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Real Estate and Intangible Assets | 6 Months Ended
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Jun. 30, 2020
Real Estate [Abstract] |
REAL ESTATE AND INTANGIBLE ASSETS | REAL ESTATE AND INTANGIBLE ASSETS All of our properties are wholly-owned on a fee-simple basis, except where noted. The following table provides certain summary information about the 115 farms we owned as of June 30, 2020 (dollars in thousands, except for footnotes):
Location |  | No. of Farms |  | Total Acres |  | Farm Acres |  | Net Cost Basis(1) |  | Encumbrances(2)
California(3) |  | 43 |  | 15,420 |  | 14,203 |  | $ | 436,744 |  |  | $ | 268,244 |
Florida |  | 23 |  | 20,770 |  | 16,256 |  | 210,474 |  |  | 131,359 |
Arizona(4) |  | 6 |  | 6,280 |  | 5,228 |  | 58,498 |  |  | 22,087 |
Colorado |  | 12 |  | 32,773 |  | 25,577 |  | 48,864 |  |  | 31,047 |
Nebraska |  | 9 |  | 7,782 |  | 7,050 |  | 30,825 |  |  | 19,331 |
Michigan |  | 15 |  | 962 |  | 682 |  | 12,262 |  |  | 7,573 |
Texas |  | 1 |  | 3,667 |  | 2,219 |  | 8,363 |  |  | 5,173 |
Washington |  | 1 |  | 746 |  | 417 |  | 8,031 |  |  | 4,957 |
Oregon |  | 3 |  | 418 |  | 363 |  | 6,198 |  |  | 3,785 |
North Carolina |  | 2 |  | 310 |  | 295 |  | 2,264 |  |  | 1,206 |
|  | 115 |  | 89,128 |  | 72,290 |  | $ | 822,523 |  |  | $ | 494,762 |
(1) | Consists of the initial acquisition price (including the costs allocated to both tangible and intangible assets acquired and liabilities assumed), plus subsequent improvements and other capitalized costs associated with the properties, and adjusted for accumulated depreciation and amortization. Specifically, includes Investments in real estate, net (excluding improvements paid for by the tenant) and Lease intangibles, net; plus net above-market lease values, lease incentives, and investments in special-purpose LLCs included in Other assets, net; and less net below-market lease values and other deferred revenue included in Other liabilities, net; each as shown on the accompanying Condensed Consolidated Balance Sheets.
(2) | Excludes approximately $3.1 million of debt issuance costs related to notes and bonds payable, included in Notes and bonds payable, net on the accompanying Condensed Consolidated Balance Sheet.
(3) | Includes ownership in a special-purpose LLC that owns a pipeline conveying water to one of our properties. As of June 30, 2020, this investment had a net carrying value of approximately $613,000 and is included within Other assets, net on the accompanying Condensed Consolidated Balance Sheet.
(4) | Includes two farms in which we own a leasehold interest via ground leases with the State of Arizona that expire in February 2022 and February 2025, respectively. In total, these two farms consist of 1,368 total acres and 1,221 farm acres and had an aggregate net cost basis of approximately $1.9 million as of June 30, 2020 (included in Lease intangibles, net on the accompanying Condensed Consolidated Balance Sheet).
Real Estate The following table sets forth the components of our investments in tangible real estate assets as of June 30, 2020, and December 31, 2019 (dollars in thousands):
| June 30, 2020 |  | December 31, 2019
Real estate: |  |  |
Land and land improvements | $ | 609,792 |  |  | $ | 583,247 |
Irrigation and drainage systems | 115,293 |  |  | 108,222 |
Horticulture | 108,779 |  |  | 107,941 |
Farm-related facilities | 21,250 |  |  | 20,665 |
Other site improvements | 7,215 |  |  | 7,180 |
Real estate, at gross cost | 862,329 |  |  | 827,255 |
Accumulated depreciation | (41,566 | ) |  | (35,174 | )
Real estate, net | $ | 820,763 |  |  | $ | 792,081 |
Real estate depreciation expense on these tangible assets was approximately $3.5 million and $7.0 million for the three and six months ended June 30, 2020, respectively, and approximately $2.6 million and $4.9 million for the three and six months ended June 30, 2019, respectively. Included in the figures above are amounts related to improvements made on certain of our properties paid for by our tenants but owned by us, or tenant improvements. As of June 30, 2020, and December 31, 2019, we recorded tenant improvements, net of accumulated depreciation, of approximately $2.1 million and $2.2 million, respectively. We recorded both depreciation expense and additional lease revenue related to these tenant improvements of approximately $76,000 and $152,000 for the three and six months ended June 30, 2020, respectively, and approximately $72,000 and $146,000 for the three and six months ended June 30, 2019, respectively. Intangible Assets and Liabilities The following table summarizes the carrying values of certain lease intangible assets and the related accumulated amortization as of June 30, 2020, and December 31, 2019 (dollars in thousands):
| June 30, 2020 |  | December 31, 2019
Lease intangibles: |  |  |
Leasehold interest – land | $ | 3,498 |  |  | $ | 3,498 |
In-place leases | 2,007 |  |  | 2,293 |
Leasing costs | 1,584 |  |  | 2,066 |
Tenant relationships | 414 |  |  | 414 |
Lease intangibles, at cost | 7,503 |  |  | 8,271 |
Accumulated amortization | (3,823 | ) |  | (3,444 | )
Lease intangibles, net | $ | 3,680 |  |  | $ | 4,827 |
Total amortization expense related to these lease intangible assets, including amounts charged to amortization expense due to early lease terminations, was approximately $321,000 and $1.1 million for the three and six months ended June 30, 2020, respectively, and approximately $326,000 and $650,000 for the three and six months ended June 30 2019, respectively. See below, under “Significant Existing Real Estate Activity—Leasing Activity—Lease Termination” for further discussion of this lease termination. The following table summarizes the carrying values of certain lease intangible assets or liabilities included in Other assets, net or Other liabilities, net, respectively, on the accompanying Condensed Consolidated Balance Sheets and the related accumulated amortization or accretion, respectively, as of June 30, 2020, and December 31, 2019 (dollars in thousands):
|  | June 30, 2020 |  | December 31, 2019
Intangible Asset or Liability |  | Deferred Rent Asset (Liability) |  | Accumulated (Amortization) Accretion |  | Deferred Rent Asset (Liability) |  | Accumulated (Amortization) Accretion
Above-market lease values and lease incentives(1) |  | $ | 201 |  |  | $ | (103 | ) |  | $ | 111 |  |  | $ | (41 | )
Below-market lease values and other deferred revenue(2) |  | (886 | ) |  | 307 |  |  | (886 | ) |  | 257 |
|  | $ | (685 | ) |  | $ | 204 |  |  | $ | (775 | ) |  | $ | 216 |
(1) | Net above-market lease values and lease incentives are included as part of Other assets, net on the accompanying Condensed Consolidated Balance Sheets, and the related amortization is recorded as a reduction of Lease revenue on the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income.
(2) | Net below-market lease values and other deferred revenue are included as a part of Other liabilities, net on the accompanying Condensed Consolidated Balance Sheets, and the related accretion is recorded as an increase to Lease revenue on the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income.
Total amortization related to above-market lease values and lease incentives was approximately $31,000 and $62,000 for the three and six months ended June 30, 2020, respectively, and approximately $33,000 and $66,000 for the three and six months ended June 30, 2019, respectively. Total accretion related to below-market lease values and other deferred revenue was approximately $25,000 and $50,000 for the three and six months ended June 30, 2020, respectively, and approximately $39,000 and $77,000 for the three and six months ended June 30, 2019, respectively. Acquisitions 2020 Acquisitions During the six months ended June 30, 2020, we acquired four new farms, which are summarized in the table below (dollars in thousands, except for footnotes):
Property Name |  | Property Location |  | Acquisition Date |  | Total Acres |  | No. of Farms |  | Primary Crop(s) |  | Lease Term |  | Renewal Options |  | Total Purchase Price |  | Acquisition Costs(1) |  | Annualized Straight-line Rent(2) |  | New Long-term Debt
County Road 18 |  | Phillips, CO |  | 1/15/2020 |  | 1,325 |  | 2 |  | Sugar beets, edible beans, potatoes, & corn |  | 6.0 years |  | None |  | $ | 7,500 |  |  | $ | 39 |  |  | $ | 417 |  |  | $ | 4,500 |
Lamar Valley |  | Chase, NE |  | 5/7/2020 |  | 678 |  | 1 |  | Potatoes, edible beans, & corn |  | 6.7 years |  | 2 (5 years) |  | 3,500 |  |  | 47 |  |  | 204 |  |  | 2,100 |
Driver Road(3) |  | Kern, CA |  | 6/5/2020 |  | 590 |  | 1 |  | Pecans |  | 4.7 years |  | 2 (10 years) |  | 14,169 |  |  | 53 |  |  | 784 |  |  | 8,500 |
|  |  |  |  |  | 2,593 |  | 4 |  |  |  |  |  |  |  | $ | 25,169 |  |  | $ | 139 |  |  | $ | 1,405 |  |  | $ | 15,100 |
(1) | Includes approximately $18,000 of aggregate external legal fees associated with negotiating and originating the leases associated with these acquisitions, which costs were expensed in the period incurred.
(2) | Annualized straight-line rent is based on the minimum cash rental payments guaranteed under the applicable leases, as required under GAAP, and excludes contingent rental payments, such as participation rents.
(3) | The lease provides for an initial term of 14.7 years and includes six tenant termination options throughout the initial term. The lease term stated above represents the term through the first available termination option, and the annualized straight-line rent amount represents the rent guaranteed through the noncancelable term of the lease.
During the three and six months ended June 30, 2020, we recognized lease revenue of approximately $191,000 and $280,000, respectively, and net income of approximately $125,000 and $196,000, respectively, related to the above acquisition. 2019 Acquisitions During the six months ended June 30, 2019, we acquired 13 new farms, which are summarized in the table below (dollars in thousands, except for footnotes):
Property Name |  | Property Location |  | Acquisition Date |  | Total Acres |  | No. of Farms |  | Primary Crop(s) |  | Lease Term |  | Renewal Options |  | Total Purchase Price |  | Acquisition Costs(1) |  | Annualized Straight-line Rent(2) |  | New Long-term Debt
Somerset Road |  | Lincoln, NE |  | 1/22/2019 |  | 695 |  | 1 |  | Popcorn & edible beans |  | 4.9 years |  | 1 (5 years) |  | $ | 2,400 |  |  | $ | 33 |  |  | $ | 126 |  |  | $ | 1,440 |
Greenhills Boulevard(3) |  | Madera, CA |  | 4/9/2019 |  | 928 |  | 1 |  | Pistachios |  | 10.6 years |  | 2 (5 years) |  | 28,550 |  |  | 141 |  |  | 1,721 |  |  | 17,130 |
Van Buren Trail |  | Van Buren, MI |  | 5/29/2019 |  | 159 |  | 2 |  | Blueberries & cranberries |  | 10.6 years |  | 2 (5 years) |  | 2,682 |  |  | 26 |  |  | 206 |  |  | 1,609 |
Blue Star Highway |  | Allegran & Van Buren, MI |  | 6/4/2019 |  | 357 |  | 8 |  | Blueberries |  | 10.6 years |  | 2 (5 years) |  | 5,100 |  |  | 30 |  |  | 390 |  |  | 3,060 |
Yolo County Line Road |  | Yolo, CA |  | 6/13/2019 |  | 542 |  | 1 |  | Olives for olive oil |  | 14.6 years |  | 1 (5 years) |  | 9,190 |  |  | 68 |  |  | 624 |  |  | 5,514 |
|  |  |  |  |  | 2,681 |  | 13 |  |  |  |  |  |  |  | $ | 47,922 |  |  | $ | 298 |  |  | $ | 3,067 |  |  | $ | 28,753 |
(1) | Includes approximately $18,000 of external legal fees associated with negotiating and originating the lease associated with this acquisition, which cost was expensed in the period incurred.
(2) | Annualized straight-line rent is based on the minimum cash rental payments guaranteed under the applicable leases, as required under GAAP, and excludes contingent rental payments, such as participation rents.
(3) | Lease provides for a participation rent component based on the gross crop revenues earned on the farm. The rent figure above represents only the minimum cash guaranteed under the lease.
During the three and six months ended June 30, 2019, we recognized operating revenues of approximately $503,000 and $527,000, respectively, and net income of approximately $218,000 and $220,000, respectively, related to the above acquisitions. Purchase Price Allocations The allocation of the aggregate purchase price for the farms acquired during each of the six months ended June 30, 2020 and 2019 is as follows (dollars in thousands):
Acquisition Period |  | Land and Land Improvements |  | Irrigation & Drainage Systems |  | Horticulture |  | Farm-related Facilities |  | Total Purchase Price
2020 Acquisitions |  | $ | 22,630 |  |  | $ | 2,119 |  |  | $ | 369 |  |  | $ | 51 |  |  | $ | 25,169 |
2019 Acquisitions |  | 18,209 |  |  | 4,022 |  |  | 23,989 |  |  | 1,702 |  |  | 47,922 |
Significant Existing Real Estate Activity Property Add-on In connection with the acquisition of a 366-acre vineyard located in Napa, California (“Withers Road”), on August 28, 2019, we committed to provide up to approximately $4.0 million as additional compensation, contingent upon the County of Napa approving the planting of additional vineyards on up to 47 acres of the property by February 25, 2020 (the “Permit Deadline”). In addition, if approval was obtained, we also committed to contribute up to $40,000 per approved acre for the development of such vineyards. While approval of the additional plantings was not received from the County of Napa by the Permit Deadline, in March 2020, we executed an agreement with the tenant on Withers Road to extend the Permit Deadline until August 24, 2020. In April 2020, we received notification from the County of Napa informing us that it had approved of additional vineyard plantings on 38.7 acres of the property. As such, in May 2020, we paid additional compensation related to this acquisition of approximately $3.2 million. As a result, and pursuant to a lease amendment, we will earn additional straight-line rental income of approximately $335,000 per year throughout the remaining term of the lease, which expires on December 31, 2029. We will also earn additional rent on any of the aforementioned development costs as they are incurred by us. Leasing Activity The following table summarizes certain leasing activity that occurred on our existing properties during the six months ended June 30, 2020 (dollars in thousands):
|  |  |  | PRIOR LEASES |  | NEW LEASES(1)(2)
Farm Locations | Number of Leases | Total Farm Acres |  | Total Annualized Straight-line Rent(3) | # of Leases with Participation Rents | Lease Structures (# of NNN / NN / N)(4) |  | Total Annualized Straight-line Rent(3) | Wtd. Avg. Term (Years) | # of Leases with Participation Rents | Lease Structures (# of NNN / NN / N)(4)
AZ, CA, & NE | 10 | 6,525 |  | $ | 4,661 |  | 3 | 6 / 2 / 2 |  | $ | 4,758 |  | 6.2 | 4 | 6 / 3 / 0
(1) | In connection with certain of these leases, we committed to provide capital for certain improvements on these farms. See Note 7, “Commitments and Contingencies—Operating Obligations,” for additional information on these commitments.
(2) | Two of the prior leases encompassing four of our farms were renewed under a single lease encompassing the same four farms.
(3) | Annualized straight-line rent is based on the minimum cash rental payments guaranteed under the leases (presented on an annualized basis), as required under GAAP, and excludes contingent rental payments, such as participation rents.
(4) | “NNN” refers to leases under triple-net lease arrangements, “NN” refers to leases under partial-net lease arrangements, and “N” refers to leases under single-net lease arrangements. For a description of each of these types of lease arrangements, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Leases—General.”
Lease Termination On February 10, 2020, we reached an agreement with a tenant occupying four of our farms in Arizona to terminate the existing leases encompassing those four farms effective February 10, 2020. As part of the termination agreement, the outgoing tenant made a one-time termination payment to us of approximately $3.0 million, which we recognized as additional lease revenue during the six months ended June 30, 2020. The prior leases were scheduled to expire on September 15, 2026 (with two of the farms subject to the renewal of certain state leases currently scheduled to expire on February 14, 2022, and February 14, 2025). In connection with the early termination of these leases, during the six months ended June 30, 2020, we recognized approximately $89,000 of prepaid rent as additional lease revenue and wrote off an aggregate net deferred rent balance of approximately $254,000 against lease revenue. In addition, approximately $470,000 of unamortized lease intangible assets related to the terminated leases were written off and charged to amortization expense during the six months ended June 30, 2020. Upon termination of these leases, we entered into a new, seven-year lease with a new tenant effective immediately. These leases are included in the Leasing Activity table above. Investments in Unconsolidated Entities In connection with the acquisition of 2,110 gross acres of farmland located in Fresno County, California (“Sutter Avenue”), which occurred in two phases during the year ended December 31, 2019, we also acquired an ownership in a related LLC, the sole purpose of which is to own and maintain a pipeline conveying water to this and other neighboring properties. On August 16, 2019, we acquired an 11.75% ownership interest in the LLC that was valued at approximately $280,000 at the time of acquisition. On November 1, 2019, we acquired an additional 13.25% interest in the LLC that was valued at approximately $307,000 at the time of acquisition. As our investment in the LLC is deemed to constitute “significant influence,” we have accounted for this investment under the equity method. During the three and six months ended June 30, 2020, we recorded (loss) income of approximately $(8,000) and $26,000, respectively (included on our Condensed Consolidated Statements of Operations and Comprehensive Income as Income from investments in unconsolidated entities), which represents our pro-rata share of the (loss) income recognized by the LLC. Prior to fiscal year 2020, we had not recorded any material income or loss related to our ownership interest in the LLC. Our combined ownership interest in the LLC, which had an aggregate carrying value of approximately $613,000 and $587,000, as of June 30, 2020, and December 31, 2019, respectively, is included within Other assets, net on the accompanying Condensed Consolidated Balance Sheets. Portfolio Diversification and Concentrations Diversification The following table summarizes the geographic locations (by state) of our farms owned and with leases in place as of the six months ended June 30, 2020 and 2019 (dollars in thousands):
|  | As of and For the six months ended June 30, 2020 |  | As of and For the six months ended June 30, 2019
State |  | Number of Farms |  | Total Acres |  | % of Total Acres |  | Lease Revenue |  | % of Total Lease Revenue |  | Number of Farms |  | Total Acres |  | % of Total Acres |  | Lease Revenue |  | % of Total Lease Revenue
California(1) |  | 43 |  | 15,420 |  | 17.3% |  | $ | 13,815 |  |  | 49.5% |  | 35 |  | 11,617 |  | 15.3% |  | $ | 7,906 |  |  | 48.8%
Florida |  | 23 |  | 20,770 |  | 23.3% |  | 6,669 |  |  | 23.9% |  | 22 |  | 17,184 |  | 22.6% |  | 4,689 |  |  | 29.0%
Arizona |  | 6 |  | 6,280 |  | 7.1% |  | 3,805 |  |  | 13.6% |  | 6 |  | 6,280 |  | 8.3% |  | 1,077 |  |  | 6.7%
Colorado |  | 12 |  | 32,773 |  | 36.8% |  | 1,662 |  |  | 6.0% |  | 10 |  | 31,448 |  | 41.4% |  | 1,411 |  |  | 8.7%
Nebraska |  | 9 |  | 7,782 |  | 8.7% |  | 762 |  |  | 2.7% |  | 3 |  | 3,254 |  | 4.3% |  | 162 |  |  | 1.0%
Michigan |  | 15 |  | 962 |  | 1.1% |  | 384 |  |  | 1.4% |  | 15 |  | 962 |  | 1.3% |  | 89 |  |  | 0.5%
Oregon |  | 3 |  | 418 |  | 0.5% |  | 263 |  |  | 0.9% |  | 3 |  | 418 |  | 0.6% |  | 257 |  |  | 1.6%
Washington |  | 1 |  | 746 |  | 0.8% |  | 245 |  |  | 0.9% |  | 1 |  | 746 |  | 1.0% |  | 245 |  |  | 1.5%
Texas |  | 1 |  | 3,667 |  | 4.1% |  | 225 |  |  | 0.8% |  | 1 |  | 3,667 |  | 4.8% |  | 263 |  |  | 1.6%
North Carolina |  | 2 |  | 310 |  | 0.3% |  | 88 |  |  | 0.3% |  | 2 |  | 310 |  | 0.4% |  | 93 |  |  | 0.6%
TOTALS |  | 115 |  | 89,128 |  | 100.0% |  | $ | 27,918 |  |  | 100.0% |  | 98 |  | 75,886 |  | 100.0% |  | $ | 16,192 |  |  | 100.0%
(1) | According to the California Chapter of the American Society of Farm Managers and Rural Appraisers, there are eight distinct growing regions within California; our farms are spread across six of these growing regions.
Concentrations Credit Risk As of June 30, 2020, our farms were leased to 72 different, unrelated third-party tenants, with certain tenants leasing more than one farm. Due primarily to an early lease termination payment of approximately $3.0 million received from an outgoing tenant (“Tenant A”) during the six months ended June 30, 2020 (see “—Lease Termination” above), aggregate lease revenue attributable to Tenant A accounted for approximately $3.0 million, or 10.1%, of the total lease revenue recorded during the six months ended June 30, 2020. As of June 30, 2020, we are no longer a party to any contractual agreements with Tenant A. No other individual tenant represented greater than 10.0% of the total lease revenue recorded during the six months ended June 30, 2020. Geographic Risk Farms located in California, Florida, and Arizona accounted for approximately $13.8 million (49.5%), $6.7 million (23.9%) and $3.8 million (13.6%), respectively, of the total lease revenue recorded during the six months ended June 30, 2020. Though we seek to continue to further diversify geographically, as may be desirable or feasible, should an unexpected natural disaster occur where our properties are located, there could be a material adverse effect on our financial performance and ability to continue operations. No other single state accounted for more than 10.0% of our total lease revenue recorded during the six months ended June 30, 2020.

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- Definition The entire disclosure for long-lived, physical asset used in normal conduct of business and not intended for resale. Includes, but is not limited to, work of art, historical treasure, and similar asset classified as collections. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 958 -SubTopic 360 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=120429125&loc=d3e99893-112916 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 360 -URI http://asc.fasb.org/topic&trid=2155823 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 958 -SubTopic 360 -Section 50 -Paragraph 7 -URI http://asc.fasb.org/extlink&oid=120429125&loc=SL120174063-112916 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 958 -SubTopic 360 -Section 50 -Paragraph 1 -Subparagraph (d) -URI http://asc.fasb.org/extlink&oid=120429125&loc=d3e99779-112916 + Details
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