committee.
b) When an Investment is ready to be allocated, the CIO will evaluate whether the Investment meets the Investment Guidelines of the First Account. If the Committee determines that the Investment meets the Investment Guidelines of the First Account, the Investment will be allocated to the First Account. If the First Account is a non-discretionary account, the allocation will be previewed by the CIO or his or her designee with such First Account to gauge its interest in receiving the allocation. If such First Account notifies PAI within three business days (as may reasonably be extended by PAI) following the preview that it does not wish to receive the allocation, such First Account will maintain its position in the relevant Queue. If such First Account accepts the allocation or does not reject the allocation within the three prescribed business days referred to above (as may reasonably be extended by PAI), such First Account would then move to the end of the relevant Queue.
c) If the Committee determines the Investment does not meet the Investment Guidelines of the First Account (or the allocation is rejected by the First Account), the CIO will evaluate whether the Investment meets the Investment Guidelines of the Eligible Account that is in the next highest position in the Queue. If the Committee determines that the Investment meets the Investment Guidelines of the next Eligible Account, the Investment will be allocated to that Eligible Account, which will then move to the end of the relevant Queue. This process would continue along the Queue, until the Committee allocates the Investment to an Eligible Account. Notwithstanding the foregoing, if an Eligible Account is a non-discretionary account, the procedures set forth in (b) above will be followed to preview the allocation with such Eligible Account and if such Eligible Account timely rejects such allocation, it will maintain its position in the relevant Queue.
d) If an Eligible Account is allocated an Investment and such Eligible Account turns it down (other than for reasons stated in Section IV.A.4), such Eligible Account shall still be deemed to have received an allocation for purposes of adjusting its position in the relevant Queue and the Investment would then be allocated to the next Eligible Account in the relevant Queue; provided, however, the foregoing shall not apply to where an Eligible Account is a non-discretionary account and such Eligible Account timely rejects such allocation as described in (b) above, where it will maintain its position in the relevant Queue
e) If an Investment is presented for allocation and no Eligible Account in the relevant Queue has Investment Guidelines that meet the Investment or if no Eligible Account accepts the Investment, the Investment may be made available, in the sole discretion of PAI, to an Account that is not an Eligible Account or to an Eligible Account that is not in the relevant Queue.
IV. Other Considerations
A. Special Cases / Exceptions:
1. Broken Deals: If an allocation is made to and accepted by an Eligible Account, and the Investment fails to close for any reason (a Broken Deal ), the Eligible Account shall still be deemed to have received an allocation for purposes of adjusting its position in the relevant Queue.
2. Reprised Deals: If an Investment previously considered a Broken Deal resumes, the Investment shall remain with the original Eligible Account regardless of that Eligible Accounts position in the relevant Queue provided 180 days or less have passed since the date the Investment became a Broken Deal. If more than 180 days have passed since the Investment became a Broken Deal, the resumed Investment will be allocated in accordance with this Policy for new Investments.
3. Other Exceptions: Notwithstanding any other provision of this Policy, PAI shall strive to avoid allocations that could create actual or potential conflicts of interest, and shall take such steps, including without limitation the allocation of Investments in contravention of the other terms of this Policy, as it deems necessary and appropriate to avoid or mitigate such situations. Examples of such situations may include, without limitation, the following types of Investments:
a) If an Investment is of a similar property type and within close proximity of an existing Accounts owned property, the Investment is allocated to that Account regardless of that Accounts position in the relevant Queue or whether the Account is an Eligible Account.
b) Investments that are tied by agreement to an Accounts existing property through contract (e.g. an option to purchase land) will be allocated to that Account regardless of that Accounts position in the relevant Queue or whether the Account is an Eligible Account.
c) Such other Investments for which such treatment may be deemed necessary and appropriate by the Committee.
4. Reallocations: Once an Investment has been allocated to an Eligible Account (and, where necessary, approved by the Eligible Account), the allocation may be changed by PAI to another Eligible Account if: (1) the Investment is determined to be prohibited by law (including, without limitation, under ERISA), (2) the Investment is determined to raise issues with the income or asset tests of the real estate investment trust ( REIT ) rules promulgated under the Internal Revenue Code for an Account that is a REIT (or a partnership with one or more REIT partners), (3) due diligence results indicate that the Investment in fact fails to meet the Eligible Accounts Investment Guidelines, or (4) appropriate documentation of the Investment cannot be made as required for the Eligible Account (e.g., because the transaction counterparty is unwilling to make appropriate ERISA representations). In such an event, the Eligible Account that had received the original allocation and will no longer make the Investment will be restored to the same position it occupied in the Queue before the allocation and the Eligible Account to which the Investment has been allocated will move to the end of the relevant Queue.
B. New Accounts: Any Accounts that become Eligible Accounts under this Policy shall be placed initially in the last position in the relevant Queue(s). Any Eligible Account that is added to a Queue, either by having revised Investment Guidelines or change in investment appetite shall be placed initially in the last position in the relevant Queue(s).
V. Documentation / Review
PAI shall establish procedures to create and maintain documentation evidencing the allocations that are made under this Policy, and to establish a process by which allocations shall be regularly reviewed by PAI in an effort to assess the effectiveness of this Policy in providing a fair and reasonable allocation of available Investments for all Eligible Accounts.
VI. Interpretation / Amendment
PAI shall retain full authority to interpret and implement this Policy, in its sole discretion. This Policy only applies to agricultural real property investments sourced by PAI and does not apply to (a) investments in real property sectors other than agriculture, (b) investments that are not in real property (e.g., debt or securities investments) or (c) investments not sourced by PAI. PAI shall have the right to amend this Policy in its sole discretion, and shall provide notice and a copy of such amendment to all Eligible Accounts no later than five business days prior to the effective date of any such amendment.
VII. Limitations / Policy Changes
Nothing contained herein shall serve to create a legal claim by any Account or PAI client to receive an allocation of a specific Investment, nor shall it prevent PAI from entering into new agreements with new Accounts, nor shall it prevent PAI from entering into any other agreement with any party for any purpose.
Exhibit F
Client Sourced Transaction Procedure
AFA, the Partnership and the Company, together with Agricultural Sub-Advisor, the Parties are all party to the Allocation Procedure. Set forth below are circumstances whereby AFA, the Partnership or the Company, may surface an acquisition opportunity that would by-pass the Allocation Procedure and be allocated directly to AFA for the benefit of the Partnership. Notwithstanding the foregoing, in order to be fair to all Parties, Agricultural Sub-Adviser shall have the sole authority to implement the Allocation Procedure and shall have authority to reasonably interpret the procedures set forth below.
1. Acquisition opportunities that no client of Agricultural Sub-Adviser (other than the Partnership or the Company) could invest in as a result of a unique transaction structure required by the seller. For example, where the consideration to be paid for the property is stock of the Company or interests in the Partnership.
2. Acquisition opportunities that are sourced through proprietary relationships of AFA, the Partnership or the Company. Proprietary relationships will be reviewed by the Parties from time-to-time to determine whether the relationship is still proprietary.
3. Acquisition opportunities that are sourced through reverse inquiry, where Agricultural Sub-Adviser (a) is not aware of the transaction and (b) would not have otherwise become aware of the opportunity. This may include a broker sourced transaction, if Agricultural Sub-Adviser, in its sole discretion, concludes that the proposed transaction would not have come to its attention otherwise.
4. Acquisition opportunities that are sourced by AFA, the Partnership or the Company in a geographic region or area where Agricultural Sub-Adviser is not actively sourcing acquisitions and from a source that Agricultural Sub-Adviser would not have otherwise seen.
The Parties agree to review this Client Sourced Transaction Procedure periodically, but not less often than every six months.
To the extent an acquisition opportunity is sourced by AFA, the Partnership or the Company and does not fit within one of the specified categories described above, such acquisition opportunity will be reviewed by Agricultural Sub-Adviser and, if approved by Agricultural Sub-Adviser, become part of the Allocation Procedure (and therefore may be allocated to a client other than AFA for the benefit of the Partnership).
Exhibit 10.9
TRANSITIONAL SERVICES AGREEMENT
This Transitional Services Agreement (the Agreement ) is entered into as of , 2015, by and between Optima Fund Management LLC, a Delaware limited liability company (the Provider ), American Farmland Company, a Maryland corporation ( AFC ) and American Farmland Company L.P., a Delaware limited partnership ( AFCLP and, together with AFC, the Recipients ).
WHEREAS, AFC intends to conduct an initial public offering (the IPO ) of shares of its common stock, par value $0.01 per share;
WHEREAS, in connection with and conditioned upon the completion of the IPO, AFC desires to engage in a transaction pursuant to which AFC will complete an internalization of its management structure (the Internalization );
WHEREAS, AFC seeks an orderly transition of the operations of AFC following the Internalization;
WHEREAS, in connection with the Internalization, Provider has agreed to provide to Recipients certain transitional services, as further described herein;
NOW THEREFORE, in consideration of the mutual agreements and covenants herein contained and intending to be legally bound hereby, the parties hereto hereby agree as follows:
1. Services to be Performed .
(a) Provider agrees to perform, upon Recipients request, the transitional services set forth on Exhibit A hereto (the Services ), on the terms and conditions hereof. The term during which Services are being performed shall begin on the date when the Internalization is consummated (the Closing Date ) and end on the first anniversary thereof (the Transition Period ), subject to the Recipients right to renew (in whole or in part) for successive one-year terms, as set forth below. To the extent that Services of a particular individual are requested by AFC, Provider agrees to use commercially reasonable efforts to make such individual available to provide such services, but that under no circumstances shall Provider be obligated to make such individual available if such individual is no longer an employee of Provider or its affiliates. Additionally, in no case will Provider be required to provide any services that require personnel other than those then-currently employed by Provider or its affiliates.
(b) Provider hereby acknowledges and agrees that (i) Recipients determination to require Provider to provide some or all of the Services shall be made by Recipients in their sole discretion, and (ii) Recipients may terminate any request for Services upon five (5) business days notice to Provider, and Provider shall terminate the performance of any such Services upon Recipients request becoming effective. Recipients shall have no obligation to use any of the Services. Upon effectiveness of any such termination, Recipients shall have no further payment obligations with respect to any terminated Service(s) other than an obligation to pay for third-party expenses incurred in connection with Services rendered before such notice is effective (including any expenses related to termination fees or minimum payment
requirements to such third party providers previously approved by Recipients pursuant to Section 3(a) below), and Provider shall have no obligation to resume performance of any terminated Service(s) unless Provider and Recipients agree otherwise.
(c) The Transition Period with respect to any Services may be extended for successive one (1) year terms upon the written notice of Recipients to Provider at least thirty (30) days in advance of the expiration of the Transition Period, provided, however , such extension must be approved by a majority of the members of AFCs board of directors who are not affiliated with Provider.
2. Standard of Care . Provider represents, warrants and agrees that the Services shall be provided in good faith, in accordance with law and in a manner generally consistent in scope and quality with the historical provision of the Services and with the same standard of care as historically provided to AFC and AFCLP prior to the Closing Date. Provider agrees to assign sufficient resources and qualified personnel as are reasonably required to perform the Services in accordance with the standards set forth in the preceding sentence and in accordance with past practices.
3. Expenses and Payment .
(a) Each Service shall be provided by Provider to the Recipients at Providers cost for such services. Any third-party expenses incurred by Provider in rendering Services hereunder and approved by Recipients in writing in connection with the provision of such Services shall be reimbursable by Recipients at Providers cost for such services. Provider shall use commercially reasonable efforts to bill any such third party expenses directly to the Recipients, and, in any event, shall provide Recipients with copies of any receipts, bills or other documentation evidencing such third party expenses.
(b) Provider shall submit monthly invoices to the Recipients for any reimbursable third-party expenses incurred for Services rendered hereunder and not billed directly to Recipients, which invoices shall be payable within thirty (30) days of Recipients receipt of such invoices.
4. Relationship of Parties . Provider is an independent contractor, and neither Provider nor its employees or representatives will be deemed to be employees or representatives of the Recipients for any purpose or under any circumstances. No partnership, joint venture, alliance, fiduciary, agency or other relationship, except that of an independent contractor, is created hereby, either expressly or by implication.
5. Use of Information, Confidentiality . Each party hereby covenants and agrees that neither it nor any of its affiliates will, directly or indirectly, disclose or furnish to any Person, any proprietary information of, or confidential information concerning, the other party or any of its affiliates; provided , however , that this covenant of non-disclosure shall not apply to information (i) which is, or at any time becomes, available in the public domain (other than as a result of disclosure by the recipient party or any of its affiliates), (ii) which has been lawfully acquired by the recipient party from a third party not under a confidentiality obligation with respect to such information to the other party or its affiliates, (iii) which is required to be disclosed by law or
court or administrative court ( provided that the recipient party give the other party notice of such required disclosure and a reasonable opportunity to take steps to maintain the confidentiality thereof), or (iv) which the other party expressly authorizes the recipient party to disclose in writing prior to such disclosure. Upon termination of this Agreement, each party will return to the other party (or certify that it has destroyed) all copies of such confidential information, including, but not limited to, financial information, customer lists, business and corporate records, worksheets, test reports, tax returns, lists, memoranda, and other documents prepared by or made available in connection with this Agreement. This provision shall survive the termination of this Agreement.
6. Default; Termination . This Agreement may be terminated as follows:
(a) By mutual written consent of the parties to this Agreement;
(b) By Provider by written notice to AFC and AFCLP if (i) either AFC or AFCLP is in breach of any material provision of this Agreement and such breach shall not have been cured within twenty (20) business days of receipt by AFC and AFCLP of written notice thereof from Provider, and (ii) Provider is not, on the date of termination, in material breach of any provisions of this Agreement;
(c) By Provider, in its sole discretion, upon six (6) months written notice to AFC and AFCLP;
(d) By Recipients by written notice to Provider if (i) Provider is in breach of any material provision of this Agreement and such breach shall not have been cured within twenty (20) business days of receipt by Provider of written notice thereof from Recipients, and (ii) Recipients are not, on the date of termination, in material breach of any provisions of this Agreement;
(e) By Recipients, in their sole discretion, upon thirty (30) days written notice to Provider; or
(f) Upon expiration of the Transition Period.
7. Compliance with Laws . Each party will, with respect to its obligations and performance hereunder, comply with all applicable requirements of federal, state, local and foreign laws, rules and regulations.
8. Indemnification . Provider shall indemnify, defend and hold harmless the Recipients, their affiliates and its representatives (collectively, the Recipient Indemnified Parties ) from and against any and all Losses of the Recipient Indemnified Parties relating to, arising out of or resulting from the provision of the Services to the Recipients pursuant to this Agreement in connection with the provision of, or failure to provide, any Services to the Recipients as required under this Agreement. Providers maximum indemnification obligation hereunder shall be limited to the greater of: (i) the actual aggregate amount of compensation paid by the Recipients to the Provider hereunder, or (ii) the Companys incremental cost of obtaining the Service from a third party; provided, however, that none of the foregoing shall limit any liability arising from gross negligence, fraud, bad faith or intentional misconduct of Provider. As
used herein, Losses means all damages, losses, expenses, costs, taxes, diminution in value, charges, penalties, fees and liabilities (including reasonable attorneys fees and costs of investigation and collection), but excluding all consequential damages, punitive and exemplary damages or special damages.
9. Miscellaneous .
(a) Governing Law . This Agreement shall be deemed to be a contract made under, and shall be construed in accordance with, the laws of the State of New York, without giving effect to conflict of laws principles thereof.
(b) Assignment . Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assignable or transferable by any party without the prior written consent of the other parties hereto, and any such unauthorized assignment or transfer will be void. This Agreement and all the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns.
(c) Entire Agreement; Modification; Waivers . This Agreement (including Exhibit A and any other future Exhibits hereto) constitutes the entire agreement between the parties with respect to the subject matter hereof and shall supersede all previous negotiation, commitments and writings with respect to the Services. This Agreement (including Exhibit A , and any other future Exhibits hereto) may not be altered, modified or amended except by a written instrument signed by each of the parties hereto.
(d) Severability . The provisions of this Agreement are severable, and in the event that any one or more provisions are deemed illegal or unenforceable the remaining provisions shall remain in full force and effect unless the deletion of such provision shall cause this Agreement to become materially adverse to either party, in which event the parties shall use reasonable commercial efforts to arrive at an accommodation that best preserves for the parties the benefits and obligations of the offending provision.
(e) Notices . Each notice, request and other communication hereunder will be in writing and will be deemed to have been duly given (i) when delivered by hand (so long as the delivering party shall have received a receipt of delivery executed by the party to whom such notice was delivered), (ii) three (3) business days after deposited in United States certified or registered mail, postage prepaid, return receipt requested, (iii) when sent by telecopier or email (in each case, with receipt confirmed) provided a copy is also sent by United States mail or recognized overnight courier service, or (iv) one (1) business day after delivery to a recognized overnight courier service, in each case addressed to the parties as follows (or to such other address as a party may designate by notice to the others):
If to the Recipients: |
American Farmland Company |
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10 East 53 rd Street |
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New York, NY 10022 |
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Attention: General Counsel |
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Facsimile: (212) 484-3001 |
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Email: christine.rivera@optima.com |
If to Provider: |
Optima Fund Management LLC |
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10 East 53 rd Street |
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New York, NY 10022 |
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Attention: Geoffrey Lewis |
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Facsimile: (212) 484-5540 |
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Email: geoffrey.lewis@optima.com |
(f) Title and Headings . Titles and headings to sections herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
(g) Execution in Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
(h) No Third-Party Beneficiaries . Nothing in this Agreement, expressed or implied, is intended to or shall (a) confer on any person other than the parties hereto and their respective successors or assigns any rights (including third-party beneficiary rights), remedies, obligations or liabilities under or by reason of this Agreement, or (b) constitute the parties hereto as partners or as participants in a joint venture. This Agreement shall not provide any third parties with any remedy, claim, liability, reimbursement, cause of action or other right in excess of those existing without reference to the terms of this Agreement. No third party shall have any right under or granted by this Agreement, to bring any suit at law or equity for any matter governed by or subject to the provisions of this Agreement.
[SIGNATURE PAGES FOLLOW]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized representatives as of the day and year first above written.
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OPTIMA FUND MANAGEMENT LLC, a Delaware limited liability company |
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AFC: |
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AMERICAN FARMLAND COMPANY, a Maryland corporation |
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AFCLP: |
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AMERICAN FARMLAND COMPANY L.P., a Delaware limited Partnership |
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By: American Farmland Company, its sole General Partner |
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[Signature Page to Transitional Services Agreement]
Exhibit A
TRANSITIONAL SERVICES PROVIDED BY
OPTIMA FUND MANAGEMENT LLC
Office Space
Includes Salt Lake City, UT office space to the extent the Optima Fund Management LLC pays the costs associated with renting that office space.
Information Technology Support Services
Includes maintenance of website and related costs as well as maintenance on computer networks dedicated to American Farmland Company.
General Administrative Services
1. A pro-rata share of the salary, taxes and benefits of Optima Fund Management LLC employees who are mutually identified as spending a substantial amount of their time on American Farmland Companys business.
2. Reimbursement of out-of-pocket costs for courier expenses, travel and other miscellaneous costs.
Exhibit 21.1
SUBSIDIARIES OF AMERICAN FARMLAND COMPANY
Name |
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Jurisdiction of Formation/
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Abraham (IL) LLC |
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Delaware |
AFC California LLC |
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Delaware |
AFC Florida LLC |
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Delaware |
AFC Illinois LLC |
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Delaware |
AFC Illinois II LLC |
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Delaware |
American Farmland Company L.P. |
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Delaware |
Arnold (CA) LLC |
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Delaware |
Hoover (CA) LLC |
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Delaware |
Jebbie (FL) LLC |
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Delaware |
Jefferson (AR) LLC |
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Delaware |
Jerry Farms LLC |
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Delaware |
Jimmy (GA) LLC |
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Delaware |
Leland Farms (CA) LLC |
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Delaware |
Milhous (CA) LLC |
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Delaware |
Ronald (CA) LLC |
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Delaware |
Sargent Farms (CA) LLC |
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Delaware |
Scott (FL) LLC |
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Delaware |
Shortridge Farms (CA) LLC |
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Delaware |
Warren (CA) LLC |
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Delaware |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use in this Registration Statement on Form S-11 of our report dated March 19, 2015 relating to the consolidated financial statements and financial statement schedule of American Farmland Company appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading Experts in such Prospectus.
/s/ Deloitte & Touche LLP
New York, New York
June 26, 2015
Exhibit 23.4
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Merced Office
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American AgAppraisal |
December 18, 2014
Board of Directors
American Farmland Company
10 East 53 rd Street
New York, NY 10543
Members of the Board:
We hereby consent to the use of our firms name (including under the heading Experts) in a Registration Statement on Form S-11, and amendments thereto, filed or to be filed by American Farmland Company with the U.S. Securities and Exchange Commission (the Registration Statement). Additionally, we consent to the summary of, and reference to, any appraisal reports produced by our firm, American AgAppraisal for properties purchased by American Farmland Company in such filings and amendments, including the prospectus of American Farmland Company contained therein. We consent to the reference to any updated appraisal information we provide on these properties. We further consent to the filing of this letter as an exhibit to the Registration Statement.
Sincerely,
/s/ Richard Bell |
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Richard Bell, ARA |
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AG034972 (State of CA) |
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American AgAppraisal |
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Exhibit 23.5
ANGUS INVESTMENTS, INC.
Real Estate Broker & Appraiser
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EDWIN A. JONES, JR., ARA, President |
9659 Landings Drive |
Accredited Rural Appraiser/ASFMRA |
Port St. Lucie, FL 34986 |
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Licensed Real Estate Broker |
Ph 772-462-3003 |
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State-Certified General Appraiser RZ-1331 |
Fax 772-462-3005 |
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anguseaj@comcast.net |
December 25, 2014
Board of Directors
American Farmland Company
10 East 53 rd Street
New York, NY 10543
Re: Consent to Use Firms Name in Registration Statement on Form S-11
Members of the Board:
We hereby consent to the use of our firms name (including under the heading Experts) in a Registration Statement on Form S-11, and amendments thereto, filed or to be filed by American Farmland Company with the U.S. Securities and Exchange Commission (the Registration Statement).
Additionally, we consent to the summary of, and reference to, any appraisal reports produced by our firm, Angus Investments, Inc. for properties purchased by American Farmland Company in such filings and amendments, including the prospectus of American Farmland Company contained therein. We consent to the reference to any updated appraisal information we provide on these properties. We further consent to the filing of this letter as an exhibit to the Registration Statement.
Respectfully,
/s/ Edwin A. Jones, Jr. |
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Edwin A. Jones, Jr. A.R.A, President |
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State-Certified General Real Estate Appraiser RZ-1331 |
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Exhibit 23.6
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December 18, 2014
Board of Directors
American Farmland Company
10 East 53
rd
Street
New York, NY 10543
Members of the Board:
We hereby consent to the use of our firms name (including under the heading Experts) in a Registration Statement on Form S-11, and amendments thereto, filed or to be filed by American Farmland Company with the U.S. Securities and Exchange Commission (the Registration Statement). Additionally, we consent to the summary of, and reference to, any appraisal reports produced by our firm, Brigantino & Company for properties purchased by American Farmland Company in such filings and amendments, including the prospectus of American Farmland Company contained therein. We consent to the reference to any updated appraisal information we provide on these properties. We further consent to the filing of this letter as an exhibit to the Registration Statement.
Sincerely,
(Signature) |
/s/ Ralph A. Brigantino |
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(Ralph A. Brigantino, MAI) |
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(Brigantino & Company) |
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BRIGANTINO & COMPANY · Real Estate Appraisers Brokers and Consultants
18921 PORTOLA DRIVE, SUITE F, SALINAS CALIFORNIA 93908 · 831-455-1070 · www.brigco.com
Exhibit 23.7
December 18, 2014
Board of Directors
American Farmland Company
10 East 53 rd Street
New York, NY 10543
Members of the Board:
We hereby consent to the use of our firms name (including under the heading Experts) in a Registration Statement on Form S-11, and amendments thereto, filed or to be filed by American Farmland Company with the U.S. Securities and Exchange Commission (the Registration Statement). Additionally, we consent to the summary of, and reference to, any appraisal reports produced by our firm, Central Coast AgAppraisal, Inc. for properties purchased by American Farmland Company in such filings and amendments, including the prospectus of American Farmland Company contained therein. We consent to the reference to any updated appraisal information we provide on these properties. We further consent to the filing of this letter as an exhibit to the Registration Statement.
Sincerely,
/s/ JoAnn C. Wall |
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JoAnn C. Wall, ARA |
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CEO/Principal Appraiser |
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Central Coast AgAppraisal, Inc. |
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P.O. Box 551, Templeton, CA 93465 Tel: 805-286-4356 Fax: 805-286-4359 www.centralcoastagappraisal.com
Exhibit 23.8
COCHRAN AG SERVICES, INC.
ARA
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2453 E. 700th Av. Wheeler, IL 62479 |
Office Phone: 618/783-8383
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Donald K . Cochran |
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email: cochranag@wbnorriselectric.com |
Accredited Rural Appraiser |
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December 19, 2014
Board of Directors
American Farmland Company
10 East 53 rd Street
New York, NY 10543
Members of the Board:
We hereby consent to the use of our firms name (including under the heading Experts) in a Registration Statement on Form S-11, and amendments thereto, filed or to be filed by American Farmland Company with the U.S. Securities and Exchange Commission (the Registration Statement). Additionally, we consent to the summary of, and reference to, any appraisal reports produced by our firm, Cochran Ag Services, Inc. for properties purchased by American Farmland Company in such filings and amendments, including the prospectus of American Farmland Company contained therein. We consent to the reference to any updated appraisal information we provide on these properties. We further consent to the filing of this letter as an exhibit to the Registration Statement.
Sincerely,
/s/ Donald K. Cochran |
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Donald K. Cochran, ARA |
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Cochran Ag Services, Inc. |
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Specializing in Farm Real Estate Appraisals
Exhibit 23.9
December 18, 2014
Board of Directors
American Farmland Company
10 East 53rd Street
New York, NY 10543 Re:
Members of the Board:
We hereby consent to the use of our firms name (Correia-Xavier, Inc.) in a Registration Statement on Form S-11, and amendments thereto, filed or to be filed by American Farmland Company with the U.S. Securities and Exchange Commission (the Registration Statement). Additionally, we consent to the summary of, and reference to, any appraisal reports produced by our firm, Correia-Xavier, Inc. for properties purchased by American Farmland Company in such filings and amendments, including the prospectus of American Farmland Company contained therein. We consent to the reference to any updated appraisal information we provide on these properties. We further consent to the filing of this letter as an exhibit to the Registration Statement.
Sincerely,
Correia - Xavier, Incorporated
/s/ Stanley Xavier, Jr. |
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Stanley Xavier, Jr. |
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President/CEO |
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State Certified General Appraiser #AG011583 |
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6435 N. Palm Avenue, Suite 106, Fresno, California 93704
559.277.7474 · 800.841.5502 · Fax 559.277.7479 · www.c-x.com
Exhibit 23.10
December 18, 2014
Board of Directors
American Farmland Company
10 East 53 rd Street
New York, NY 10543
Members of the Board:
We hereby consent to the use of our firms name (including under the heading Experts) in a Registration Statement on Form S-11, and amendments thereto, filed or to be filed by American Farmland Company with the U.S. Securities and Exchange Commission (the Registration Statement). Additionally, we consent to the summary of, and reference to, any appraisal reports produced by our firm, Edwards, Lien & Toso, Inc., for properties purchased by American Farmland Company in such filings and amendments, including the prospectus of American Farmland Company contained therein. We consent to the reference to any updated appraisal information we provide on these properties. We further consent to the filing of this letter as an exhibit to the Registration Statement.
Sincerely,
/s/ Anthony J. Toso |
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Anthony J. Toso, ARA |
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Edwards, Lien & Toso, Inc. |
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8408 N. Lander Avenue |
Hilmar, CA 95324 |
Phone: 209-634-9484 |
Fax: 209-634-0765 |
www.eltappraisers.com |
Exhibit 23.11
December 19, 2014
Board of Directors
American Farmland Company
10 East 53 rd Street
New York, NY 10543
Members of the Board:
We hereby consent to the use of our firms name (including under the heading Experts) in a Registration Statement on Form S-11, and amendments thereto, filed or to be filed by the American Farmland Company with the U.S. Securities and Exchange Commission (the Registration Statement). Additional, we consent to the summary of, and references to, any appraisal reports produced by our firm, Heartland Ag Group Ltd. for properties purchased by American Farmland Company in such filings and amendments, including the prospectus of American Farmland Company contained therein. We consent to the reference to any updated appraisal information we provide on these properties. We further consent to the filing of this letter as an exhibit to the Registration Statement.
Sincerely, |
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/s/ Jeremy L. Crouch |
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Jeremy L. Crouch |
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State Certified General Appraiser |
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Heartland Ag Group Ltd. |
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/s/ Dale E. Aupperle |
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Dale E. Aupperle, AFM, ARA |
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President |
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Heartland Ag Group Ltd. |
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The Farmland Specialists |
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www.heartlandaggroup.com |
Exhibit 23.12
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ARTHUR C. BLISS, JR. Accredited Rural Appraiser 455 E. La Loma Avenue, Somis, CA 93066 (805) 485-1579 (phone & fax) artbliss@dishmail.net
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December 22, 2014
Board of Directors
American Farmland Company
10 East 53 rd Street
New York, NY 10543
Members of the Board:
I hereby consent to the use of my name (including under the heading Experts) in a Registration Statement on Form S-11, and amendments thereto, filed or to be filed by American Farmland Company with the U.S. Securities and Exchange Commission (the Registration Statement). Additionally, I consent to the summary of, and reference to, any appraisal reports produced by me Arthur C. Bliss, Jr., Accredited Rural Appraiser for properties purchased by American Farmland Company in such filings and amendments, including the prospectus of American Farmland Company contained therein. I consent to the reference to any updated appraisal information I provide on these properties. I further consent to the filing of this letter as an exhibit to the Registration Statement.
Sincerely, |
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/s/ Arthur C. Bliss, Jr. |
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Arthur C. Bliss, Jr. |
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Accredited Rural Appraiser |
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Exhibit 23.13
December 18, 2014
Board of Directors
American Farmland Company
10 East 53rd Street
New York, NY 10543
Members of the Board
I hereby consent to the use of our firms name (including under the heading Experts) in a Registration Statement on Form S-11, and amendments thereto, filed or to be filed by American Farmland Company with the U.S. Securities and Exchange Commission (the Registration Statement). Additionally, I consent to the summary of, and reference to, any appraisal reports produced by our firm, Lightle Appraisal Company for properties purchased by American Farmland Company in such filings and amendments, including the prospectus of American Farmland Company contained therein. I consent to the reference to any updated appraisal information we provide on these properties. I further consent to the filing of this letter as an exhibit to the Registration Statement.
Exhibit 23.14
LYNN E. RICKARD, ARA
P.O. BOX 2234
BAKERSFIELD, CA 93303
(661) 328-9950
Fax: (661) 328-9950
December 18, 2014
Board of Directors
American Farmland Company
10 East 53 rd Street
New York, NY 10543
Members of the Board:
We hereby consent to the use of our firms name (including under the heading Experts) in a Registration Statement on Form S-11, and amendments thereto, filed or to be filed by American Farmland Company with the U.S. Securities and Exchange Commission (the Registration Statement). Additionally, we consent to the summary of, and reference to, any appraisal reports produced by our firm, Lynn E. Rickard, ARA, for properties purchased by American Farmland Company in such filings and amendments, including the prospectus of American Farmland Company contained therein. We consent to the reference to any updated appraisal information we provide on these properties. We further consent to the filing of this letter as an exhibit to the Registration Statement.
Sincerely,
/s/ Lynn E. Rickard |
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Lynn E. Rickard, ARA |
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CGREA #AG006603 |
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Exp. 1/5/2017 |
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For the Firm, LYNN E. RICKARD, ARA |
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LER/me |
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Exhibit 23.15
Stanley Saunders
Saunders Appraisal Service
PO Box 480
Marianna, FL 32447
December 18, 2014
Board of Directors
American Farmland Company
10 East 53 rd Street
New York, NY 10543
Members of the Board:
We hereby consent to the use of our firms name (including under the heading Experts) in a Registration Statement on Form S-11, and amendments thereto, filed or to be filed by American Farmland Company with the U.S. Securities and Exchange Commission (the Registration Statement). Additionally, we consent to the summary of, and reference to, any appraisal reports produced by our firm, Saunders Appraisal Service LLC for properties purchased by American Farmland Company in such filings and amendments, including the prospectus of American Farmland Company contained therein. We consent to the reference to any updated appraisal information we provide on these properties. We further consent to the filing of this letter as an exhibit to the Registration Statement.
Sincerely, |
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/s/ Stanley Saunders |
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Stanley Saunders, ARA, Certified Gen. |
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Saunders Appraisal Service LLC |
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PO Box 480 |
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Marianna, FL 32447 |
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Exhibit 99.1
CONSENT OF PERSON TO BE NAMED DIRECTOR
As required by Rule 438 under the Securities Act of 1933, as amended (the Securities Act), the undersigned hereby consents to being named in the Registration Statement on Form S-11 (together with any amendments or supplements thereto, and any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act, the Registration Statement) of American Farmland Company, a Maryland corporation (the Company), as a person who has agreed to serve as a director of the Company beginning immediately after the closing of the Companys initial public offering and to the inclusion of his or her biographical information in the Registration Statement.
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/s/ Morton A. Cohn |
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Signature |
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Morton A. Cohn |
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Printed Name |
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6/17/15 |
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Date |
Exhibit 99.2
CONSENT OF PERSON TO BE NAMED DIRECTOR
As required by Rule 438 under the Securities Act of 1933, as amended (the Securities Act ), the undersigned hereby consents to being named in the Registration Statement on Form S-11 (together with any amendments or supplements thereto, and any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act, the Registration Statement ) of American Farmland Company, a Maryland corporation (the Company ), as a person who has agreed to serve as a director of the Company beginning immediately after the closing of the Companys initial public offering and to the inclusion of his or her biographical information in the Registration Statement.
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/s/ Roberto de Guardiola |
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Signature |
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Roberto de Guardiola |
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Printed Name |
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2.20.15 |
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Date |
Exhibit 99.3
CONSENT OF PERSON TO BE NAMED DIRECTOR
As required by Rule 438 under the Securities Act of 1933, as amended (the Securities Act ), the undersigned hereby consents to being named in the Registration Statement on Form S-11 (together with any amendments or supplements thereto, and any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act, the Registration Statement ) of American Farmland Company, a Maryland corporation (the Company ), as a person who has agreed to serve as a director of the Company beginning immediately after the closing of the Companys initial public offering and to the inclusion of his or her biographical information in the Registration Statement.
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/s/ Terry Allen Kramer |
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Signature |
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Terry Allen Kramer |
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Printed Name |
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2/26/2015 |
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Date |