sv11
As filed
with the Securities and Exchange Commission on August 6,
2010
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
GLADSTONE LAND
CORPORATION
(Exact Name of Registrant as
Specified in its Governing Instruments)
1521 Westbranch Drive, Second Floor
McLean, Virginia 22102
(703) 287-5800
(Address, Including Zip
Code, and Telephone Number, including Area Code, of
Registrants Principal Executive Offices)
David Gladstone
Chairman and Chief Executive Officer
Gladstone Land Corporation
1521 Westbranch Drive, Second Floor
McLean, Virginia 22102
(703) 287-5800
(703) 287-5801
(facsimile)
(Name, Address, Including
Zip Code, and Telephone Number, Including Area Code, of Agent
for Service)
Copies to:
Thomas R. Salley, Esq.
Cooley LLP
777 6th
Street, NW
Washington, D.C. 20004
(202) 842-7800
(202) 842-7899
(facsimile)
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 þ
|
Smaller
reporting
company o
|
(Do not check if a smaller reporting company)
CALCULATION
OF REGISTRATION FEE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposed Maximum
|
|
|
Proposed Maximum
|
|
|
Amount of
|
|
|
|
Amount to be
|
|
|
Offering
|
|
|
Aggregate
|
|
|
Registration
|
Title of Securities to be Registered
|
|
|
Registered(1)
|
|
|
Price per Share(2)
|
|
|
Offering Price(1)
|
|
|
Fee
|
Common Stock, $0.01 par value per share
|
|
|
|
13,915,000
|
|
|
|
$
|
16.00
|
|
|
|
$
|
222,640,000
|
|
|
|
$
|
15,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes shares subject to sale pursuant to the
underwriters over-allotment option.. |
|
(2) |
|
Estimated solely for the purpose of calculating the amount of
the registration fee pursuant to Rule 457(o) under the
Securities Act of 1933. |
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 this Registration
Statement shall become effective on such date as the Commission,
acting pursuant to Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We and the selling stockholder may not sell these
securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and is not soliciting
an offer to buy these securities in any state where the offer or
sale is not permitted.
|
SUBJECT TO COMPLETION DATED
AUGUST 6, 2010
12,100,000 Shares of
Common Stock
This is an initial public offering of shares of common stock of
Gladstone Land Corporation, or Gladstone Land. We are a Delaware
corporation that owns farmland in California. We intend to
acquire more farmland, which we will lease to farmers until such
time as the land may be converted to urban or suburban uses. We
also intend to lend to farmers for the purchase of farmland. We
may also acquire and invest in mortgages for properties related
to farming, such as coolers, processing plants, packing
buildings and distribution centers. We intend to elect and
qualify to be taxed as a real estate investment trust, or REIT,
for U.S. federal income tax purposes commencing with our
taxable year ending December 31, 2011.
Gladstone Land is offering 11,350,000 of the shares to be sold
in the offering. The selling stockholder identified in this
prospectus is offering an additional 750,000 shares.
Gladstone Land will not receive any of the proceeds from the
sale of the shares being sold by the selling stockholder.
Prior to this offering, there has been no public market for the
common stock. It is currently estimated that the initial public
offering price per share will be between $14.00 and $16.00. We
intend to apply to have our common stock listed on The NASDAQ
Global Market under the symbol LAND.
See Risk Factors on page 12 to read about
factors you should consider before buying shares of the common
stock. Some risks include:
|
|
|
|
|
In 2004, we reoriented our company to focus on acquisition of
agricultural property to be leased for annual crops, as well as
other land and buildings, and may not be able to operate
successfully.
|
|
|
|
In addition to acquiring farms and leasing them to tenants, we
also intend to make mortgage loans secured by farms and
farm-related properties. We cannot predict how much of our
assets will be in mortgages.
|
|
|
|
Our real estate investments will include farms and other
agricultural properties that may be difficult to sell or
re-lease upon tenant defaults or early lease terminations.
|
|
|
|
We intend to set a distribution rate
at % of the public offering price
in this offering, which may have an adverse impact on the market
price for our common stock.
|
|
|
|
Because some of our properties will be devoted to agricultural
uses pending their potential future conversion to urban or
suburban uses, we will be subject to risks associated with
agriculture, which may result in an adverse impact on the price
of our common stock.
|
|
|
|
There are material income tax risks associated with the offering.
|
|
|
|
We currently own only two farm properties and we have
identified
properties to purchase with the net proceeds we will receive
from this offering. As a result, investors will be unable to
evaluate the manner in which the net proceeds are invested and
the economic merits of projects prior to investment.
|
|
|
|
We cannot guarantee when or if our farm properties will ever be
converted to urban or suburban uses. If we are unable to sell
our agricultural real estate for urban or suburban development,
our long-term operating results may be materially adversely
affected.
|
|
|
|
Highly leveraged tenants may be unable to make lease payments,
which could adversely affect our cash available for distribution
to our stockholders.
|
|
|
|
Conflicts of interest exist between us, our Adviser, its
officers, directors, and their affiliates, which could result in
decisions that are not in the best interests of our stockholders.
|
|
|
|
Our success will depend on the performance of our Adviser. If
our Adviser makes inadvisable investment or management
decisions, our operations could be materially adversely impacted.
|
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved of these securities
or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
Total
|
|
Public Offering Price
|
|
$
|
|
|
|
$
|
|
|
Underwriting Discount
|
|
$
|
|
|
|
$
|
|
|
Proceeds, before expenses, to us
|
|
$
|
|
|
|
$
|
|
|
Proceeds, before expenses, to the selling stockholder
|
|
$
|
|
|
|
$
|
|
|
To the extent that the underwriters sell more than
12,100,000 shares of common stock, the underwriters have
the option to purchase up to an additional 1,815,000 shares
of common stock from us at the initial public offering price,
less the underwriting discount, within 30 days from the
date of this prospectus, solely to cover over-allotments.
The underwriters expect to deliver the shares of common stock on
[ ],
2010.
[Underwriters]
The date of this prospectus
is ,
2010.
GLADSTONE
LAND CORPORATION
TABLE OF
CONTENTS
|
|
|
|
|
|
|
|
1
|
|
|
|
|
9
|
|
|
|
|
12
|
|
|
|
|
26
|
|
|
|
|
27
|
|
|
|
|
28
|
|
|
|
|
29
|
|
|
|
|
30
|
|
|
|
|
31
|
|
|
|
|
33
|
|
|
|
|
47
|
|
|
|
|
57
|
|
|
|
|
66
|
|
|
|
|
67
|
|
|
|
|
68
|
|
|
|
|
71
|
|
|
|
|
74
|
|
|
|
|
78
|
|
|
|
|
83
|
|
|
|
|
88
|
|
|
|
|
90
|
|
|
|
|
93
|
|
|
|
|
94
|
|
|
|
|
95
|
|
|
|
|
97
|
|
|
|
|
101
|
|
|
|
|
102
|
|
|
|
|
105
|
|
|
|
|
122
|
|
|
|
|
125
|
|
|
|
|
126
|
|
|
|
|
129
|
|
|
|
|
129
|
|
|
|
|
129
|
|
|
|
|
F-1
|
|
|
|
|
II-1
|
|
PROSPECTUS
SUMMARY
This summary highlights some information from this
prospectus. It may not include all of the information that is
important to you. To understand this offering fully, you should
read the entire prospectus carefully, including the Risk
Factors. Unless the context suggests otherwise, when we use the
term we or us or Company or
Gladstone Land, we are referring to Gladstone Land
Corporation and Gladstone Land Limited Partnership and their
respective subsidiaries and not to our Adviser, Gladstone
Management Corporation or any of its other affiliated entities.
When we use the term Adviser we are referring to our
Adviser, Gladstone Management Corporation. Unless otherwise
indicated, the information included in this prospectus assumes
no exercise of the underwriters over-allotment option. All
information in this prospectus gives effect to a 27,500-for-1
stock split, which will be effected before the closing of this
offering.
Corporate
Overview
We are an externally-managed corporation that currently owns two
farms in California that we lease to Dole Fresh Vegetables,
Inc., or Dole Fresh, a wholly owned subsidiary of Dole Food
Company, or Dole Foods, which is a guarantor of the leases. We
intend to acquire more farmland, which we will lease to farmers
until such time as the land may be converted to urban or
suburban uses. We also intend to provide senior secured first
lien mortgages to farmers for the purchase of farmland and
properties related to farming. We expect these mortgages to be
secured by farming properties in operation for over five years
with a history of crop production and profitable farming
operations. We expect that most of our future tenants and
borrowers will be small and medium-sized farming operations that
are unrelated to us. We may also acquire properties related to
farming, such as coolers, processing plants, packing buildings
and distribution center, as well as ground leases under these
facilities. We intend to lease our properties under triple net
leases, an arrangement under which the tenant maintains the
property while paying us rent plus taxes and insurance. We have
currently
identified
properties to acquire, although we have not yet entered into
letters of intent or binding agreements to acquire these
properties, and there is no guarantee that we will be able to
acquire any of them. We have not identified any other specific
properties to acquire or for which to invest in mortgages. We
are actively seeking and evaluating properties in this regard.
We may also provide ancillary services to farmers through our
wholly owned taxable real estate investment trust, or REIT,
subsidiary, Gladstone Land Advisers, Inc.
We were formed in 1997. Prior to 2004, we engaged in the owning
and leasing of farmland, as well as an agricultural operating
business whereby we engaged in the farming, contract growing,
packaging, marketing and distribution of fresh berries,
including commission selling and contract cooling services to
independent berry growers. In 2004 we sold our agricultural
operating business to Dole Fresh. Since 2004, our operations
have consisted solely of leasing our farms located in
Watsonville, California and Oxnard, California to Dole Fresh. We
also lease a small parcel on our Oxnard farm to an oil company.
We do not currently intend to enter the business of growing and
marketing farmed products. However, if we do so in the future we
will do so through a taxable REIT subsidiary.
We intend to elect to be taxed as a REIT under federal tax laws
beginning with the year ending December 31, 2011. Gladstone
Management Corporation serves as our adviser and manages our
real estate portfolio.
Industry
Overview and Our Opportunity
Land
Acquisitions
The United States Department of Agriculture, or USDA, estimates
that in 2007 there were approximately 2.2 million farms on
922.1 million acres of land in the United States. Out of
this total, there were 1.7 million farms dedicated to
producing crops on 406.4 million acres of land, resulting
in an average of approximately 241 acres per farm.
The USDAs 2007 Census of Agriculture estimates the total
annual market value of crops harvested in the United States at
$143.7 billion. According to the National Council of Real
Estate Investment Fiduciaries, or NCREIF, Farmland Index, which
tracks domestic farmland income and appreciation,
U.S. farmland has yielded
1
average annualized returns of 13.9% between 2000 and 2009.
Furthermore, the USDA estimates that U.S. cropland value
per acre has increased by 92.7% between 2000 and 2009.
Crops can be divided into two
sub-categories,
annual cropland and permanent cropland. Annual crops, such as
strawberries, corn and soybeans, are planted and harvested
annually. Permanent crops, such as oranges, almonds and grapes,
have plant structures such as trees or vines that produce crops
annually without being replanted. We intend to acquire and lease
farmland for the primary purpose of harvesting annual crops,
with less emphasis on permanent crop farms, because annual crops
are less expensive to replace and are less susceptible to
disease and poor weather.
We intend to lease to independent farmers with sufficient
experience and capital to operate the farms without our
financial assistance. We believe this capability on the part of
our tenant farmers will give us flexibility to replace tenants
if needed and to increase annual rents. We do not have resources
to farm the land we acquire, but we know farmers who we believe
we can lease to. We seek to acquire cropland in multiple
locations in the United States, including California, the
Southeast and the Midwest, in order to provide diversification
of climate conditions and water sources.
We believe that agricultural real estate that is leased for
farming has certain features that distinguish it from other
rental real estate. First, because almost all of the property
consists of land, there is generally not a significant concern
about risks associated with fires or other natural disasters
that may damage the property. Second, we believe farmland has
historically maintained relatively low vacancy rates when
compared to other types of rental real estate and we believe
that it is rare for good farmland not to be leased and farmed.
As a result, we believe there is a relatively low risk of being
unable to lease our properties. Based on our own survey of real
estate agents, a low percentage of the farmland in the areas in
which we intend to purchase property has remained un-rented
during the past ten years. Third, most farmland in the areas in
which we intend to buy land is leased under short-term leases,
and we plan to lease our property under short term-leases. By
entering into short-term leases, we believe we will be in a
position to increase our rental rates when the leases are
renewed, which could result in higher rents. Conversely there is
the possibility that the land cannot be rented. Members of our
management team have experience in leasing land that could be
used for strawberries, raspberries, tomatoes, beans, peppers,
lettuce and other annual crops which produce for one season and
are then replaced with newly planted crops. We believe that this
strategy will provide us with an opportunity to lease our land
holdings to a wide variety of different farmers from year to
year and avoid the risk of owning land dedicated to a single
crop.
We also believe that much of the real estate we are seeking to
acquire will be owned by families and farming businesses.
According to the USDA, as of 2007, approximately 86% of farms in
the United States are owned by families. Some of these farmers
may wish to simultaneously lease their property back and
continue their agricultural businesses under short term, net
leases. Sellers in these sale-leaseback transactions
can then use the cash sales proceeds to repay existing
indebtedness or for growth of their farming operations. Other
sellers may wish to use the cash proceeds for retirement or
other business endeavors. Therefore, we believe that real estate
that we acquire but do not simultaneously lease back to the
seller may instead be leased to other independent farmers. While
we expect we will generally receive rents from leasing land for
these farming operations from year to year, we believe that we
will be able to sell this land at appreciated valuations in the
future when these properties may be sold for urban or suburban
development.
We believe that, as an investment, U.S. farmland has
performed extremely well in recent years compared to other asset
classes and has provided investors with a safe haven during the
recent turbulence in the financial markets. From 2000 to 2009
the average annual return of the S&P 500 was 1.2%, while
the average annual return of the NCREIF Farmland Index was
13.9%. In general, the farming sector is not heavily leveraged,
and farmland has maintained low debt levels during a period of
unprecedented leverage in other asset classes. As a result, farm
values and income have not experienced the extreme volatility
seen in recent years in other asset classes.
We believe that farmland possesses the following attributes that
may appeal to long-term investors:
|
|
|
|
|
Inflation drives up food costs and therefore the cost of
agricultural commodities. As a result, the underlying land that
supports agricultural production will increase with significant
correlation to inflation.
|
2
|
|
|
|
|
Farmland provides investors with another asset class to increase
portfolio diversification. Historically, farmland values have
not been significantly impacted by major swings in the stock and
bond markets.
|
|
|
|
Large acreage farmland has minimal vacancy loss and limited
capital expense requirements, which results in relatively stable
and predictable operating income.
|
These features increase our confidence in evaluating prospective
individual farm acquisitions, including projecting rental income
that may be generated from specific properties.
Mortgage
Loans
We also expect to make senior secured first lien mortgage loans
to farmers for the purchase of farmland and properties related
to farming. We believe that we can offer more favorable terms
than the traditional farmland lenders against whom we expect to
compete. Based on our own survey of agricultural lenders, these
institutions are currently lending to borrowers purchasing
farmland in amounts up to approximately 65% of the appraised
value of the mortgaged land, at interest rates of 6% to 8%.
Most, if not all, of these lenders require significant monthly
payments of principal. Interest-only loans are not readily
available to farmers.
We plan to enter this lending market by offering a greater
loan-to-value
on mortgaged land, but at slightly higher interest rates and no
principal amortization. We believe this loan product will be
attractive to two different groups. First, we believe there are
farmers that have loans maturing that cannot locate refinancing
opportunities. We will seek to make those loans at higher
interest rates than offered by the local banks. Second, certain
buyers of farms may lack sufficient equity capital to purchase
property with the relatively low
loan-to-value
loans offered by traditional farmland lenders. These buyers need
to borrow more of the purchase price, and we intend to lend up
to 80% of the purchase price because of our willingness to own
the property if the buyer defaults on our loan. Banks usually do
not intend to own property, and we do not intend to make a loan
solely in order to own the property, as is the case with some
vulture funds. Instead, we will advise all of our
borrowers that non-payment may result in our seeking to own and
control the collateral farmland. We also plan on offering
interest-only loans to farmers that other lenders are currently
not offering. Based on prevailing market rates, we currently
intend to initially make these mortgage loans at interest rates
of 6.5% to 8.5%.
When we make mortgage loans we intend to provide borrowers with
a conditional put option so they can sell their property to us
at an agreed fair market value. This option will provide the
borrowers with the assurance that they can sell their land if
needed. We intend to apply the same underwriting criteria to our
loans as we do when buying farmland to ensure the property meets
our acquisition criteria if the borrower exercises the put
option and sells us the property.
Our
Current Properties
We currently own an aggregate of 959 acres of farmland in
California, of which approximately 737 acres is farmable.
We acquired 306 acres of farmland in Watsonville,
California in 1997, which is held through our wholly owned
subsidiary San Andreas Road Watsonville, LLC, for a
purchase price of approximately $4.4 million. We currently
lease this farm to Dole Fresh on a net lease basis under a lease
that expires on December 31, 2010. During 2009, we earned
gross rental income on this property of $405,000. We have in
place a credit facility that is secured by a mortgage on this
property. The credit facility currently has $5,000 outstanding,
the minimum amount required under the credit facility.
We acquired 653 acres of farmland in Oxnard, California in
1998, which is held through our wholly owned subsidiary West
Gonzales Road Oxnard, LLC, for a purchase price of approximately
$9.9 million. We currently lease this farm, including a
cooler operation, a box barn, and other buildings, to Dole Fresh
on a net lease basis under a lease that expires on
December 31, 2013. During 2009, we earned gross rental
income on this property of $2.0 million. We have in place a
mortgage on this property. The mortgage loan currently has a
principal balance of approximately $12.0 million and
matures in February 2021. The mortgage loan balance is in excess
of the original purchase price, because the value of the land
has increased since the purchase in 1998.
3
Our
Objectives and Our Strategy
Our principal business objective is to maximize stockholder
returns through a combination of monthly cash distributions to
our stockholders, sustainable long-term growth in cash flow from
operations and long-term appreciation in the value of our real
estate properties. Our primary strategy to achieve our business
objective is to invest in and own a diversified portfolio of
leased farmland, mortgages on farmland and properties related to
farming operations that we believe will produce stable cash flow
and increase in value. This strategy includes the following
components:
|
|
|
|
|
Owning Farms and Farm-Related Real Estate. We
intend to acquire farmland and lease it to independent farmers.
In addition to farmland, we may also seek to buy operations that
are related to farmland, such as vegetable and fruit coolers and
freezers, packing houses, storage sheds and distribution centers
that could generate rental income. We expect to sell some of our
real estate assets from time to time when doing so would be
advantageous to us and our stockholders. We also expect many of
the properties we purchase to eventually be converted to urban
or suburban uses, which could result in their long-term
appreciation in value.
|
|
|
|
Owning Mortgages on Farms and Farm-Related Real
Estate. In circumstances where our purchase of
farms and farm-related properties is not feasible, we will seek
to provide the purchaser of the property with a mortgage loan
secured by the property, often with an option to sell the
property to us in the future. Currently, there are few lenders
who provide financing for the purchase of farm and farm-related
properties, and those loans that can be obtained are at
relatively lower amounts to the value of the real estate. This
loan to value ratio has fallen substantially since
the recent economic recession in the United States. We are also
aware of shorter term mortgages that were made by banks and
other lending institutions that will come due in the near term,
and the absence of significant numbers of mortgage providers to
make replacement mortgages. We hope to take advantage of this
opportunity and provide mortgage loans to owners of farmland and
farm-related real estate. We anticipate that these mortgage
loans will be at rates and on terms that, in the early years of
the loans, will provide us with more income than we would
receive from owning and renting farmland in those years. We
believe that these attractive terms will be available to us
because lending by banks and other financial institutions is
currently at a relatively low point. By providing a mortgage
loan on the farmland, we believe we will also be in a good
position to purchase the farmland should the owner wish to sell
the land.
|
|
|
|
Owning Ground Leases. Sometimes an
agricultural real estate owner will enter into a long-term lease
for the land alone and the tenant will build a building on the
site. At the end of the lease the landlord often owns the
building. Some of these ground leases are as short as
20 years but many are longer. We believe that there is an
opportunity to buy land that is leased under long-term ground
leases.
|
|
|
|
Expanding Our Operations Beyond
California. The United States is one of the
largest farming countries in the world, and we believe this
provides us with a great deal of expansion opportunities. While
we will begin our farm acquisition operations in California, we
expect that we will establish other operations in other farming
locations. The southern part of the United States, such as
Georgia and Florida, offers additional attractive areas. We also
expect to seek farmland acquisitions in the Midwest and
Mid-Atlantic. In addition, there are other farming communities
throughout the United States and Canada that have similar
characteristics, and we may seek to own farmland in those
locations as well.
|
|
|
|
Using Leverage. Our strategy includes the use
of leverage so that we may make more investments than would
otherwise be possible in order to maximize potential returns to
stockholders. We intend to borrow through mortgage loans secured
by our properties and, in such cases, will attempt to limit our
loss exposure on any property to the amount of equity invested
in that property. We may also borrow funds on a short-term basis
or incur other indebtedness. Some of our investments may be made
through joint ventures that will permit us to own interests in
large properties without restricting the diversity of our
portfolio.
|
4
Our
Structure
We intend to conduct our business through a traditional Umbrella
Partnership Real Estate Investment Trust, or UPREIT, structure
in which our properties and mortgages will be held directly or
indirectly by our operating partnership, Gladstone Land Limited
Partnership, or our Operating Partnership. We are the sole
general partner of our Operating Partnership and currently hold
100% of the outstanding limited partnership units of our
operating partnership. In the future, we may issue operating
partnership units to third parties from time to time in
connection with real property acquisitions. Limited partners who
hold limited partnership units in our Operating Partnership will
be entitled to redeem these units for cash or, at our election,
shares of our common stock on a
one-for-one
basis at any time after the first anniversary of the completion
of this offering. Farmland owners who exchange their farms for
Operating Partnership units may be able to do so in a tax free
exchange. As long as we qualify as a REIT, we generally will not
be subject to U.S. federal income tax to the extent that we
currently distribute our net taxable income to our stockholders.
We may utilize a taxable REIT subsidiary, or TRS, such as
Gladstone Land Advisers, Inc., to own or manage our assets and
engage in other activities when we deem it necessary or
advisable. The taxable income generated by our TRS will be
subject to regular corporate income tax.
The following diagram depicts our expected ownership structure
upon completion of this offering.
Our
Adviser
Gladstone Management Corporation, a Delaware corporation and a
registered investment adviser, serves as our adviser, and we
refer to it in this prospectus as our Adviser. Our Adviser is
responsible for managing our real estate business activities on
a day-to-day
basis and for identifying and making acquisitions and
dispositions that it believes meet our investment criteria. Our
Adviser does not acquire or lease real estate other than for its
own use. Our Adviser does not and will not make loans to or
investments in any company with which we have or intend to enter
into a lease, and we will not co-invest with our Adviser in any
real estate transaction.
Each of our officers, who are also officers of our Adviser, has
significant experience in making investments in and lending to
small and medium-sized businesses, including investing in real
estate and making mortgage loans. In addition to our officers,
our Adviser currently has 32 professionals who are involved in
structuring, arranging and managing investments on behalf of
companies advised by our Adviser. We also rely on outside
professionals that have agricultural experience that are
involved in conducting due diligence on the properties that we
acquire and lease. Additionally, our Adviser plans to hire
additional investing professionals from the California area
following this offering.
5
Under the terms of an amended Advisory Agreement with our
Adviser that we will enter into upon completion of this
offering, we will pay an annual base management fee equal to
2.0% of our total stockholders equity, less the recorded
value of any preferred stock, and an incentive fee based on
funds from operations, or FFO. For purposes of calculating the
incentive fee, FFO includes any realized capital gains and
capital losses, less any dividends paid on preferred stock, but
FFO does not include any unrealized capital gains or losses. The
incentive fee will reward our Adviser if our quarterly FFO,
before giving effect to any incentive fee, exceeds 1.75%, or 7%
annualized, (the hurdle rate) of total
stockholders equity, less the recorded value of any
preferred stock. Our Adviser will receive 100% of the amount of
the pre-incentive fee FFO that exceeds the hurdle rate, but is
less than 2.1875% of our pre-incentive fee FFO. Our Adviser will
also receive an incentive fee of 20% of the amount of our
pre-incentive fee FFO that exceeds 2.1875%.
We have designed the incentive fee to reward our Adviser based
on our generation of funds from operations. There are no
acquisition fees paid to our Adviser when real estate is
acquired, and there are no sale fees paid to our Adviser when
real estate is sold. The incentive fee is paid based on the
generation of income for us. Therefore, we believe the Adviser
is incentivized to generate stable and consistent funds from
operations to pay our monthly dividends and its incentive fee.
We also have entered into a trademark agreement with our Adviser
that permits us to use the trademarked diamond-shaped
G and Gladstone logo for the sum of $10 per quarter.
Our
Administrator
We will enter into an amended Administration Agreement with
Gladstone Administration, LLC, which we refer to in this
prospectus as our Administrator, upon the completion of this
offering. Under this agreement, we will pay separately for our
allocable portion of our Administrators overhead expenses
in performing its obligations including, but not limited to,
rent and our allocable portion of the salaries and benefits
expenses of its employees, including, but not limited to, our
chief financial officer, chief compliance officer, treasurer,
internal counsel, investor relations officer and their
respective staffs.
Our Other
Affiliates and Potential Conflicts of Interest
Gladstone Commercial Corporation. Many of our
directors and executive officers are also affiliated with
Gladstone Commercial Corporation, a publicly held REIT whose
common stock is traded on the NASDAQ Global Select Market under
the trading symbol GOOD. Gladstone Commercial
invests primarily in commercial real estate and selectively
makes long-term commercial and industrial mortgage loans.
Gladstone Commercial does not invest in or own agricultural real
estate or make loans secured by agricultural real estate.
Gladstone Capital Corporation. Many of our
directors and executive officers are also affiliated with
Gladstone Capital Corporation, a publicly held closed-end
management investment company whose common stock is traded on
the NASDAQ Global Market under the trading symbol
GLAD. Gladstone Capital makes loans to and
investments in small and medium-sized businesses. It does not
buy or lease real estate and does not lend to agricultural
enterprises. Gladstone Capital will not make loans to or
investments in any company with which we have or intend to enter
into a lease.
Gladstone Investment Corporation. Many of our
directors and executive officers are also affiliated with
Gladstone Investment Corporation, a publicly held closed-end
management investment company whose common stock is traded on
the NASDAQ Global Market under the trading symbol
GAIN. Gladstone Investment makes loans to and
investments in small and medium-sized businesses in connection
with buyouts and other recapitalizations. It does not buy or
lease real estate and does not lend to agricultural enterprises.
Gladstone Investment will not make loans to or investments in
any company with which we have or intend to enter into a lease.
We do not presently intend to co-invest with Gladstone Capital,
Gladstone Commercial, Gladstone Investment or any other
affiliated entity in any business. However, in the future it may
be advisable for us to co-invest with one of our affiliates. If
we decide to change our policy on co-investments with
affiliates, we will seek approval of this decision from our
independent directors.
6
Many of our officers are also officers or directors of our
Adviser, Gladstone Capital, Gladstone Commercial and Gladstone
Investment. Our Adviser and its affiliates, including our
officers, may have conflicts of interest in the course of
performing their duties for us. These conflicts may include:
|
|
|
|
|
Our Adviser may realize substantial compensation on account of
its activities on our behalf;
|
|
|
|
Our agreements with our Adviser are not arms-length
agreements;
|
|
|
|
We may experience competition with our affiliates for financing
transactions; and
|
|
|
|
Our Adviser and other affiliates could compete for the time and
services of our officers and directors.
|
Our Tax
Status
We were taxed as a C corporation for our taxable years ended
December 31, 1997 through December 31, 2009. We will
elect to be taxed as a REIT for federal income tax purposes
commencing with our taxable year ending December 31, 2011.
To qualify as a REIT, we may not have, at the end of any taxable
year ending on or after December 31, 2011, any
undistributed earnings and profits accumulated in any non-REIT
taxable year. Our non-REIT earnings and profits include any
earnings and profits we accumulated before the effective date of
our REIT election, which is expected to be January 1, 2011.
As of the date of this prospectus, we estimate our non-REIT
earnings and profits to be approximately $10.6 million. We
intend to distribute sufficient earnings and profits, to
stockholders of record after the completion of this offering,
before December 31, 2011 to eliminate any non-REIT earnings
and profits, which distributions will be in addition to
distributions we will be required to make to satisfy the 90%
distribution test (as discussed above) and avoid incurring tax
on our undistributed income.
We intend to elect and qualify to be taxed as a REIT under the
Code commencing with the taxable year ending December 31,
2011. We believe that, following the completion of this
offering, our election to be taxed as a REIT for the tax year
ending December 31, 2011, and any distribution of pre-REIT
earnings and profits (as discussed above), we will be organized
and operated in conformity with the requirements for
qualification and taxation as a REIT and that our proposed
method of operation will enable us to continue to meet the
requirements for qualification and taxation as a REIT for
U.S. federal income tax purposes thereafter. We expect to
receive an opinion of counsel to the effect that, commencing
with our taxable year ending December 31, 2011, and subject
to our distribution of all pre-REIT earnings and profits (as
discussed above), we have been organized in conformity with the
requirements for qualification and taxation as a REIT under the
Code and that our proposed method of operation will enable us to
meet the requirements for qualification and taxation as a REIT
thereafter. It is possible that the Internal Revenue Service, or
IRS, may challenge our qualification as a REIT or attempt to
recharacterize the nature of our assets or income. We do not
intend to seek a ruling from the IRS as to the foregoing
matters. It must be emphasized that the opinion of our counsel,
which is not binding on the IRS or any court, is based on
various assumptions and certain representations made by our
management relating to our organization, assets, income and
operations, including, without limitation, the amount of rents
that we will receive from personal property.
To maintain our qualification as a REIT beginning with the tax
year ending December 31, 2011, we must meet a number of
organizational and operational requirements, including a
requirement that we annually distribute at least 90% of our net
income, excluding net capital gains, to our stockholders, and a
requirement that we distribute by December 31, 2011, all of
our pre-REIT earnings and profits. As a REIT, we generally will
not be subject to U.S. federal income tax on our net income
that we currently distribute to our stockholders beginning with
the year ending December 31, 2011. 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 qualify for taxation as a REIT, we may be subject to some
U.S. federal, state and local taxes on our income or
property, and the net income of our TRS will be subject to
taxation at normal corporate rates. In addition, we will be
subject to regular corporate income tax for the taxable years
ending on or before December 31, 2010. See
U.S. Federal Income Tax Considerations.
Risk
Factors
You should carefully consider the matters discussed in the
Risk Factors section of this prospectus beginning on
page [ ] prior to deciding to invest in
our common stock. Some of the risks include:
|
|
|
|
|
We may not be able to successfully operate our agricultural
properties to be leased for annual crops.
|
7
|
|
|
|
|
We have
identified
specific properties to purchase with the net proceeds we will
receive from this offering and are reviewing others, although we
have not yet entered into letters of intent or binding
agreements to acquire these properties, and there is no
guarantee that we will be able to acquire any of them.
|
|
|
|
There is no assurance that we will be able to purchase the
properties under review. As a result, investors will be unable
to evaluate the manner in which the net proceeds are invested
and the economic merits of projects prior to investment.
|
|
|
|
Because our properties will be devoted to agricultural uses
pending their potential future conversion to urban uses, we will
be subject to risks associated with agriculture, which may
result in an adverse impact on the price of our common stock.
|
|
|
|
Conflicts of interest exist between us, our Adviser, its
officers and directors and their affiliates, which could result
in decisions that are not in the best interests of our
stockholders.
|
|
|
|
We cannot guarantee when or if our properties will ever be
converted to urban or suburban uses. If we are unable to sell
our agricultural real estate for urban or suburban development,
our operating results may be materially adversely affected.
|
|
|
|
We intend to set a distribution rate
at % of the public offering price
in this offering, which may have an adverse impact on the market
price for our common stock.
|
|
|
|
Highly leveraged tenants may be unable to make lease payments,
which could adversely affect our cash available for distribution
to our stockholders.
|
|
|
|
Our real estate investments will include farms that may be
difficult to sell or re-lease upon tenant defaults or early
lease terminations.
|
|
|
|
The inability of a tenant to make lease payments will reduce our
revenues.
|
|
|
|
We have not identified any properties on which we will make
mortgage loans. As a result, investors will be unable to
evaluate the economic merits of the mortgage lending aspect of
our plan.
|
|
|
|
The inability of a borrower to make interest and principal
amortization payments will reduce our revenues.
|
|
|
|
Our business strategy relies on external financing, which may
expose us to risks associated with leverage such as restrictions
on additional borrowing and payment of distributions, risks
associated with balloon payments and risk of loss of our equity
upon foreclosure.
|
|
|
|
We are subject to certain risks associated with the ownership of
agricultural real estate which could reduce the value of our
investments.
|
|
|
|
We may not qualify as a REIT for federal income tax purposes,
which would subject us to federal income tax on our taxable
income at regular corporate rates, thereby reducing the amount
of funds available for paying distributions to stockholders.
|
|
|
|
Our success will depend on the performance of our Adviser. If
our Adviser makes inadvisable investment or management
decisions, our operations could be materially adversely impacted.
|
Corporate
Information
We were incorporated in California in 1997 and reincorporated in
Delaware in 2004. Our executive offices are located at
1521 Westbranch Drive, Second Floor, McLean, Virginia
22102. We also have an office in Oxnard, California near the
location of one of our current properties. Our telephone number
at our executive offices is
(703) 287-5800
and our corporate website will be www.GladstoneLand.com.
The information contained on, or accessible through, our website
is not incorporated into this prospectus.
8
The
Offering
|
|
|
Common stock offered by us(1)(2) |
|
11,350,000 shares |
|
Common stock offered by the selling stockholder(3) |
|
750,000 shares |
|
Common stock retained by the selling stockholder |
|
2,000,000 shares |
|
Common stock to be outstanding after this offering(1) |
|
14,100,000 shares |
|
Use of proceeds |
|
To purchase agricultural real estate to be leased for farming
and to make mortgages on similar agricultural real estate. |
|
Proposed NASDAQ Listing Symbol |
|
LAND |
|
Distribution Policy |
|
Consistent with our objective of qualifying as a REIT, we expect
to pay monthly distributions and distribute at least 90% of our
REIT taxable income. We expect to commence monthly distributions
upon the completion of this offering. Our Board of Directors
will determine the amount of distributions we will pay, and our
initial distribution rate will be %
of the public offering price in this offering. We also intend to
distribute sufficient earnings and profits, to stockholders of
record after the completion of this offering, before
December 31, 2011 to eliminate any non-REIT earnings and
profits (which we are required to do to qualify as a REIT).
These distributions will be in addition to distributions we are
required to make to satisfy the 90% distribution test. |
|
Our Adviser |
|
Pursuant to the terms of an advisory agreement, our Adviser will
administer our
day-to-day
operations, and select our real estate investments. |
|
|
|
(1) |
|
Excludes 1,815,000 shares of our common stock issuable
pursuant to the over-allotment option granted to the
underwriters. |
|
(2) |
|
Up
to
shares of our common stock will be reserved for sale by the
underwriters to our directors, officers and employees and
certain associated persons at the public offering price net of
the underwriting discount. For more information, see
Underwriting Directed Shares. |
|
(3) |
|
Mr. Gladstone intends to sell these shares in the offering
in order for us to meet one of the REIT qualification
requirements. |
The number of shares of our common stock to be outstanding after
this offering is based on 2,750,000 shares of common stock
outstanding as
of ,
2010.
Unless otherwise indicated, all information in this prospectus
reflects and assumes the following:
|
|
|
|
|
effect to 27,500-for-1 stock split prior to the completion of
the offering;
|
|
|
|
no exercise by the underwriters of their over-allotment option
to purchase up to 1,815,000 additional shares of our common
stock in this offering;
|
|
|
|
an initial public offering price of $15.00, which is the
midpoint of the range listed on the cover page of this
prospectus; and
|
|
|
|
the filing and effectiveness of our amended and restated
certificate of incorporation immediately prior to the completion
of this offering.
|
9
Summary
Consolidated Financial Data
You should read the summary financial information below in
conjunction with Managements 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
consolidated financial data as of December 31, 2009 and
2008 and for the years ended December 31, 2009, 2008 and
2007 are derived from audited financial statements included
elsewhere in this prospectus. The summary consolidated financial
data as of December 31, 2007 is derived from audited
financial statements not included in this prospectus. The
summary consolidated financial data as of and for the six months
ended June 30, 2010 and 2009 are derived from unaudited
financial statements included elsewhere in this prospectus. Our
results of operations are not necessarily indicative of results
of operations that should be expected in any future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30,
|
|
For the Years Ended December 31,
|
|
|
2010
|
|
2009
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Rental Income
|
|
$
|
1,196,634
|
|
|
$
|
1,196,634
|
|
|
$
|
2,418,111
|
|
|
$
|
2,418,111
|
|
|
$
|
2,418,111
|
|
Net Income
|
|
|
275,313
|
|
|
|
303,725
|
|
|
|
654,761
|
|
|
|
760,253
|
|
|
|
857,384
|
|
EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortization)(1)
|
|
|
1,036,956
|
|
|
|
1,043,171
|
|
|
|
2,119,977
|
|
|
|
2,345,583
|
|
|
|
2,536,017
|
|
FFO available to common stockholders(2)
|
|
|
432,237
|
|
|
|
460,649
|
|
|
|
968,608
|
|
|
|
1,075,798
|
|
|
|
1,173,048
|
|
Assets
|
|
|
20,655,379
|
|
|
|
21,128,789
|
|
|
|
20,096,184
|
|
|
|
21,051,214
|
|
|
|
24,737,513
|
|
Liabilities
|
|
|
12,392,956
|
|
|
|
12,492,714
|
|
|
|
12,109,074
|
|
|
|
12,718,865
|
|
|
|
12,921,494
|
|
Stockholders Equity
|
|
|
8,262,423
|
|
|
|
8,636,075
|
|
|
|
7,987,110
|
|
|
|
8,332,349
|
|
|
|
11,816,019
|
|
|
|
|
(1) |
|
EBITDA is a key financial measure that our management uses to
evaluate our operating performance but should not be construed
as an alternative to operating income, cash flows from operating
activities or net income (loss), as determined in accordance
with accounting principles generally accepted in the United
States of America, or GAAP. EBITDA is not a measure defined in
accordance with GAAP. We believe that EBITDA is a standard
performance measure commonly reported and widely used by
analysts and investors in our industry. A reconciliation of net
income (loss) to EBITDA is set forth in the table below. |
|
|
|
EBITDA has limitations as an analytical tool, and you should not
consider it in isolation, or as a substitute for analysis of our
results as reported under GAAP. Some of these limitations are: |
|
|
|
EBITDA does not reflect our cash expenditures, or
future requirements, for capital expenditures or contractual
commitments;
|
|
|
|
EBITDA does not reflect changes in, or cash
requirements for, our working capital needs;
|
|
|
|
EBITDA does not reflect the interest expense, or the
cash requirements necessary to service interest or principal
payments, on our debt;
|
|
|
|
Although depreciation and amortization are non-cash
charges, the assets being depreciated and amortized will often
have to be replaced in the future, and EBITDA does not reflect
any cash requirements for these replacements; and
|
|
|
|
Other companies in our industry may calculate EBITDA
differently than we do, limiting its usefulness as a comparative
measure.
|
|
|
|
Because of these limitations, EBITDA should not be considered as
a measure of discretionary cash available to us to invest in the
growth of our business. We compensate for these limitations by
relying primarily on our GAAP results of operations and using
EBITDA only supplementally. |
10
|
|
|
|
|
A reconciliation of net income (loss) to EBITDA is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30,
|
|
For the Years Ended December 31,
|
|
|
2010
|
|
2009
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
275,313
|
|
|
$
|
303,725
|
|
|
$
|
654,761
|
|
|
$
|
760,253
|
|
|
$
|
857,384
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
352,101
|
|
|
|
369,048
|
|
|
|
727,249
|
|
|
|
793,477
|
|
|
|
812,023
|
|
Income Taxes
|
|
|
252,618
|
|
|
|
213,474
|
|
|
|
424,120
|
|
|
|
476,308
|
|
|
|
550,946
|
|
Depreciation Expense
|
|
|
156,924
|
|
|
|
156,924
|
|
|
|
313,847
|
|
|
|
315,545
|
|
|
|
315,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
1,036,956
|
|
|
$
|
1,043,171
|
|
|
$
|
2,119,977
|
|
|
$
|
2,345,583
|
|
|
$
|
2,536,017
|
|
|
|
|
(2) |
|
Funds From Operations, or FFO, is a term approved by the
National Association of Real Estate Investment Trusts, or NAREIT. |
|
|
|
FFO was developed by the NAREIT, as a relative non-GAAP
supplemental measure of operating performance of an equity REIT
in order to recognize that income-producing real estate
historically has not depreciated on the basis determined under
GAAP. FFO, as defined by NAREIT, is net income (loss) (computed
in accordance with GAAP), excluding gains (or losses) from sales
of property, plus depreciation and amortization of real estate
assets, and after adjustments for unconsolidated partnerships
and joint ventures. FFO does not represent cash flows from
operating activities in accordance with GAAP and should not be
considered an alternative to either net income (loss) as an
indication of our performance or cash flow from operations as a
measure of liquidity or ability to make distributions.
Comparison of FFO to similarly titled measures for other REITs
may not necessarily be meaningful due to possible differences in
the application of the NAREIT definition used by such REITs. |
|
|
|
Basic funds from operations per share, or Basic FFO per share,
and diluted funds from operations per share, or Diluted FFO per
share, are FFO divided by weighted average common shares
outstanding and FFO divided by weighted average common shares
outstanding on a diluted basis, respectively, during a period.
We believe that FFO, Basic FFO per share and Diluted FFO per
share are useful to investors because they provide investors
with a further context for evaluating our FFO results in the
same manner that investors use net income and earnings per
share, or EPS, in evaluating net income available to common
stockholders. In addition, since most REITs provide FFO, Basic
FFO and Diluted FFO per share information to the investment
community, we believe these are useful supplemental measures for
comparing us to other REITs. We believe that net income is the
most directly comparable GAAP measure to FFO, basic EPS is the
most directly comparable GAAP measure to Basic FFO per share,
and diluted EPS is the most directly comparable GAAP measure to
Diluted FFO per share. |
|
|
|
The following table provides a reconciliation of our FFO to the
most directly comparable GAAP measure, net income, and a
computation of Basic and Diluted FFO per weighted average common
share and basic and diluted net income per weighted average
common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
For the Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
275,313
|
|
|
$
|
303,725
|
|
|
$
|
654,761
|
|
|
$
|
760,253
|
|
|
$
|
857,384
|
|
Add: Real estate depreciation and amortization
|
|
|
156,924
|
|
|
|
156,924
|
|
|
|
313,847
|
|
|
|
315,545
|
|
|
|
315,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO available to common stockholders
|
|
$
|
432,237
|
|
|
$
|
460,649
|
|
|
$
|
968,608
|
|
|
$
|
1,075,798
|
|
|
$
|
1,173,048
|
|
Weighted average shares outstanding
basic & diluted
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
Basic & Diluted net income per weighted average common
share
|
|
$
|
2,753
|
|
|
$
|
3,037
|
|
|
$
|
6,548
|
|
|
$
|
7,603
|
|
|
$
|
8,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & Diluted FFO per weighted average common share
|
|
$
|
4,322
|
|
|
$
|
4,606
|
|
|
$
|
9,686
|
|
|
$
|
10,758
|
|
|
$
|
11,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
RISK
FACTORS
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
Relating To Our Business
We may
not be successful in identifying and consummating suitable
acquisitions that meet our investment criteria, which may impede
our growth and negatively affect our results of
operations.
In 2004, we reoriented our operations and began to implement a
strategy of land acquisition to lease for the farming of annual
crops, primarily strawberries, while continuing to own and
operate our traditional operating farms business. We own two
large farm properties in the State of California which we lease
to Dole Fresh Vegetables, Inc., or Dole Fresh. We intend to use
the net proceeds of this offering to invest in and own more net
leased farmland. We expect that most of our future tenants will
be small and medium-sized farming operations. Because of the
reorientation of our business focus, we are subject to many of
the business risks and uncertainties associated with any new
business enterprise. Our failure to operate successfully or
profitably or accomplish our investment objectives could have a
material adverse effect on our ability to generate cash flow to
make distributions to our stockholders, and the value of an
investment in our common stock may decline substantially or be
reduced to zero.
Although
we have
identified
specific properties to purchase with a portion of the net
proceeds from this offering, there can be no assurance that we
will be close on
these
properties. Therefore, investors will be unable to evaluate the
manner in which the net proceeds are invested and the economic
merits of projects prior to investment.
At the time of this offering, we have
identified
specific properties to purchase with a portion of the net
proceeds we will receive from this offering. See
Properties Under Consideration. However, we have not
yet completed our due diligence investigations of any of these
properties, nor have we entered into letters of intent or
definitive agreements to purchase any of these properties. As a
result, there can be no assurance that we will be successful in
purchasing any of these properties. Factors that could cause us
not to purchase one or more of these properties include our
potential inability to agree to definitive purchase terms for
the properties with the prospective sellers, and our discovery
of problems with the properties in our due diligence
investigations. Additionally, besides these
initial
properties, we have not yet identified any other properties to
purchase. As a result, investors in the offering will be unable
to evaluate the manner in which the net proceeds are invested
and the economic merits of projects prior to investment.
Additionally, our Adviser will have broad authority to make
acquisitions of properties that it may identify in the future.
There can be no assurance that our Adviser will be able to
identify or negotiate acceptable terms for the acquisition of
properties that meet our investment criteria, or that we will be
able to acquire such properties. We cannot assure you that
acquisitions made using the net proceeds of this offering will
produce a return on our investment. Any significant delay in
investing the net proceeds of this offering would have a
material adverse effect on our ability to generate cash flow and
make distributions to our stockholders.
Our
distribution rate may have an adverse effect on the market price
of our common stock.
We intend to set an initial distribution rate
at % of the public offering price
in this offering. However, because we only own two properties,
we currently do not expect to generate sufficient cash flows
from operations to pay distribution at this level. Our failure
to rapidly invest the net proceeds of this offering or make
investments at acceptable rates of return could result in us
using a significant portion of the proceeds of this offering for
the purpose of making these distributions or result in our
fixing a distribution rate that is not competitive with
alternative investments, which could adversely affect the market
price for our common stock.
12
Highly
leveraged tenants may be unable to pay rent, which could
adversely affect our cash available to make distributions to our
stockholders.
Some of our tenants may have been recently restructured using
leverage acquired in a leveraged transaction or may otherwise be
subject to significant debt obligations. Tenants that are
subject to significant debt obligations may be unable to make
their rent payments if there are adverse changes to their
businesses or economic conditions. Tenants that have experienced
leveraged restructurings or acquisitions will generally have
substantially greater debt and substantially lower net worth
than they had prior to the leveraged transaction. In addition,
the payment of rent and debt service may reduce the working
capital available to leveraged entities and prevent them from
devoting the resources necessary to remain competitive in their
industries. In situations where management of the tenant will
change after a transaction, it may be difficult for our Adviser
to determine with certainty the likelihood of the tenants
business success and of it being able to pay rent throughout the
lease term. These companies are more vulnerable to adverse
conditions in their businesses or industries, economic
conditions generally and increase in interest rates.
Leveraged tenants are more susceptible to bankruptcy than
unleveraged tenants. Bankruptcy of a tenant could cause:
|
|
|
|
|
the loss of lease payments to us;
|
|
|
|
an increase in the costs we incur to carry the property occupied
by such tenant;
|
|
|
|
a reduction in the value of our common stock; and
|
|
|
|
a decrease in distributions to our stockholders.
|
Under bankruptcy law, a tenant who is the subject of bankruptcy
proceedings has the option of continuing or terminating any
unexpired lease. If a bankrupt tenant terminates a lease with
us, any claim we might have for breach of the lease (excluding a
claim against collateral securing the claim) will 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
years lease payments or 15% of the remaining lease
payments payable under the lease (but no more than three
years lease payments). In addition, a bankruptcy court
could recharacterize a net lease transaction as a secured
lending transaction. If that were to occur, we would not be
treated as the owner of the property, but might have additional
rights as a secured creditor. This would mean our claim in
bankruptcy court would only be for the amount we paid for the
property, which could adversely impact our financial condition.
Our
real estate investments will consist of agricultural properties
that may be difficult to sell or re-lease upon tenant defaults
or early lease terminations.
We intend to focus our investments on agricultural properties.
These types of properties are relatively illiquid compared to
other types of real estate and financial assets. This
illiquidity will limit our ability to quickly change our
portfolio in response to changes in economic or other
conditions. With these properties, if the current lease is
terminated or not renewed, we may be required to renovate the
property to the extent we have buildings on the property, or to
make rent concessions in order to lease the property to another
tenant or sell the property. In addition, in the event we are
forced to sell the property, we may have difficulty finding
qualified purchasers who are willing to buy the property. These
and other limitations may affect our ability to sell or re-lease
properties without adversely affecting returns to our
stockholders.
Our
current properties are leased to the same tenant, Dole Fresh,
and Dole Fresh may no longer be able to make rental payments or
may chose to terminate its leases.
Both of our current farm leases are with Dole Fresh. If Dole
Fresh fails to make rental payments or elects to terminate its
leases and the land cannot be re-leased on satisfactory terms,
it would have a material adverse effect on our financial
performance and our ability to make dividend payments to our
stockholders.
13
The
inability of a tenant to pay rent will reduce our
revenues.
We expect that a single tenant will occupy each of our
properties and, therefore, the success of our investments will
be materially dependent on the financial stability of these
tenants. Lease payment defaults by these tenants could adversely
affect our cash flows and cause us to reduce the amount of
distributions to stockholders. In the event of a default by a
tenant, we may experience delays in enforcing our rights as
landlord and may incur substantial costs in protecting our
investment and re-leasing our property. If a lease is
terminated, there is no assurance that we will be able to lease
the property for the rent previously received or sell the
property without incurring a loss.
Our
business strategy relies heavily on external financing, which
may expose us to risks associated with leverage such as
restrictions on additional borrowing and payment of
distributions, risks associated with balloon payments, and risk
of loss of our equity upon foreclosure.
Our acquisition strategy contemplates the use of leverage so
that we may make more investments than would otherwise be
possible in order to maximize potential returns to stockholders.
If the income generated by our properties and other assets fails
to cover our debt service, we could be forced to reduce or
eliminate distributions to our stockholders and may experience
losses. We may borrow on a secured or unsecured basis. Neither
our certificate of incorporation nor our bylaws impose any
limitation on borrowing on us. However, our Board of Directors
has adopted a policy that our aggregate borrowing will not
result in a total debt to total equity ratio greater than
two-to-one.
This coverage ratio means that, for each dollar of equity we
have, we can incur up to two dollars of debt. Our Board of
Directors may change this policy at any time.
We currently have a line of credit from a bank that permits us
to borrow up to $3,250,000 secured by the Watsonville farm. To
date, we have not used this line of credit beyond the minimum
draw requirements. In the future, we expect to use it for
working capital. As of June 30, 2010, we currently have a
$11.5 million mortgage loan from a life insurance company
that is secured by the Oxnard farm. The current interest rate on
the Oxnard farm loan is 6%. The loan is being amortized over
17 years, of which 12 years are remaining.
Our ability to achieve our investment objectives will be
affected by our ability to borrow money in sufficient amounts
and on favorable terms. We expect that we will borrow money that
will be secured by our properties and that these financing
arrangements will contain customary covenants such as those that
limit our ability, without the prior consent of the lender, to
further mortgage the applicable property or to discontinue
insurance coverage. In addition, any credit facility we might
enter into is likely to contain certain customary restrictions,
requirements and other limitations on our ability to incur
indebtedness, and will specify debt ratios that we will be
required to maintain. Accordingly, we may be unable to obtain
the degree of leverage that we believe to be optimal, which may
cause us to have less cash for distribution to stockholders than
we would have with an optimal amount of leverage. Our use of
leverage could also make us more vulnerable to a downturn in our
business or the economy generally. There is also a risk that a
significant increase in the ratio of our indebtedness to the
measures of asset value used by financial analysts may have an
adverse effect on the market price of our common stock.
Some of our debt financing arrangements may require us to make
lump-sum or balloon payments at maturity. Our
ability to make a balloon payment at maturity is uncertain and
may depend upon our ability to obtain additional financing or to
sell the financed property. At the time the balloon payment is
due, we may not be able to refinance the balloon payment on
terms as favorable as the original loan or sell the property at
a price sufficient to make the balloon payment, which could
adversely affect the amount of our distributions to stockholders.
Once the net proceeds of this offering have been substantially
fully invested, we intend to acquire additional properties by
borrowing all or a portion of the purchase price and securing
the loan with a mortgage on some or all of our real property. If
we are unable to make our debt payments as required, a lender
could foreclose on the property securing its loan. This could
cause us to lose part or all of our investment in such property
which in turn could cause the value of our common stock or the
amount of distributions to our stockholders to be reduced.
14
We are
subject to certain risks associated with real estate ownership
which could reduce the value of our investments.
Our investments will include net leased agricultural real
estate. Our performance, and the value of our investments, is
subject to risks incident to the ownership and operation of
these types of properties, including:
|
|
|
|
|
adverse weather conditions;
|
|
|
|
global warming;
|
|
|
|
crop disease;
|
|
|
|
changes in the general economic climate;
|
|
|
|
changes in local conditions such as an oversupply of farmland or
reduction in demand for farmland;
|
|
|
|
changes in market price of or demand for crops that are grown on
our properties, such as strawberries;
|
|
|
|
changes in interest rates and the availability of financing;
|
|
|
|
competition from other available properties; and
|
|
|
|
changes in laws and governmental regulations, including those
governing real estate usage, zoning and taxes.
|
If one or more of these events transpires, our results of
operations and financial condition may be materially adversely
impacted, resulting in the reduction in the value of our assets
and our common stock.
Competition
for the acquisition of agricultural real estate may impede our
ability to make acquisitions or increase the cost of these
acquisitions, which could adversely affect our operating results
and financial condition.
We will compete for the acquisition of properties with many
other entities engaged in agricultural and real estate
investment activities, including corporate agriculture
companies, financial institutions, institutional pension funds,
other real estate investment trusts, or REITs, other public and
private real estate companies and private real estate investors.
These competitors may prevent us from acquiring desirable
properties or may cause an increase in the price we must pay for
real estate. 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 REITs 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
properties may increase, resulting in increased demand and
increased prices paid for these properties. If we pay higher
prices for properties, our profitability may decrease, and you
may experience a lower return on your investment. Increased
competition for properties may also preclude us from acquiring
those properties that would generate attractive returns to us.
We
expect to lease our properties to small and medium-sized farms
and agricultural businesses, which will expose us to additional
risks unique to these entities.
Leasing real property to small and medium-sized farms and
agricultural businesses will expose us to a number of unique
risks related to these entities, including the following:
|
|
|
|
|
Adverse weather conditions. Fresh produce,
including produce used in canning and other packaged food
operations, is vulnerable to adverse weather conditions,
including windstorms, floods, drought and temperature extremes,
which are quite common but difficult to predict. Unfavorable
growing conditions can reduce both crop size and crop quality.
In extreme cases, entire harvests may be lost in some geographic
areas. These factors could have material adverse effects on our
tenants and their ability to pay rent to us, which in turn could
have a material adverse effect on our business, results of
operations, financial condition and ability to make
distributions to our stockholders.
|
15
|
|
|
|
|
Crop disease. Fresh produce is also vulnerable
to crop disease and to pests, which may vary in severity and
effect, depending on the stage of production at the time of
infection or infestation, the type of treatment applied and
climatic conditions. The costs to control these infestations
vary depending on the severity of the damage and the extent of
the plantings affected. These infestations can increase costs
and decrease revenues of our tenants which could have a material
adverse effect on their ability to pay rent to us, which in turn
could have a material adverse effect on our business, results of
operations, financial condition and ability to make
distributions to our stockholders.
|
|
|
|
Sensitivity to market prices and
demand. Excess supplies often cause severe price
competition in the agricultural industry. Growing conditions in
various parts of the world, particularly weather conditions such
as floods, droughts and freezes, as well as diseases and pests,
are primary factors affecting market prices because of their
influence on the supply and quality of product. Fresh produce is
highly perishable and generally must be brought to market and
sold soon after harvest. Some items, such as lettuce must be
sold more quickly, while other items can be held in cold storage
for longer periods of time. The selling price received for each
type of produce depends on all of these factors, including the
availability and quality of the produce item in the market, and
the availability and quality of competing types of produce.
Adverse prevailing conditions could have a material adverse
effect on their ability to pay rent to us, which in turn could
have a material adverse effect on our business, results of
operations and financial condition and ability to make
distributions to our stockholders.
|
|
|
|
Limited financial resources. Small and
medium-sized agricultural businesses are more likely than larger
farming operations to have difficulty making lease payments when
they experience adverse events, such as the events described
above. If our tenants are unable to make lease payments to us,
it would have a material adverse effect on our ability to make
distributions to stockholders.
|
|
|
|
Smaller market share than larger agricultural
companies. Because our target tenants are smaller
farmers, they will tend to be more vulnerable to
competitors actions and market conditions, as well as
general economic downturns. In addition, our target tenants may
face intense competition, including competition from companies
with greater financial resources. Competition could lead to
price pressure on crops that could lower our tenants
income, which could adversely impact their ability to make lease
payments to us and, in turn, lead to a reduction in the amount
of our distributions to stockholders.
|
|
|
|
There is generally little or no publicly available
information about our target tenants. Many of our
tenants are likely to be privately owned businesses, about which
there is generally little or no publicly available operating and
financial information. As a result, we will rely on our Adviser
to perform due diligence investigations of these tenants, their
operations and their prospects. We may not learn all of the
material information we need to know regarding these businesses
through our investigations. As a result, it is possible that we
could lease properties to tenants or make mortgage loans to
borrowers that ultimately are unable to pay rent or interest to
us, which could adversely impact the amount available for
distributions.
|
|
|
|
Less predictable operating results. Small and
medium-sized farmers generally have less predictable operating
results than larger agricultural companies. We expect that many
of our tenants may experience significant fluctuations in their
operating results, may from time to time be parties to
litigation, may require substantial additional capital to
support their operations, to finance expansion or to maintain
their competitive positions, may otherwise have a weak financial
position or may be adversely affected by changes in the business
cycle. Our borrowers or tenants may not meet net income, cash
flow and other coverage tests typically imposed by their
lenders. The failure of one of our borrowers or tenants to
satisfy financial or operating covenants imposed by their
lenders could lead to defaults and, potentially, foreclosure on
credit facilities, which could additionally trigger
cross-defaults in other agreements. If this were to occur, it is
possible that the ability of one of our tenants to make required
payments to us would be jeopardized.
|
|
|
|
Dependence on one or two key
personnel. Typically, the success of a small or
medium-sized business also depends on the management talents and
efforts of one or two persons 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.
|
16
Because
we expect ultimately to sell our agricultural real estate to
developers in connection with the conversion of such properties
to urban or suburban uses, we are subject to risks associated
with expansion of urban and suburban land use.
Our business plan is based upon purchasing agricultural real
property in California and other locations that we believe is
located in the path of urban and suburban growth and ultimately
will increase in value as a result. Pending the sale of such
real property to developers for conversion to urban, suburban
and other more intensive uses, such as residential or commercial
development, we intend to lease the property for agricultural
uses, particularly farming annual crops. Urban and suburban
development is subject to a number of uncertainties, including
land zoning and environmental issues, infrastructure development
and demand. As a result, there can be no guarantee that the
increased development that we expect will actually occur and
that we will be able to sell any of the properties that we own
or acquire in the future for such conversion. Our inability to
sell these properties in the future for conversion to urban or
suburban uses could result in a reduced return on investment and
could materially adversely impact our results of operations.
Because
we must distribute a substantial portion of our net income to
qualify as a REIT, we will be largely dependent on third-party
sources of capital to fund our future capital
needs.
To qualify as a REIT, we generally must distribute to our
stockholders at least 90% of our taxable income each year,
excluding capital gains. Because of this distribution
requirement, it is not likely that we will be able to fund a
significant portion of our future capital needs, including
property acquisitions, from retained earnings. Therefore, we
will likely rely on public and private debt and equity capital
to fund our business. This capital may not be available on
favorable terms or at all. Our access to additional capital
depends on a number of things, including the markets
perception of our growth potential and our current and potential
future earnings. Moreover, additional debt financings may
substantially increase our leverage, exposing us to greater risk
of default and potentially reducing cash available for
distributions to stockholders.
Our
real estate portfolio will be concentrated in a limited number
of properties, which subjects us to an increased risk of
significant loss if any property declines in value or if we are
unable to lease a property.
Based on the anticipated net proceeds to be received from this
offering, the expected investment size and our Advisers
experience in the marketplace, we estimate that we will purchase
approximately 10 to 15 properties with the net proceeds of this
offering. To the extent we are able to leverage such
investments, we will acquire additional properties with the net
proceeds of borrowings, subject to our debt policy. A
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 property. In
addition, while we do not intend to invest 20% or more of our
total assets in a particular property at the time of investment,
it is possible that, as the values of our properties change, one
property may comprise in excess of 20% of the value of our total
assets. Lack of diversification will increase the potential that
a single under-performing investment could have a material
adverse effect on our cash flow and the price we could realize
from the sale of our properties.
Liability
for uninsured losses could adversely affect our financial
condition.
Losses from disaster-type occurrences, such as wars, earthquakes
and weather-related disasters, may be either uninsurable or not
insurable on economically viable terms. Should an uninsured loss
occur, we could lose our capital investment or anticipated
profits and cash flow from one or more properties.
Potential
liability for environmental matters could adversely affect our
financial condition.
We intend to purchase agricultural properties and will be
subject to the risk of liabilities under federal, state and
local environmental laws. Some of these laws could subject us to:
|
|
|
|
|
responsibility and liability for the cost of removal or
remediation of hazardous substances released on our properties,
generally without regard to our knowledge of or responsibility
for the presence of the contaminants;
|
17
|
|
|
|
|
liability for the costs of removal or remediation of hazardous
substances at disposal facilities for persons who arrange for
the disposal or treatment of these substances; and
|
|
|
|
potential liability for common law claims by third parties for
damages resulting from environmental contaminants.
|
We will generally include provisions in our leases making
tenants responsible for all environmental liabilities and for
compliance with environmental regulations, and requiring tenants
to reimburse us for damages or costs for which we have been
found liable. However, these provisions will not eliminate our
statutory liability or preclude third party claims against us.
Even if we were to have a legal claim against a tenant to enable
us to recover any amounts we are required to pay, there are no
assurances that we would be able to collect any money from the
tenant. Our costs of investigation, remediation or removal of
hazardous substances may be substantial. In addition, the
presence of hazardous substances on one of our properties, 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. If we are unable to
lease or sell the property, there will be less income to pay out
as distributions to shareholders.
Our
potential participation in joint ventures creates additional
risk.
We may participate in joint ventures or purchase properties
jointly with other unaffiliated entities. There are additional
risks involved in these types of transactions. These risks
include the potential of our joint venture partner becoming
bankrupt or our economic or business interests diverging. These
diverging interests could, among other things, expose us to
liabilities of the joint venture in excess of our proportionate
share of these liabilities. The partition rights of each owner
in a jointly owned property could reduce the value of each
portion of the divided property.
Failure
to hedge effectively against interest rate changes may adversely
affect our results of operations.
We may experience interest rate volatility in connection with
mortgage loans on our properties or other variable-rate debt
that we may obtain from time to time. We may seek to mitigate
our exposure to changing interest rates by using interest rate
hedging arrangements such as interest rate swaps and caps. These
derivative instruments involve risk and may not be effective in
reducing our exposure to interest rate changes. Risks inherent
in derivative instruments include the risk that counter-parties
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 movements in
interest rates, derivative instruments that we are likely to use
may also involve immediate costs, which could reduce our cash
available for distribution to our stockholders. Likewise,
ineffective hedges, as well as the occurrence of any of the
risks inherent in derivatives, could adversely affect our
reported operating results or reduce your overall investment
returns. Our Adviser and our Board of Directors will review each
of our derivative contracts and periodically evaluate their
effectiveness against their stated purposes.
In addition, the REIT provisions of the Code substantially limit
our ability to hedge. Our aggregate gross income from
non-qualifying hedges, fees, and certain other non-qualifying
sources cannot exceed 5% of our annual gross income. As a
result, we might have to limit our use of advantageous hedging
techniques or implement those hedges through a TRS. Any hedging
income earned by a TRS would be subject to federal, state and
local income tax at regular corporate rates. This could increase
the cost of our hedging activities or expose us to greater risks
associated with changes in interest rates than we would
otherwise want to bear.
Risks
Associated With Our Use of an Adviser to Manage Our
Business
Our
success will depend on the performance of our Adviser and if our
Adviser makes inadvisable investment or management decisions,
our operations could be materially adversely
impacted.
Our ability to achieve our investment objectives and to pay
distributions to our stockholders is dependent upon the
performance of our Adviser in evaluating potential investments,
selecting and negotiating property purchases and dispositions,
selecting tenants, setting lease terms and determining financing
arrangements. You will have no
18
opportunity to evaluate the terms of transactions or other
economic or financial data concerning our investments. You must
rely entirely on the analytical and management abilities of our
Adviser and the oversight of our Board of Directors. If our
Adviser or our Board of Directors makes inadvisable investment
or management decisions, our operations could be materially
adversely impacted.
We may
have conflicts of interest with our Adviser and other
affiliates.
Our Adviser will manage our real estate business and will
locate, evaluate, recommend and negotiate the acquisition of our
real estate investments. At the same time, our advisory
agreement permits our Adviser to conduct other commercial
activities and provide management and advisory services to other
entities, including Gladstone Commercial, Gladstone Capital and
Gladstone Investment entities affiliated with our officers and
directors. Moreover, most of our officers and directors are also
officers and directors of Gladstone Capital and Gladstone
Investment, which actively make loans to and invest in small and
medium-sized companies and Gladstone Commercial, which actively
makes real estate investments. As a result, we may from time to
time have conflicts of interest with our Adviser in its
management of our business and with Gladstone Commercial,
Gladstone Investment or Gladstone Capital, which may arise
primarily from the involvement of our Adviser, Gladstone
Capital, Gladstone Commercial, Gladstone Investment and their
affiliates in other activities that may conflict with our
business. Examples of these potential conflicts include:
|
|
|
|
|
our Adviser may realize substantial compensation on account of
its activities on our behalf and may, therefore, be motivated to
approve acquisitions solely on the basis of increasing
compensation to itself;
|
|
|
|
our agreements with our Adviser are not arms-length
agreements;
|
|
|
|
we may experience competition with our affiliates for financing
transactions; and
|
|
|
|
our Adviser and other affiliates, such as Gladstone Capital,
Gladstone Investment and Gladstone Commercial, could compete for
the time and services of our officers and directors.
|
These and other conflicts of interest between us and our Adviser
could have a material adverse effect on the operation of our
business and the selection or management of our real estate
investments.
Our
financial condition and results of operations will depend on our
Advisers ability to effectively manage our future
growth.
Our ability to achieve our investment objectives will depend on
our ability to sustain continued growth, which will, in turn,
depend on our Advisers ability to find, select and
negotiate property purchases and net leases that meet our
investment criteria. Accomplishing this result on a
cost-effective basis is largely a function of our Advisers
marketing capabilities, management of the investment process,
ability to provide competent, attentive and efficient services
and our access to financing sources on acceptable terms. As we
grow, our Adviser may be required to hire, train, supervise and
manage new employees. Our Advisers failure to effectively
manage our future growth could have a material adverse effect on
our business, financial condition and results of operations.
We may
be obligated to pay our Adviser incentive compensation even if
we incur a loss.
The Advisory Agreement we will enter into in connection with
this offering will entitle our Adviser to incentive compensation
based on our FFO, which will reward our Adviser if our quarterly
FFO (before giving effect to any incentive fee) exceeds 1.75%
(7% annualized) of our total stockholders equity (less the
recorded value of any preferred stock). Our pre-incentive fee
FFO for incentive compensation purposes will exclude the effect
of any unrealized gains, losses or other items that do not
affect realized net income that we may incur in the fiscal
quarter, even if such losses result in a net loss on our
statement of operations for that quarter. Thus, we may be
required to pay our Adviser incentive compensation for a fiscal
quarter even if we incur a net loss for that quarter.
19
We are
dependent upon our key management personnel for our future
success, particularly David Gladstone, Terry Lee Brubaker and
George Stelljes III.
We are dependent on our senior management and other key
management members to carry out our business and investment
strategies. Our future success depends to a significant extent
on the continued service and coordination of our senior
management team, particularly David Gladstone, our chairman and
chief executive officer, George Stelljes III, our president and
chief operating officer, Terry Lee Brubaker, our vice chairman.
The departure of any of our executive officers or key personnel
of our Adviser could have a material adverse effect on our
ability to implement our business strategy and to achieve our
investment objectives.
Risks
Associated With Our Organizational Structure
The
limit on the number of shares of common stock a person may own
may discourage a takeover.
Our certificate of incorporation prohibits ownership of more
than 7.5% of the outstanding shares of our common stock by one
person except our chairman and chief executive officer, David
Gladstone, who will own approximately 15% of our stock after
this offering. This restriction may discourage a change of
control and may deter individuals or entities from making tender
offers for our common stock, which offers might otherwise be
financially attractive to our stockholders or which might cause
a change in our management. See Certain Provisions of
Delaware Law and of our Certificate of Incorporation and
Bylaws Restrictions on Ownership of Shares.
Certain
provisions of Delaware law could restrict a change in
control.
We are subject to provisions of the Delaware General Corporation
Law, or DGCL, that, in general, prohibit any business
combination with a beneficial owner of 15% or more of our common
stock for three years unless the holders acquisition of
our stock was either approved in advance by our Board of
Directors or ratified by the Board of Directors and stockholders
owning two-thirds of our outstanding stock not owned by the
acquiring holder. Although we believe these provisions
collectively provide for an opportunity to receive higher bids
by requiring potential acquirers to negotiate with our Board of
Directors, they would apply even if the offer may be considered
beneficial by some stockholders. As a result, this statute could
reduce the likelihood of a transaction that might otherwise be
in the best interests of our stockholders.
Our
staggered director terms could deter takeover attempts and
adversely impact the price of our common stock.
Our directors will be divided into three classes, with the term
of the directors in each class expiring every third year. At
each annual meeting of stockholders, the successors to the class
of directors whose term expires at such meeting will be elected
to hold office for a term expiring at the annual meeting of
stockholders held in the third year following the year of their
election. After election, a director may only be removed by our
stockholders for cause. Election of directors for staggered
terms with limited rights to remove directors makes it more
difficult for a hostile bidder to acquire control of us. The
existence of this provision may negatively impact the price of
our common stock and may discourage third-party bids to acquire
our common stock. This provision may reduce any premiums paid to
you for your shares of common stock in a change in control
transaction.
Tax
Risks
We may
not qualify as a REIT for federal income tax purposes, which
would subject us to federal income tax on our taxable income at
regular corporate rates, thereby reducing the amount of funds
available for paying distributions to
stockholders.
We currently intend to operate in a manner that will allow us to
qualify as a REIT for federal income tax purposes beginning with
our taxable year ending December 31, 2011. Before
January 1, 2011, we will be subject to regular corporate
income taxation. Our qualification as a REIT beginning with our
taxable year ending December 31, 2011 will depend on our
ability to meet various requirements set forth in the Code
concerning, among other things, the ownership of our outstanding
common stock, the nature of our assets, the sources of our
20
income and the amount of our distributions to our stockholders.
The REIT qualification requirements are extremely complex, and
interpretations of the federal income tax laws governing
qualification as a REIT are limited. Accordingly, we cannot be
certain that we will be successful in operating so as to qualify
as a REIT. At any time new laws, interpretations or court
decisions may change the federal tax laws relating to, or the
federal income tax consequences of, qualification as a REIT. It
is possible that future economic, market, legal, tax or other
considerations may cause our Board of Directors to revoke our
REIT election, which it may do without stockholder approval.
If we fail to qualify, or lose or revoke our REIT status, we
will face serious tax consequences that will substantially
reduce the funds available for distribution to you because:
|
|
|
|
|
we would not be allowed a deduction for distributions to
stockholders in computing our taxable income, we would be
subject to federal income tax at regular corporate rates and we
might need to borrow money or sell assets in order to pay any
such tax;
|
|
|
|
we also could be subject to the federal alternative minimum tax
and possibly increased state and local taxes; and
|
|
|
|
unless we are entitled to relief under statutory provisions, we
would be disqualified from taxation as a REIT for the four
taxable years following the year during which we ceased to
qualify.
|
In addition, all distributions to stockholders made before
January 1, 2011, and all distributions thereafter, if we
fail to qualify as a REIT, will be subject to tax to the extent
of our current and accumulated earnings and profits, provided
that the U.S. federal rate of income tax on the taxable
portion of such distributions is limited to 15% through 2010
under certain circumstances for stockholders who are
individuals. If we do fail to qualify as a REIT, we will not be
required to make distributions to stockholders and distributions
to stockholders that are U.S. corporations might be
eligible for the dividends received deduction.
As a result of all these factors, our failure to qualify as a
REIT could impair our ability to expand our business and raise
capital, and would adversely affect the value of our common
stock.
We
will not seek to obtain a ruling from the Internal Revenue
Service, or IRS, that we qualify as a REIT for federal income
tax purposes.
As described herein, we intend to operate so as to qualify as a
REIT for federal income tax purposes beginning with our taxable
year ending December 31, 2011. Although we have not
requested, and do not expect to request, a ruling from the IRS
that we qualify as a REIT, we have received an opinion of our
counsel that, based on certain assumptions and representations,
we will so qualify beginning with our taxable year ending
December 31, 2011. You should be aware, however, that
opinions of counsel are not binding on the IRS or any court. The
REIT qualification opinion only represents the view of our
counsel based on its review and analysis of existing law, which
includes no controlling precedent, and therefore could be
subject to modification or withdrawal based on future
legislative, judicial or administrative changes to the federal
income tax laws, any of which could be applied retroactively.
The validity of the opinion of our counsel and of our
qualification as a REIT will depend on our continuing ability to
meet the various REIT requirements described herein. An IRS
determination that we do not qualify as a REIT would deprive our
stockholders of the tax benefits of our REIT status only if the
IRS determination is upheld in court or otherwise becomes final.
To the extent that we challenge an IRS determination that we do
not qualify as a REIT, we may incur legal expenses that would
reduce our funds available for distribution to stockholders.
Failure
to make required distributions would subject us to
tax.
In order to qualify as a REIT beginning with our taxable year
ending December 31, 2011, each year we must distribute to
our stockholders at least 90% of our taxable income, other than
any net capital gains. To the extent that we satisfy the
distribution requirement but distribute less than 100% of our
taxable income, we will be subject to
21
federal corporate income tax on our undistributed income. In
addition, we will incur a 4% nondeductible excise tax on the
amount, if any, by which our distributions in any year are less
than the sum of:
|
|
|
|
|
85% of our ordinary income for that year;
|
|
|
|
95% of our capital gain net income for that year; and
|
|
|
|
100% of our undistributed taxable income from prior years.
|
We intend to pay out our income to our stockholders in a manner
intended to satisfy the distribution requirement applicable to
REITs and to avoid corporate income tax and the 4% excise tax.
Differences in timing between the recognition of income and the
related cash receipts or the effect of required debt
amortization payments could require us to borrow money or sell
assets to pay out enough of our taxable income to satisfy the
distribution requirement and to avoid corporate income tax and
the 4% excise tax in a particular year. In the future, we may
borrow funds to pay distributions to our stockholders and the
limited partners of our Operating Partnership. Any funds that we
borrow would subject us to interest rate and other market risks.
In addition, to qualify as a REIT, we are required to distribute
our non-REIT earnings and profits accumulated before the
effective date of our REIT election, which is expected to be
January 1, 2011. As of the date of this prospectus, we
estimate our non-REIT earnings and profits to be approximately
$10.6 million. We intend to distribute sufficient earnings
and profits, to stockholders of record after the completion of
this offering, before December 31, 2011 to eliminate any
non-REIT earnings and profits. If we were unable to fully
distribute our pre-REIT earnings and profits, we would fail to
qualify as a REIT.
The
IRS may treat sale-leaseback transactions as loans, which could
jeopardize our REIT status.
The IRS may take the position that specific sale-leaseback
transactions we may treat as true leases are not true leases for
federal income tax purposes but are, instead, financing
arrangements or loans. If a sale-leaseback transaction were so
recharacterized, we might fail to satisfy the asset or income
tests required for REIT qualification and consequently lose our
REIT status effective with the year of recharacterization.
Alternatively, the amount of our REIT taxable income could be
recalculated which could cause us to fail the distribution test
for REIT qualification. See Federal Income Tax
Consequences of our Status as a REIT Sale-Leaseback
Transactions.
There
are special considerations for pension or profit-sharing trusts,
Keogh Plans or individual retirement accounts, or IRAs, whose
assets are being invested in our common stock.
If you are investing the assets of a pension, profit sharing,
401(k), Keogh or other retirement plan, IRA or benefit plan in
us, you should consider:
|
|
|
|
|
whether your investment is consistent with the applicable
provisions of the Employee Retirement Income Security Act, or
ERISA, or the Code;
|
|
|
|
whether your investment will produce unrelated business taxable
income, or UBTI, to the benefit plan; and
|
|
|
|
your need to value the assets of the benefit plan annually.
|
We do not believe that under current ERISA law and regulations
that our assets would be treated as plan assets for
purposes of ERISA. However, if our assets were considered to be
plan assets, our assets would be subject to ERISA
and/or
Section 4975 of the Code, and some of the transactions we
have entered into with our Adviser and its affiliates could be
considered prohibited transactions which could cause
us, our Adviser and its affiliates to be subject to liabilities
and excise taxes. In addition, our officers and directors, our
Adviser and its affiliates could be deemed to be fiduciaries
under ERISA and subject to other conditions, restrictions and
prohibitions under Part 4 of Title I of ERISA. Even if
our assets are not considered to be plan assets, a prohibited
transaction could occur if we or any of our affiliates is a
fiduciary (within the meaning of ERISA) with respect to a
purchase by a benefit plan and, therefore, unless an
administrative or statutory exemption applies in the event such
persons are fiduciaries (within the meaning of ERISA) with
respect to your purchase, you should not purchase shares in this
offering.
22
If our
Operating Partnership fails to maintain its status as a
partnership for federal income tax purposes, its income may be
subject to taxation.
We intend to maintain the status of the Operating Partnership as
a partnership for federal income tax purposes. However, if the
IRS were to successfully challenge the status of the Operating
Partnership as a partnership, it would be taxable as a
corporation. In such event, this would reduce the amount of
distributions that the Operating Partnership could make to us.
This would also result in our losing REIT status and becoming
subject to a corporate level tax on our own income. This would
substantially reduce our cash available to pay distributions and
the return on your investment. In addition, if any of the
entities through which the Operating Partnership owns its
properties, in whole or in part, loses its characterization as a
partnership for federal income tax purposes, it would be subject
to taxation as a corporation, thereby reducing distributions to
the Operating Partnership. Such a recharacterization of an
underlying property owner could also threaten our ability to
maintain REIT status.
Complying
with REIT requirements may cause us to forego or liquidate
otherwise attractive investments.
To qualify as a REIT for federal income tax purposes beginning
with our taxable year ending December 31, 2011, we must
continually satisfy various tests regarding 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. In order to meet these tests, we may be required to
forego investments we might otherwise make. Thus, compliance
with the REIT requirements may hinder our investment
performance. In particular, we must ensure that at the end of
each calendar quarter, at least 75% of the value of our assets
consists of cash, cash items, government securities and
qualified REIT real estate assets. The remainder of our
investment in securities (other than government securities,
securities of TRSs 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 assets (other than
government securities, securities of TRSs 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. If we fail to
comply with these requirements at the end of any calendar
quarter beginning with our taxable year ending December 31,
2011, 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 and
suffering adverse tax consequences. As a result, we may be
required to dispose of otherwise attractive investments. These
actions could have the effect of reducing our income and amounts
available for distribution to our stockholders.
Dividends
payable by REITs do not qualify for the reduced tax rates
available for some dividends.
The maximum tax rate applicable to income from qualified
dividends payable to domestic stockholders of regular
corporations taxed at individual income tax rates is reduced by
legislation to 15% through the end of 2010. Dividends payable by
REITs, however, generally are not eligible for the reduced
rates. Although this legislation does not adversely affect the
taxation of REITs or dividends payable by REITs, more favorable
rates applicable to regular corporate qualified dividends may
cause investors who are taxed at individual rates to perceive
investments in REITs to be relatively less attractive than
investments in the stocks of non-REIT corporations that pay
dividends. If these favorable rates for regular corporate
qualified dividends extend beyond the end of 2010 into taxable
years in which we intend to qualify as a REIT, this could
adversely affect the value of our common stock and our other
equity securities.
Our
ownership of and relationship with TRSs will be limited and a
failure to comply with the limits would jeopardize our REIT
status and may result in the application of a 100% excise
tax.
We currently own one TRS, Gladstone Land Advisers, Inc., and may
form other TRSs as part of our overall business strategy. A TRS
may earn income that would not be qualifying income if earned
directly by the parent 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
REITs assets may consist of stock or securities of one or
more TRSs. A TRS will pay federal, state and local income tax at
regular corporate rates on any income that it earns. In
addition, the TRS rules limit the deductibility of interest paid
or accrued by a TRS to its parent REIT to
23
assure that the TRS is subject to an appropriate level of
corporate taxation. The rules also impose a 100% excise tax on
certain transactions between a TRS and its parent REIT that are
not conducted on an arms length basis.
Our TRSs will pay 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. We anticipate that the aggregate value of any TRS stock and
securities owned by us will be less than 25% of the value of our
total assets (including the TRS stock and securities). We will
scrutinize all of our transactions with any TRSs that we form
for the purpose of ensuring that they are entered into on
arms-length terms in order to avoid incurring the 100%
excise tax described above. There can be no assurance, however,
that we will be able to comply with the 25% limitation discussed
above or to avoid application of the 100% excise tax discussed
above.
We may
be subject to adverse legislative or regulatory tax changes that
could reduce the market price of our securities.
At any time, the federal income tax laws or regulations
governing REITs or the administrative interpretations of those
laws or regulations may be amended. We cannot predict when or if
any new federal income tax law, regulation or administrative
interpretation, or any amendment to any existing federal income
tax law, regulation or administrative interpretation, will be
adopted, promulgated or become effective and any such law,
regulation or interpretation may take effect retroactively. We
and our security holders could be adversely affected by any such
change in, or any new, federal income tax law, regulation or
administrative interpretation.
We
will have corporate income tax liability for taxes attributable
to taxable years prior to our REIT election.
We will be subject to regular corporate income taxation for our
taxable years ended on or before December 31, 2010. In
addition, if we were determined, as the result of a tax audit or
otherwise, to have an unpaid corporate income tax liability for
any taxable years during which we were classified as a C
corporation for federal income tax purposes, we would be
responsible for paying such tax liability notwithstanding our
subsequent qualification as a REIT.
Risks
Relating to this Offering and the Market for our Common
Stock
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 market price of our common stock may be
highly volatile and subject to wide fluctuations. In addition,
the trading volume in our common stock may fluctuate and cause
significant price variations to occur. If the market price of
our common stock declines significantly, you may be unable to
resell your shares at or above the initial public offering
price. We cannot assure you that the market price of our common
stock will not fluctuate or decline significantly in the future.
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:
|
|
|
|
|
price and volume fluctuations in the stock market from time to
time, which are often unrelated to the operating performance of
particular companies;
|
|
|
|
significant volatility in the market price and trading volume of
shares of REITs, real estate companies or other companies in our
sector, which is not necessarily related to the performance of
those companies;
|
|
|
|
adverse weather conditions where our properties are located;
|
|
|
|
initiatives that prohibit, restrict or discourage urban and
suburban development in California or other areas where our
properties are located;
|
|
|
|
changes in demand for or market prices of produce, such as
strawberries and other crops, produced in the regions in which
we own properties;
|
24
|
|
|
|
|
actual or anticipated variations in our quarterly operating
results or distributions;
|
|
|
|
changes in our funds from operations or earnings estimates or
the publication of research reports about us or the real estate
or agricultural industries generally;
|
|
|
|
increases in market interest rates that lead purchasers of our
shares of common stock to demand a higher yield;
|
|
|
|
changes in market valuations of similar companies;
|
|
|
|
adverse market reaction to our anticipated level of debt or any
increased indebtedness we incur in the future;
|
|
|
|
additions or departures of key management personnel;
|
|
|
|
actions by institutional stockholders;
|
|
|
|
speculation in the press or investment community;
|
|
|
|
price and volume fluctuations in the stock market as a result of
involvement of the United States in armed hostilities, or
uncertainty regarding United States involvement in such
activities;
|
|
|
|
changes in regulatory policies or tax guidelines, particularly
with respect to REITs;
|
|
|
|
loss of REIT status for federal income tax purposes;
|
|
|
|
loss of a major funding source; and
|
|
|
|
general market and economic conditions.
|
Shares
of common stock eligible for future sale may have adverse
effects on our share price.
We cannot predict the effect, if any, of future sales of common
stock, or the availability of shares for future sales, on the
market price of our common stock. Sales of substantial amounts
of common stock (including shares of common stock issuable upon
the conversion of units of our Operating Partnership that we may
issue from time to time) and the sale of up
to shares
of common stock held by our current stockholder, or the
perception that these sales could occur, may adversely affect
prevailing market prices for our common stock.
An
increase 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 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
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
properties and our related distributions to stockholders, and
not from the underlying appraised value of the properties
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 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.
Other
Risks
We
have identified material weaknesses in our internal controls
over financial reporting, which resulted in our need to revise
our previously issued financial statements.
In connection with reporting the financial results for the
period ended June 30, 2010, we identified a control
deficiency that has been classified as a material weakness in
our internal control over financial reporting. A material
weakness is a control deficiency that results in a more than
remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected
on a timely basis by employees in the normal course of their
assigned functions. The control deficiency identified was that
management did not maintain adequate internal controls to assess
the financial reporting and disclosure implications of the
federal and state tax consequences of certain transactions and
arrangements and therefore had not properly recognized certain
tax
25
liabilities or income tax receivables, which resulted in
accounting errors in our previously issued financial statements.
The identification of this material weakness may cause investors
to lose confidence in us and our stock may be negatively
affected.
The standards that must be met for management to assess the
internal control over financial reporting are relatively new and
complex, and require significant documentation, testing and
possible remediation to meet the detailed standards. We may
encounter problems or delays in completing the activities
necessary to make future assessments of our internal control
over financial reporting and completing the implementation of
any necessary improvements. Future assessments may require us to
incur substantial costs and may require a significant amount of
time and attention of management, which could seriously harm our
business, financial condition and results of operations. If we
are unable to assess our internal control over financial
reporting as effective in the future, investors may lose
confidence in us and our stock may be negatively affected.
CAUTIONARY
STATEMENT 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; and statements of managements
goals and objectives and other similar expressions concerning
matters that are not historical facts. When we use the words
may, should, could,
would, predicts, potential,
continue, expects,
anticipates, future,
intends, plans, believes,
estimates or similar expressions, 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:
|
|
|
|
|
our business strategy;
|
|
|
|
our projected operating results;
|
|
|
|
our ability to obtain future financing arrangements;
|
|
|
|
estimates relating to our future distributions;
|
|
|
|
our understanding of our competition;
|
|
|
|
market trends;
|
|
|
|
projected capital expenditures; and
|
|
|
|
use of the net proceeds of this offering.
|
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 managements 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:
|
|
|
|
|
the factors referenced in this prospectus, including those set
forth under the section captioned Risk Factors;
|
|
|
|
general volatility of the capital markets and the market price
of our common stock;
|
|
|
|
changes in our business strategy;
|
|
|
|
availability, terms and deployment of capital;
|
26
|
|
|
|
|
availability of qualified personnel;
|
|
|
|
changes in our industry, interest rates or the general
economy; and
|
|
|
|
the degree and nature of our competition.
|
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.
USE OF
PROCEEDS
We estimate that the net proceeds to us from this offering will
be approximately $157.0 million, assuming an initial
public offering price of $15.00 per share, which is the
midpoint of the offering price range on the cover of this
prospectus ($182.4 million if the underwriters
exercise their over-allotment option in full), after deducting
the underwriting discount and estimated offering expenses
payable by us. We expect to use the net proceeds of this
offering to buy agricultural and other real estate for lease to
tenants, to make loans secured by real estate and to make
payments to our Adviser pursuant to our advisory agreement. As
of the date of this prospectus, we do not have commitments to
purchase any properties. We will invest the net proceeds in
accordance with our investment objectives and policies. See
Investment Policies and Policies with Respect to Certain
Activities for additional information regarding our
investment objectives and policies. We will not receive any
proceeds from the sale of shares by the selling stockholder.
We estimate that it will take approximately 12 months for
us to substantially invest the net proceeds of this offering,
depending on the availability of appropriate opportunities and
market conditions. Pending such investment, we will primarily
invest the net proceeds in securities that are not
REIT-qualified investments as well as REIT-qualified investments
such as money market instruments, short-term repurchase
agreements or other cash equivalents. The non-REIT-qualified
investments are expected to provide a current return that will
be greater than the REIT-qualified investments. We may also
temporarily invest in securities that qualify as real
estate assets under the REIT provisions of the Code, such
as mortgage-backed securities. There can be no assurance that we
will be able to achieve our targeted investment pace. See
Investment Policies and Policies with Respect to Certain
Activities Additional Investment
Considerations Temporary Investments for
additional information about temporary investments we may make
while waiting to make real estate investments.
A tabular presentation of our estimated use of the proceeds to
us from this offering (assuming no exercise of the
underwriters over-allotment option) is set forth below:
|
|
|
|
|
|
|
|
|
|
|
Dollar Amount
|
|
Percentage
|
|
|
(In thousands)
|
|
|
|
Gross offering proceeds
|
|
$
|
170,250,000
|
|
|
|
100.00
|
%
|
Less offering expenses:
|
|
|
|
|
|
|
|
|
Underwriting discounts
|
|
$
|
11,917,500
|
|
|
|
7.00
|
%
|
SEC registration fee
|
|
$
|
15,875
|
|
|
|
0.01
|
%
|
FINRA filing fees
|
|
$
|
23,140
|
|
|
|
0.01
|
%
|
NASDAQ listing fees
|
|
$
|
125,000
|
|
|
|
0.07
|
%
|
Printing and engraving expenses(1)
|
|
$
|
150,000
|
|
|
|
0.09
|
%
|
Legal fees and expenses(1)
|
|
$
|
700,000
|
|
|
|
0.41
|
%
|
Accounting fees and expenses(1)
|
|
$
|
150,000
|
|
|
|
0.09
|
%
|
Transfer agent and registrar fees(1)
|
|
$
|
25,000
|
|
|
|
0.01
|
%
|
Miscellaneous offering expenses(1)
|
|
$
|
110,985
|
|
|
|
0.07
|
%
|
Estimated amount of net proceeds to us (to be used to acquire
properties and for general corporate and working capital
purposes)
|
|
$
|
157,032,500
|
|
|
|
92.24
|
%
|
27
DISTRIBUTION
POLICY
The initial annual distribution rate will be equal
to % of the initial public offering
price. The distribution will be paid monthly. We intend to
distribute substantially all of our taxable income each year
(which does not ordinarily equal net income as calculated in
accordance with generally accepted accounting principles in the
United States of America) to our stockholders so as to comply
with the REIT provisions of the Code. We intend to make monthly
distributions to our stockholders beginning within 120 days
after we complete this offering. Our distribution policy is
subject to revision at the discretion of our Board of Directors.
Our Board of Directors will determine the amount of any
distributions and such amount will depend on our capital needs,
our taxable earnings, our financial condition, our annual
distribution requirements to maintain REIT status and such other
factors as our Board of Directors deems relevant.
Distributions to our stockholders will generally be subject to
tax as ordinary income, although we may designate a portion of
such distributions as capital gain and a portion may constitute
a tax-free return of capital. Since most of the land we expect
to own will be farmland, we do not anticipate that there will be
any significant depreciation in the calculation of our taxable
income and, therefore, we believe that our taxable income is
likely to approximate our funds from operations, or FFO. As a
result, we do not believe that it is likely that a material
amount of our distributions to stockholders will constitute a
return of capital. We will furnish to each of our stockholders
annually a statement setting forth distributions paid during the
preceding year and their characterization as ordinary income,
capital gains or return of capital. We have adopted a dividend
reinvestment plan that allows holders of our common stock to
have their distributions reinvested automatically in additional
shares of our common stock. For more information, see
Dividend Reinvestment Plan.
To qualify as a REIT, we may not have, at the end of any taxable
year, any undistributed earnings and profits accumulated in any
non-REIT taxable year. Our non-REIT earnings and profits include
any earnings and profits we accumulated before the effective
date of our REIT election, which is expected to be
January 1, 2011. As of the date of this prospectus, we
estimate our non-REIT earnings and profits to be approximately
$10.6 million. We intend to distribute, to stockholders of
record after the completion of this offering, sufficient
earnings and profits before December 31, 2011 to eliminate
any non-REIT earnings and profits, which distributions will be
in addition to the regular annual distributions described above.
28
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
our capitalization as of June 30, 2010 on:
|
|
|
|
|
an actual basis; and
|
|
|
|
an as adjusted basis to give effect to:
|
|
|
|
|
|
the filing of an amendment to our certificate of incorporation
to effect a 27,500-for-1 stock split prior to the completion of
this offering;
|
|
|
|
the filing of our amended and restated certificate of
incorporation; and
|
|
|
|
the sale by us of shares of common stock in this offering at an
assumed initial public offering price of $15.00 per share, the
midpoint of the range listed on the cover page of this
prospectus, and our receipt of the estimated net proceeds from
that sale after deducting the estimated underwriting discounts
and estimated offering expenses payable by us (assuming no
exercise of the underwriters over-allotment option).
|
This table should be read in conjunction with Use of
Proceeds, Selected Consolidated Financial
Data, Description of Capital Stock,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, our consolidated
financial statements and the notes thereto included elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
June 30, 2010
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
Cash and cash equivalents
|
|
$
|
2,215,794
|
|
|
$
|
159,248,294
|
|
Mortgage notes payable
|
|
|
11,469,376
|
|
|
|
11,469,376
|
|
Borrowings under line of credit
|
|
|
5,000
|
|
|
|
5,000
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value per share, 1,000 shares
authorized, and 100 shares issued and outstanding, actual;
XX,XXX,XXX shares authorized, 14,100,000 shares issued and
outstanding, as adjusted
|
|
|
1
|
|
|
|
141,000
|
|
Preferred stock, $0.01 par value per share, no shares
authorized, issued or outstanding, actual; XX,XXX,XXX shares
authorized, no shares issued or outstanding, as adjusted
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
99
|
|
|
|
156,891,600
|
|
Retained earnings
|
|
|
8,262,323
|
|
|
|
8,262,323
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
8,262,423
|
|
|
|
165,294,923
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
19,736,799
|
|
|
$
|
176,769,299
|
|
|
|
|
|
|
|
|
|
|
29
DILUTION
Dilution is the amount by which the offering price paid by the
purchasers of the shares of common stock sold in the offering
exceeds the net tangible book value per share of common stock
after the offering. Net tangible book value per share is
determined at any date by subtracting our total liabilities from
the total book value of our tangible assets and dividing the
difference by the number of shares of common stock deemed to be
outstanding at that date.
Our net tangible book value as of June 30, 2010 was
$7.7 million, or $2.80 per share. After giving effect to
the receipt of approximately $157.0 million of estimated
net proceeds from our sale of shares of common stock in this
offering at an assumed offering price of $15.00 per share, which
is the midpoint of the range listed on the cover page of this
prospectus, as adjusted net tangible book value as of
June 30, 2010 would have been $164.7 million, or
$11.69 per share. This represents an immediate increase in net
tangible book value of $8.89 per share to existing stockholders
and an immediate dilution of $3.32 per share to new investors
purchasing shares of common stock in the offering. The following
table illustrates this substantial and immediate per share
dilution to new investors.
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share (the midpoint of
the range listed on the cover page of this prospectus)
|
|
|
|
|
|
$
|
15.00
|
|
Pro forma net tangible book value per share at June 30, 2010
|
|
$
|
2.80
|
|
|
|
|
|
Pro forma increase per share attributable to new investors
|
|
$
|
8.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible book value per share after
giving effect to this offering
|
|
|
|
|
|
$
|
11.69
|
|
|
|
|
|
|
|
|
|
|
Dilution in net tangible book value per share to new investors
|
|
|
|
|
|
$
|
3.31
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $15.00 per share, which is the midpoint of the
range listed on the cover page of this prospectus, would
increase (decrease) our as adjusted net tangible book value by
$10.6 million, the as adjusted net tangible book value per
share by $1.00 per share and the dilution per share to new
investors in this offering by $3.57, or $1.63 if the
underwriters exercise their option to purchase additional shares
in full, assuming the number of shares offered by us, as set
forth on the cover page of this prospectus, remains the same and
after deducting the estimated underwriting discounts and
commissions and estimated expenses payable by us.
The following table summarizes, as of June 30, 2010:
|
|
|
|
|
the total number of shares of common stock purchased from us by
our existing stockholder and by new investors purchasing shares
in this offering;
|
|
|
|
the total consideration paid to us by our existing stockholder
and by new investors purchasing shares in this offering,
assuming an initial public offering of $15.00 per share, which
is the midpoint of the range listed on the cover page of this
prospectus (before deducting the estimated underwriting
discounts and commissions and estimated offering expenses
payable by us in connection with this offering); and
|
|
|
|
the average price per share paid by our existing stockholder and
by new investors purchasing shares in this offering.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
per Share
|
|
|
Existing stockholder
|
|
|
2,750,000
|
|
|
|
20
|
%
|
|
$
|
100
|
|
|
|
0
|
%
|
|
$
|
0.00
|
|
New Investors
|
|
|
11,350,000
|
|
|
|
80
|
%
|
|
|
170,250,000
|
|
|
|
100
|
%
|
|
$
|
15.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
14,100,000
|
|
|
|
100
|
%
|
|
$
|
170,350,000
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $15.00 per share, which is the midpoint of the
range listed on the cover page of this prospectus, would
increase (decrease) total consideration paid by new investors
and the average price per share by $10.6 million and $1.00,
respectively, assuming the number of
30
shares offered by us, as set forth on the cover page of this
prospectus, remains the same and without deducting the estimated
underwriting discounts and commissions and estimated expenses
payable by us.
The foregoing table does not reflect the sales by the existing
stockholder in connection with the sales made by him in this
offering. Sales by the selling stockholder in this offering will
reduce the number of shares held by existing stockholders to
2,000,000 shares, or 14.2% of the total number of shares of
our common stock outstanding after this offering, and will
increase the number of shares held by new investors to
12,100,000 shares, or 85.8% of the total number of shares
of our common stock outstanding after this offering. In
addition, if the underwriters exercise their option to purchase
additional shares in full, the shares held by the existing
stockholder after this offering would be reduced to 12.6% of the
total number of shares of our common stock outstanding after
this offering, and the number of shares held by new investors
would increase to 13,915,000 or 87.4% of the total number of
shares of our common stock outstanding after this offering.
SELECTED
FINANCIAL DATA
You should read the following selected consolidated financial
data together with Managements Discussion and
Analysis of Financial Condition and Results of Operations,
our consolidated financial statements and the related notes
included in this prospectus.
The selected consolidated financial data as of December 31,
2009 and 2008 and for the years ended December 31, 2009,
2008 and 2007 are derived from our revised audited consolidated
financial statements included in this prospectus. The selected
consolidated financial data as of December 31, 2007, 2006
and 2005 and for the years ended December 31, 2006 and 2005
are derived from our revised audited consolidated financial
statements that are not included in this prospectus. The
selected consolidated financial data as of and for the six
months ended June 30 2010 and 2009 are derived from our
unaudited consolidated financial statements included in this
prospectus. Our results of operations are not necessarily
indicative of results of operations that should be expected in
any future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue
|
|
$
|
1,196,634
|
|
|
$
|
1,196,634
|
|
|
$
|
2,418,111
|
|
|
$
|
2,418,111
|
|
|
$
|
2,418,111
|
|
|
$
|
2,355,144
|
|
|
$
|
2,175,271
|
|
Total operating expenses
|
|
|
(328,142
|
)
|
|
|
(311,521
|
)
|
|
|
(614,322
|
)
|
|
|
(571,289
|
)
|
|
|
(497,417
|
)
|
|
|
(415,146
|
)
|
|
|
(450,658
|
)
|
Other expense
|
|
|
(340,561
|
)
|
|
|
(367,914
|
)
|
|
|
(724,908
|
)
|
|
|
(610,261
|
)
|
|
|
(512,364
|
)
|
|
|
(547,824
|
)
|
|
|
(549,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
527,931
|
|
|
|
517,199
|
|
|
|
1,078,881
|
|
|
|
1,236,561
|
|
|
|
1,408,330
|
|
|
|
1,392,174
|
|
|
|
1,175,361
|
|
Provision for income taxes
|
|
|
(252,618
|
)
|
|
|
(213,474
|
)
|
|
|
(424,120
|
)
|
|
|
(476,308
|
)
|
|
|
(550,946
|
)
|
|
|
(529,988
|
)
|
|
|
(450,508
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
275,313
|
|
|
$
|
303,725
|
|
|
$
|
654,761
|
|
|
$
|
760,253
|
|
|
$
|
857,384
|
|
|
$
|
862,186
|
|
|
$
|
724,853
|
|
Share and Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per weighted average common share
basic & diluted
|
|
$
|
2,753
|
|
|
$
|
3,037
|
|
|
$
|
6,548
|
|
|
$
|
7,603
|
|
|
$
|
8,574
|
|
|
$
|
8,622
|
|
|
$
|
7,249
|
|
Weighted average shares outstanding
basic & diluted
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
Supplemental Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
275,313
|
|
|
$
|
303,725
|
|
|
$
|
654,761
|
|
|
$
|
760,253
|
|
|
$
|
857,384
|
|
|
$
|
862,186
|
|
|
$
|
724,853
|
|
Real estate depreciation and amortization
|
|
|
156,924
|
|
|
|
156,924
|
|
|
|
313,847
|
|
|
|
315,545
|
|
|
|
315,664
|
|
|
|
281,088
|
|
|
|
247,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations(1)
|
|
|
432,237
|
|
|
|
460,649
|
|
|
|
968,608
|
|
|
|
1,075,798
|
|
|
|
1,173,048
|
|
|
|
1,143,274
|
|
|
|
972,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate, before accumulated depreciation
|
|
$
|
19,501,233
|
|
|
$
|
19,501,233
|
|
|
$
|
19,501,233
|
|
|
$
|
19,501,233
|
|
|
$
|
19,501,233
|
|
|
$
|
19,501,233
|
|
|
$
|
18,604,281
|
|
Total assets
|
|
$
|
20,532,629
|
|
|
$
|
21,128,789
|
|
|
$
|
20,096,184
|
|
|
$
|
21,051,214
|
|
|
$
|
24,737,513
|
|
|
$
|
24,218,122
|
|
|
$
|
20,385,584
|
|
Mortgage notes payable and borrowings under the line of credit
|
|
$
|
11,474,376
|
|
|
$
|
11,892,782
|
|
|
$
|
11,686,709
|
|
|
$
|
12,091,037
|
|
|
$
|
12,432,589
|
|
|
$
|
12,783,259
|
|
|
$
|
9,394,190
|
|
Total stockholders equity
|
|
$
|
8,262,423
|
|
|
$
|
8,636,075
|
|
|
$
|
7,987,110
|
|
|
$
|
8,332,349
|
|
|
$
|
11,816,019
|
|
|
$
|
10,973,992
|
|
|
$
|
10,182,607
|
|
Total common shares outstanding
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
|
(1) |
|
Funds From Operations, or FFO, is a term approved by the
National Association of Real Estate Investment Trusts, or NAREIT. |
|
|
|
FFO was developed by the NAREIT, as a relative non-GAAP
supplemental measure of operating performance of an equity REIT
in order to recognize that income-producing real estate
historically has not depreciated on the basis determined under
GAAP. FFO, as defined by NAREIT, is net income (loss) (computed
in accordance with GAAP), excluding gains (or losses) from sales
of property, plus depreciation and amortization of real estate
assets, and after adjustments for unconsolidated partnerships
and joint ventures. FFO does not represent cash flows from
operating activities in accordance with GAAP and should not be
considered an alternative to either net income (loss) as an
indication of our performance or cash flow from operations as a
measure of liquidity or ability to make distributions.
Comparison of FFO to similarly titled measures for other REITs
may not necessarily be meaningful due to possible differences in
the application of the NAREIT definition used by such REITs. |
|
|
|
Basic funds from operations per share, or Basic FFO per share,
and diluted funds from operations per share, or Diluted FFO per
share, are FFO divided by weighted average common shares
outstanding and FFO divided by weighted average common shares
outstanding on a diluted basis, respectively, during a period.
We believe that FFO, Basic FFO per share and Diluted FFO per
share are useful to investors because they provide investors
with a further context for evaluating our FFO results in the
same manner that investors use net income and earnings per
share, or EPS, in evaluating net income available to common
stockholders. In addition, since most REITs provide FFO, Basic
FFO and Diluted FFO per share information to the investment
community, we believe these are useful supplemental measures for
comparing us to other REITs. We believe that net income is the
most directly comparable GAAP measure to FFO, basic EPS is the
most directly comparable GAAP measure to Basic FFO per share,
and diluted EPS is the most directly comparable GAAP measure to
Diluted FFO per share. |
|
|
|
The following table provides a reconciliation of our FFO to the
most directly comparable GAAP measure, net income, and a
computation of Basic and Diluted FFO per weighted average common
share and basic and diluted net income per weighted average
common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months
|
|
|
|
|
|
|
Ended June 30,
|
|
|
For the Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
275,313
|
|
|
$
|
303,725
|
|
|
$
|
654,761
|
|
|
$
|
760,253
|
|
|
$
|
857,384
|
|
|
$
|
862,186
|
|
|
$
|
724,853
|
|
Add: Real estate depreciation and amortization
|
|
|
156,924
|
|
|
|
156,924
|
|
|
|
313,847
|
|
|
|
315,545
|
|
|
|
315,664
|
|
|
|
281,088
|
|
|
|
247,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO available to common stockholders
|
|
$
|
432,237
|
|
|
$
|
460,649
|
|
|
$
|
968,608
|
|
|
$
|
1,075,798
|
|
|
$
|
1,173,048
|
|
|
$
|
1,143,274
|
|
|
$
|
972,241
|
|
Weighted average shares outstanding
basic & diluted
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
Basic & Diluted net income per weighted average common
share
|
|
$
|
2,753
|
|
|
$
|
3,037
|
|
|
$
|
6,548
|
|
|
$
|
7,603
|
|
|
$
|
8,574
|
|
|
$
|
8,622
|
|
|
$
|
7,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & Diluted FFO per weighted average common share
|
|
$
|
4,322
|
|
|
$
|
4,606
|
|
|
$
|
9,686
|
|
|
$
|
10,758
|
|
|
$
|
11,730
|
|
|
$
|
11,433
|
|
|
$
|
9,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Managements 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
anticipated 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. The
following discussions should be read in conjunction with our
consolidated financial statements and related notes thereto
included elsewhere in this prospectus.
Overview
We were incorporated under the general corporation laws of the
State of California in 1997 primarily for the purpose of
operating strawberry farms through our subsidiary Coastal Berry
Company, LLC, or Coastal Berry, a company that that provided
growing, packaging, marketing and distribution of fresh berries
and other agricultural products. We operated Coastal Berry as
our primary business until 2004 when it was sold to Dole Food
Company, or Dole Foods.
In 2004, we reincorporated in the State of Delaware and we
reoriented our operations and began to implement a strategy of
leasing agricultural land for farming. We own two large farms in
California which we lease to Dole Fresh Vegetables, Inc., or
Dole Fresh, and we intend to use the net proceeds from this
offering to invest in and own more farmland. We expect that most
of our future tenants will be small and medium-sized farming
operations. We also will use some of the proceeds of this offer
to make mortgage loans on farms and farm-related properties.
We will conduct substantially all of our investment activities
through, and all of our properties will be held directly or
indirectly by our Operating Partnership. We will control our
Operating Partnership as its sole general partner and we will
also initially own all limited partnership units, or Units, of
our Operating Partnership. We expect our Operating Partnership
to issue Units from time to time, following the completion of
this offering, in exchange for agricultural real property. By
structuring our acquisitions in this manner, the sellers of the
real estate will generally be able to defer the realization of
gains until they redeem the Units. Limited partners who hold
Units in our Operating Partnership will be entitled to redeem
these units for cash or, at our election, shares of our common
stock on a
one-for-one
basis at any time after the first anniversary of the completion
of this offering.
Whenever we issue common stock for cash, we will be obligated to
contribute any net proceeds we receive from the sale of the
stock to our Operating Partnership and our Operating Partnership
will, in turn, be obligated to issue an equivalent number of
Units to us. Our Operating Partnership will distribute the
income it generates from its operations to us and its limited
partners on a pro rata basis. At present we do not have any
limited partners of our Operating Partnership. We will, in turn,
distribute the amounts we receive from our Operating Partnership
to our stockholders in the form of monthly cash distributions.
We intend to qualify as a REIT for federal tax purposes
beginning with the year ending December 31, 2011, whereby
we would not be required to pay federal and state income taxes
on the distributions we make to our stockholders other than any
distribution made to eliminate our earnings and profits for
periods prior to our REIT election. However, we do have a
taxable REIT subsidiary and if it has any business it will have
to pay federal and state income taxes. We will also be subject
to regular income tax on our income prior to the effective date
of our REIT election, which is expected to be January 1,
2011.
Our strategy is to purchase farmland and farm-related properties
and lease these properties to farmers for use in farming
operations. We will likely also make mortgage loans secured by
farmland. We expect to earn income from rent received on land
and from collecting interest payments from mortgagors.
Leases
We anticipate that our typical lease will have a term of one to
two years and will be payable annually at a fixed rate with one
half due at the beginning of the each year and the other half
due at midyear for each lease year. The lease would require that
the tenant pay taxes, insurance, water costs and other operating
costs. Some leases may have longer terms (e.g., for five or ten
years) but have escalation clauses as to the amounts payable by
the tenants. The escalation clause may be a fixed amount each
year or be variable based on standard cost of living figures. In
33
addition, some long-term leases may require a regular survey of
comparable land rents, with an adjustment to reflect the current
rents.
Mortgages
We expect that the typical mortgage we offer will be for a fixed
interest rate, over a term of five years, and require
interest-only payments and no amortization of the principal
until maturity. The mortgage will be set up to have the senior
claim on the property, but will not require the owner to
guarantee the mortgage personally.
Advisory
and Administration Agreements
Since 2004, we have been externally managed pursuant to a
contractual investment advisory arrangement with our Adviser,
under which our Adviser has directly employed all of our
personnel and paid its payroll, benefits, and general expenses
directly. Prior to January 1, 2010, this agreement also
covered the administrative services we received from our
Administrator, which until January 1, 2010, was a wholly
owned subsidiary of our Adviser. Since January 1, 2010, we
have received administrative services pursuant to a separate
administration agreement with our Administrator. Upon completion
of this offering, we will enter into an amended and restated
investment advisory agreement with our Adviser and an amended
and restated administration agreement with our Administrator.
Current
Advisory Agreement and Administration Agreement
Under the terms of the existing Advisory Agreement, we are
responsible for all expenses incurred for our direct benefit.
Examples of these expenses include, legal, accounting, interest
on short-term debt and mortgages, tax preparation, directors and
officers insurance, stock transfer services, shareholder related
fees, consulting and related fees. During the years ended
December 31, 2009, 2008, and 2007, the total amount of
these expenses that we incurred was approximately $275,187,
$238,201 and $151,525, respectively. All of these charges are
incurred directly by us rather than by our Adviser for our
benefit. Accordingly, we did not make any reimbursements to our
Adviser for these amounts.
In addition, we are also responsible for all fees charged by
third parties that are directly related to our business, which
may include real estate brokerage fees, mortgage placement fees,
lease-up
fees and transaction structuring fees (although we may be able
to pass some or all of such fees on to our tenants and
borrowers). In the event that any of these expenses are incurred
on our behalf by our Adviser, we are required to reimburse our
Adviser on a
dollar-for-dollar
basis for all such amounts. During the years ended
December 31, 2009, 2008, and 2007, we did not incur any
such fees during these periods. Accordingly, we did not make any
reimbursements to our Adviser for these amounts. The actual
amount of such fees that we incur in the future will depend
largely upon the aggregate costs of the properties we acquire,
the aggregate amount of mortgage loans we make, and the extent
to which we are able to shift the burden of such fees to our
tenants and borrowers. Accordingly, the amount of these fees
that we will pay in the future is not determinable at this time.
We do not presently expect that our Adviser will incur any of
these fees on our behalf.
Under our existing Advisory Agreement, we were required to
reimburse our Adviser for our pro rata share of our
Advisers payroll and benefits expenses on an
employee-by-employee
basis, based on the percentage of each employees time
devoted to our matters. Until January 1, 2010, this
obligation also extended to administrative services provided to
us by our Administrator, which until January 1, 2010 was a
wholly owned subsidiary of our Adviser. During the years ended
December 31, 2009, 2008, and 2007, these expenses were
approximately $19,995, $13,228, and $22,529, respectively.
Under our existing Advisory Agreement, we are also required to
reimburse our Adviser for our pro rata portion of all other
expenses of our Adviser not reimbursed under the arrangements
described above, which we refer to as overhead expenses, equal
to the total overhead expenses of our Adviser, multiplied by the
ratio of hours worked by our Advisers (and until
January 1, 2010, our Administrators) employees on our
projects to the total hours worked by our Advisers (and
until January 1, 2010, our Administrators) employees.
However, we are only required to reimburse our Adviser for our
portion of its overhead expenses if the amount of payroll and
benefits we reimburse to our Adviser is less than 2.0% of our
average invested assets for the year. Additionally, we are only
required to reimburse our Adviser for overhead expenses up to
the point that reimbursed overhead expenses and payroll and
34
benefits expenses, on a combined basis, equal 2.0% of our
average invested assets for the year. Our Adviser bills us on a
monthly basis for these amounts. Our Adviser is required to
reimburse us annually for the amount by which amounts billed to
and paid by us exceed this 2.0% limit during a given year. To
date, these amounts have never exceeded the 2.0% limit, and we
have never received reimbursement. During the years ended
December 31, 2009, 2008, and 2007, we reimbursed to our
Adviser approximately $5,293, $4,315, and $7,699, respectively,
of overhead expenses.
Since January 1, 2010, we have been required to reimburse
our Administrator for our pro rata portion of its payroll and
benefits expenses on an
employee-by-employee
basis, based on the percentage of each employees time
devoted to our matters. We are also required to reimburse our
Administrator for our pro rata portion of its overhead expenses,
equal to the total overhead expenses of our Administrator,
multiplied by the ratio of hours worked by our
Administrators employees on our projects to the total
hours worked by our Administrators employees.
The
Amended Advisory and Administration Agreements
As with the existing Advisory Agreement, under the terms of the
Amended Advisory Agreement, we will be responsible for all
expenses incurred for our direct benefit. Examples of these
expenses include, legal, accounting, interest on short-term debt
and mortgages, tax preparation, directors and officers
insurance, stock transfer services, shareholder related fees,
consulting and related fees. In addition, we will continue to be
responsible for all fees charged by third parties that are
directly related to our business, which may include real estate
brokerage fees, mortgage placement fees,
lease-up
fees and transaction structuring fees (although we may be able
to pass some or all of such fees on to our tenants and
borrowers). In the event that any of these expenses are incurred
on our behalf by our Adviser, we will be required to reimburse
our Adviser on a
dollar-for-dollar
basis for all such amounts.
The Amended Advisory Agreement will provide for an annual base
management fee equal to 2.0% of our total stockholders
equity, less the recorded value of any preferred stock, and an
incentive fee based on funds from operations, or FFO. For
purposes of calculating the incentive fee, FFO will include any
realized capital gains and capital losses, less any dividends
paid on preferred stock, but FFO will not include any unrealized
capital gains or losses. The incentive fee will reward our
Adviser if our quarterly FFO, before giving effect to any
incentive fee, exceeds 1.75%, or 7% annualized, (the
hurdle rate) of total stockholders equity,
less the recorded value of any preferred stock. Our Adviser will
receive 100% of the amount of the pre-incentive fee FFO that
exceeds the hurdle rate, but is less than 2.1875% of our
pre-incentive fee FFO. Our Adviser will also receive an
incentive fee of 20% of the amount of our pre-incentive fee FFO
that exceeds 2.1875%.
Under the Amended Administration Agreement, we will pay
separately for our allocable portion of the Administrators
overhead expenses in performing its obligations, including rent,
and our allocable portion of the salaries and benefits expenses
of our chief financial officer, chief compliance officer,
treasurer, internal counsel, investor relations officer and
their respective staffs.
Critical
Accounting Policies
The preparation of our financial statements in accordance with
generally accepted accounting principles in the United States of
America, or GAAP, requires management to make judgments that are
subjective in nature in order to make certain estimates and
assumptions. Management relies on its experience, collects
historical data and current market data, and analyzes this
information in order to arrive at what it believes to be
reasonable estimates. Under different conditions or assumptions,
materially different amounts could be reported related to the
accounting policies described below. In addition, application of
these accounting policies involves the exercise of judgment on
the use of assumptions as to future uncertainties and, as a
result, actual results could materially differ from these
estimates. A summary of all of our significant accounting
policies is provided in Note 1 to our consolidated
financial statements included elsewhere in this prospectus.
Below is a summary of accounting polices involving estimates and
assumptions that require complex, subjective or significant
judgments in their application and that materially affect our
results of operations.
35
Asset
Impairment Evaluation
We will periodically review the carrying value of each property
to determine if circumstances that indicate impairment in the
carrying value of an investment exist or that depreciation
periods should be modified. In determining if impairment exists,
management will consider such factors as our tenants
payment history, the financial condition of our tenants,
including calculating the current leverage ratios of tenants,
the likelihood of lease renewal, business conditions in the
industry in which our tenants operate and whether the carrying
value of our real estate has decreased. If any of the factors
above support the possibility of impairment, we will prepare a
projection of the undiscounted future cash flows, without
interest charges, of the specific property and determine if the
investment in such property is recoverable. In preparing the
projection of undiscounted future cash flows, we will estimate
the hold periods of the properties and cap rates using
information we obtain from market comparability studies and
other comparable sources. If impairment is indicated, the
carrying value of the property will be written down to its
estimated fair value based on our best estimate of the
propertys discounted future cash flows. Any material
changes to the estimates and assumptions used in this analysis
could have a significant impact on our results of operations, as
the changes would impact our determination of whether impairment
is deemed to have occurred and the amount of impairment loss we
would recognize.
Investments
in Real Estate
We will record investments in real estate at cost and we will
capitalize improvements and replacements when they extend the
useful life or improve the efficiency of the asset. In a triple
net lease, the tenant generally provides repairs and
maintenance. However, to the extent that we undertake repairs or
maintenance, we will expense these costs of repairs and
maintenance as incurred. We will compute depreciation using the
straight-line method over the estimated useful life of
39 years for buildings and improvements, and 5 to
10 years for equipment. The estimated useful life of our
buildings and improvements is 20 years. Real estate
depreciation expense on these assets was $313,847, $315,545 and
$315,664 for the years ended December 31, 2009, 2008, and
2007, respectively. Since most of our real estate will be
farmland, we expect that the impact of the items above on our
financial statements will be minimal.
We will be required to make subjective assessments as to the
useful lives of our properties for purposes of determining the
amount of depreciation to record on an annual basis with respect
to our investments in real estate. These assessments will have a
direct impact on our net income because, if we were to shorten
the expected useful lives of our investments in real estate, we
would depreciate these investments over fewer years, resulting
in more depreciation expense and lower net income on an annual
basis. Since most of our real estate will be farmland it is
likely that the impact of these assessments will have little
effect on our financial statements.
We have adopted FASB Accounting Standards Codification, or ASC,
Topic
360-10,
Impairment or Disposal of Long-Lived Assets, or
ASC 360-10,
which establishes a single accounting model for the impairment
or disposal of long-lived assets including discontinued
operations.
ASC 360-10
requires that the operations related to properties that have
been sold or that we intend to sell be presented as discontinued
operations in the statement of operations for all periods
presented, and properties we intend to sell be designated as
held for sale on our balance sheet.
Purchase
Price Allocation
We will record above-market and below-market in-place lease
values for owned properties based on the present value (using an
interest rate which 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) managements 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.
We will amortize the capitalized above-market lease values as a
reduction of rental income over the remaining non-cancelable
terms of the respective leases. We will amortize the capitalized
below-market lease values (presented in the accompanying balance
sheet as value of assumed lease obligations) as an increase to
rental income over the initial term and any fixed-rate renewal
periods in the respective leases. Since our mortgage strategy
will to a large degree involve sale-leaseback transactions with
newly originated leases at market rates, we do not expect that
the above-market and below-market in-place lease values will be
significant for many of the transactions we will ultimately
enter into.
36
We will measure the aggregate value of other intangible assets
acquired based on the difference between (i) the property
valued with existing in-place leases adjusted to market rental
rates and (ii) the property valued as if vacant.
Managements estimates of value are expected to be made
using methods similar to those used by independent appraisers
(e.g., discounted cash flow analysis). Factors to be considered
by management in its analysis will include an estimate of
carrying costs during hypothetical expected
lease-up
periods considering current market conditions, and costs to
execute similar leases. We will also consider 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.
In estimating carrying costs, management will also include real
estate taxes, insurance and other operating expenses and
estimates of lost rentals at market rates during the expected
lease-up
periods, which we expect to primarily range from six to eighteen
months, depending on specific local market conditions.
Management will also estimate costs to execute similar leases
including leasing commissions, legal and other related expenses
to the extent that such costs are not already incurred in
connection with a new lease origination as part of the
transaction.
The total amount of other intangible assets acquired will be
further allocated to in-place lease values and customer
relationship intangible values based on managements
evaluation of the specific characteristics of each tenants
lease and our overall relationship with that respective tenant.
Characteristics to be considered by management in allocating
these values include the nature and extent of our existing
business relationships with the tenant, growth prospects for
developing new business with the tenant, the tenants
credit quality and expectations of lease renewals (including
those existing under the terms of the lease agreement), among
other factors.
We will amortize the value of in-place leases to expense over
the initial term of the respective leases, which we primarily
expect to range from ten to twenty years. The value of customer
relationship intangibles will be amortized to expense over the
initial term and any renewal periods in the respective leases,
but in no event will the amortization period for intangible
assets exceed the remaining depreciable life of the asset.
Should a tenant terminate its lease, the unamortized portion of
the in-place lease value and customer relationship intangibles
would be charged to expense.
Income
Taxes
Our financial results generally will not reflect provisions for
current or deferred income taxes for taxable years after 2010.
Management believes that we will operate in a manner that will
allow us to be taxed as a REIT and, as a result, we do not
expect to pay substantial corporate-level income taxes for
taxable years after 2010. Many of the requirements for REIT
qualification, however, are highly technical and complex. If we
were to fail to meet these requirements, we would be subject to
federal income tax which could have a material adverse impact on
our results of operations and amounts available for
distributions to our stockholders. Our taxable REIT subsidiary
will pay taxes on its income, if any.
In connection with intercompany transfers of the Watsonville and
Oxnard Farms in 2002 and of the Watsonville farm again in 2004,
we created taxable gains for both federal and state purposes.
These taxable gains are generally based on the excess of the
fair market value of the property over the tax basis of the
property. These intercompany taxable gains are indefinitely
deferred until a triggering event occurs, generally when the
transferee or the transferor leave the consolidated group as
defined by the relevant tax law or the property is sold to a
third party. While there are taxable gains to the transferring
entity, the receiving entitys tax basis is the fair market
value at the date of transfer. Thus a deferred tax liability is
created related to the taxable gain to the transferring entity
but an offsetting deferred tax asset is created representing the
basis difference created by the new tax basis of the receiving
entity. As a result, the deferred tax assets and liabilities
offset one another and there is no net impact to us. In
accordance with ASC 740 and ASC 810, no tax impact is
recognized in the consolidated financial statements as a result
of intra-entity transfers of assets.
As a result of the transfers above, the related deferred tax
assets and liabilities total approximately $2.3 million as
of December 31, 2009. With respect to the federal amount of
$2.1 million, this amount will become payable when we make
a REIT election and as a REIT, we will no longer be able to
obtain the benefit of the related deferred tax asset. As a
result, we will reverse the deferred tax asset when we have
completed all significant actions necessary to qualify as a REIT
and are committed to a course of action for this to occur. We
currently expect this to occur in the
37
fourth quarter of 2010 however, there can be no assurance that
this will occur. The REIT election does not have the same impact
on the state tax amount of approximately $200,000, therefore
these will continue to be deferred.
In addition, at the time of transfer of the Watsonville farm in
February 2004 from SC Land, a deferred intercompany stock
account, or DISA, was created at the state income tax level. The
DISA is calculated based upon the fair market value of the
property at the time of distribution and the resulting tax
liability was approximately $98,000. SC Land was formally
liquidated in June 2010, however we have concluded that SC Land
was de facto liquidated in May 2009, when it transferred its
remaining existing asset to the parent company, since the
business operations of SC Land were effectively terminated as of
that date. The state income taxes of $98,000 related to the DISA
became payable at the time of the de facto liquidation in May
2009.
In addition, we transferred the Oxnard farm in May 2009 from SC
Land Inc into the parent company. As stated in the paragraph
above, SC Land was de facto liquidated in May 2009 and as a
result, we will not be subject to a similar tax on the transfer
as discussed in the paragraphs above related to the 2002 and
2004 transfers.
In addition, under California state law, Gladstone Land and our
Adviser are presumed to be unitary entities and therefore
required to report their income on a combined basis, as David
Gladstone is the sole shareholder of both entities. The combined
reporting application will result in refunds related to previous
income tax years. The combined refunds from 2005 through 2009
are estimated to be approximately $126,000. Management has
decided to pursue these refunds.
Revision
of Historical Financial Statements
As discussed in Note 2 to the financial statements, certain
tax accounting matters were identified during 2010 that required
revisions of our financial statements for the years ended
December 31, 2009, 2008 and 2007. Managements
discussions and analysis reflects the impact of the items in
Note 2 in the discussion of the changes in comparative
results of operations and cash flows.
Results
of Operations
Comparison
of Six Months Ended June 30, 2010 and 2009
A comparison of our operating results for the six months ended
June 30, 2010 and June 30, 2009 is below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
1,196,634
|
|
|
$
|
1,196,634
|
|
|
$
|
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
1,196,634
|
|
|
|
1,196,634
|
|
|
|
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
156,924
|
|
|
|
156,924
|
|
|
|
|
|
|
|
0
|
%
|
Management advisory fee
|
|
|
65,155
|
|
|
|
10,245
|
|
|
|
54,910
|
|
|
|
536
|
%
|
Professional fees
|
|
|
75,248
|
|
|
|
130,459
|
|
|
|
(55,211
|
)
|
|
|
(42
|
)%
|
Taxes and licenses
|
|
|
2,438
|
|
|
|
1,779
|
|
|
|
659
|
|
|
|
37
|
%
|
Insurance
|
|
|
14,017
|
|
|
|
11,193
|
|
|
|
2,824
|
|
|
|
25
|
%
|
General and administrative
|
|
|
14,360
|
|
|
|
921
|
|
|
|
13,439
|
|
|
|
1459
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
328,142
|
|
|
|
311,521
|
|
|
|
16,621
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from temporary investments
|
|
|
1,639
|
|
|
|
1,134
|
|
|
|
505
|
|
|
|
45
|
%
|
Other (expense) income
|
|
|
9,901
|
|
|
|
|
|
|
|
9,901
|
|
|
|
0
|
%
|
Interest expense
|
|
|
(352,101
|
)
|
|
|
(369,048
|
)
|
|
|
16,947
|
|
|
|
(5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(340,561
|
)
|
|
|
(367,914
|
)
|
|
|
27,353
|
|
|
|
(7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
527,931
|
|
|
|
517,199
|
|
|
|
10,732
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
252,618
|
|
|
|
213,474
|
|
|
|
39,144
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
275,313
|
|
|
$
|
303,725
|
|
|
$
|
(28,412
|
)
|
|
|
(9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Operating
Revenues
Rental income remained flat for six months ended June 30,
2010, as compared to the six months ended June 30, 2009.
There were no changes to the terms of the two operating leases
during the year, and thus our revenues did not change.
Operating
Expenses
Depreciation and amortization expenses remained flat for the six
months ended June 30, 2010, as compared to the six months
ended June 30, 2009. There were no additions or disposals
of fixed assets during the year, and thus depreciation expense
did not change.
The management advisory fee increased for the six months ended
June 30, 2010, as compared to the six months ended
June 30, 2009, primarily as a result of the increased
number of hours our Advisers employees spent on our
matters related to the preparation of the registration statement
related to this offering. The management advisory fee consists
of the reimbursement of expenses, including direct allocation of
employee salaries and benefits, as well as general overhead
expense, to our Adviser in accordance with the terms of the
advisory agreement.
Professional fees, consisting primarily of legal and accounting
fees, decreased during the six months ended June 30, 2010,
as compared to the six months ended June 30, 2009,
primarily as a result of the increased amount of legal fees
incurred during the quarter ended March 31, 2009 from
discussions with the State of California regarding water
regulations and clean up costs from environmental impact
studies. Insurance expense consists of the premiums paid for
directors and officers insurance coupled with liability
insurance premiums. Insurance expense increased for the six
months ended June 30, 2010, as compared to the six months
ended June 30, 2009, because of an increase in the premiums
paid for our commercial excess liability policy.
General and administrative expense increased for the six months
ended June 30, 2010, as compared to the six months ended
June 30, 2009, due to an increase in dues and subscriptions.
Other
Income and Expense
Interest income from temporary investments increased during the
six months ended June 30, 2010, as compared to the six
months ended June 30, 2009. The increase was primarily a
result of the increase in our average cash balances during the
six months ended June 30, 2010.
Interest expense decreased for the six months ended
June 30, 2010, as compared to the six months ended
June 30, 2009. This was a result of the decrease in the
outstanding principal balance on our mortgage note due to
amortizing principal payments made throughout the year, which
results in a decrease in the amount of interest payable each
month.
Net
Income
Net income increased for the six months ended June 30,
2010, as compared to the six months ended June 30, 2009.
This increase was primarily a result of a decrease in
professional fees and interest expense, partially offset by an
increase in management advisory fees.
39
Comparison
of Years Ended December 31, 2009 and 2008
A comparison of our operating results for the years ended
December 31, 2009 and December 31, 2008 is
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
$ Change
|
|
|
% Change
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
2,418,111
|
|
|
$
|
2,418,111
|
|
|
$
|
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
2,418,111
|
|
|
|
2,418,111
|
|
|
|
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
313,847
|
|
|
|
315,545
|
|
|
|
(1,698
|
)
|
|
|
(1
|
)%
|
Management advisory fee
|
|
|
25,288
|
|
|
|
17,543
|
|
|
|
7,745
|
|
|
|
44
|
%
|
Professional fees
|
|
|
235,852
|
|
|
|
189,341
|
|
|
|
46,511
|
|
|
|
25
|
%
|
Taxes and licenses
|
|
|
2,763
|
|
|
|
19,988
|
|
|
|
(17,225
|
)
|
|
|
(86
|
)%
|
Insurance
|
|
|
24,739
|
|
|
|
14,723
|
|
|
|
10,016
|
|
|
|
68
|
%
|
General and administrative
|
|
|
11,833
|
|
|
|
14,149
|
|
|
|
(2,316
|
)
|
|
|
(16
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
614,322
|
|
|
|
571,289
|
|
|
|
43,033
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from temporary investments
|
|
|
2,341
|
|
|
|
43,663
|
|
|
|
(41,322
|
)
|
|
|
(95
|
)%
|
Interest income from note receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from employee loans
|
|
|
|
|
|
|
140,423
|
|
|
|
(140,423
|
)
|
|
|
(100
|
)%
|
Other (expense) income
|
|
|
|
|
|
|
(870
|
)
|
|
|
870
|
|
|
|
(100
|
)%
|
Interest expense
|
|
|
(727,249
|
)
|
|
|
(793,477
|
)
|
|
|
66,228
|
|
|
|
(8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(724,908
|
)
|
|
|
(610,261
|
)
|
|
|
(114,647
|
)
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
1,078,881
|
|
|
|
1,236,561
|
|
|
|
(157,680
|
)
|
|
|
(13
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
424,120
|
|
|
|
476,308
|
|
|
|
(52,188
|
)
|
|
|
(11
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
654,761
|
|
|
$
|
760,253
|
|
|
$
|
(105,492
|
)
|
|
|
(14
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
Rental income remained flat for the year ended December 31,
2009, as compared to the year ended December 31, 2008.
There were no changes to the terms of the two operating leases
during 2009, and thus our revenues did not change.
Operating
Expenses
Depreciation and amortization expenses remained relatively flat
during the year ended December 31, 2009, as compared to the
year ended December 31, 2008. There were no additions or
disposals of fixed assets during 2009, and thus depreciation
expense did not significantly change.
The management advisory fee for the year ended December 31,
2009 increased, as compared to the year ended December 31,
2008, primarily as a result of the increased number of hours our
Advisers employees spent on our matters related to the
research and preparation of this registration statement. The
management advisory fee consists of the reimbursement of
expenses, including direct allocation of employee salaries and
benefits, as well as general overhead expense, to our Adviser in
accordance with the terms of the advisory agreement.
Professional fees, consisting primarily of legal and accounting
fees, increased during the year ended December 31, 2009, as
compared to the year ended December 31, 2008, primarily as
a result of the increased
40
amount of legal fees incurred from discussions with the State of
California regarding water regulations and clean up costs from
environmental impact studies.
Taxes and licenses decreased during the year ended
December 31, 2009, as compared to the year ended
December 31, 2008, primarily as a result of interest and
penalties due to the State of California for tax returns filed
during 2004, which were paid in 2008.
Insurance expense consists of the premiums paid for directors
and officers insurance coupled with liability insurance
premiums. Insurance expense increased for the year ended
December 31, 2009, as compared to the year ended
December 31, 2008, because of an increase in the premiums
paid for our commercial excess liability policy.
General and administrative expense decreased for the year ended
December 31, 2009, as compared to the year ended
December 31, 2008, because of repairs and maintenance
incurred during 2008 that was not incurred during 2009.
Other
Income and Expense
Interest income from temporary investments decreased during the
year ended December 31, 2009, as compared to the year ended
December 31, 2008. The decrease was primarily a result of
the decrease in our average cash balances during the year ended
December 31, 2009, coupled with a decrease in the average
rate of interest earned on our money market accounts during 2009.
Interest income on employee loans decreased during the year
ended December 31, 2009, as compared to the year ended
December 31, 2008. This decrease was because the employee
loan was paid in full in December 2008.
Interest expense decreased for the year ended December 31,
2009, as compared to the year ended December 31, 2008. This
was a result of the decrease in the outstanding principal
balance on our mortgage note due to amortizing principal
payments made throughout 2008 and 2009, which results in a
decrease in the amount of interest payable each month.
Net
Income
Net income decreased for the year ended December 31, 2009,
as compared to the year ended December 31, 2008. This
decrease was primarily a result of increased professional fees,
and insurance expense, coupled with a decrease in interest
income as discussed above.
41
Comparison
of Years Ended December 31, 2008 and 2007
A comparison of our operating results for the years ended
December 31, 2008 and December 31, 2007 is
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
2,418,111
|
|
|
$
|
2,418,111
|
|
|
$
|
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
2,418,111
|
|
|
|
2,418,111
|
|
|
|
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
315,545
|
|
|
|
315,664
|
|
|
|
(119
|
)
|
|
|
0
|
%
|
Management advisory fee
|
|
|
17,543
|
|
|
|
30,228
|
|
|
|
(12,685
|
)
|
|
|
(42
|
)%
|
Professional fees
|
|
|
189,341
|
|
|
|
132,698
|
|
|
|
56,643
|
|
|
|
43
|
%
|
Taxes and licenses
|
|
|
19,988
|
|
|
|
3,574
|
|
|
|
16,414
|
|
|
|
459
|
%
|
Insurance
|
|
|
14,723
|
|
|
|
11,897
|
|
|
|
2,826
|
|
|
|
24
|
%
|
General and administrative
|
|
|
14,149
|
|
|
|
3,356
|
|
|
|
10,793
|
|
|
|
322
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
571,289
|
|
|
|
497,417
|
|
|
|
73,872
|
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from temporary investments
|
|
|
43,663
|
|
|
|
99,881
|
|
|
|
(56,218
|
)
|
|
|
(56
|
)%
|
Interest income from note receivable
|
|
|
|
|
|
|
1,203
|
|
|
|
(1,203
|
)
|
|
|
(100
|
)%
|
Interest income from employee loans
|
|
|
140,423
|
|
|
|
188,478
|
|
|
|
(48,055
|
)
|
|
|
(25
|
)%
|
Other (expense) income
|
|
|
(870
|
)
|
|
|
10,097
|
|
|
|
(10,967
|
)
|
|
|
(109
|
)%
|
Interest expense
|
|
|
(793,477
|
)
|
|
|
(812,023
|
)
|
|
|
18,546
|
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(610,261
|
)
|
|
|
(512,364
|
)
|
|
|
(97,897
|
)
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
1,236,561
|
|
|
|
1,408,330
|
|
|
|
(171,769
|
)
|
|
|
(12
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
476,308
|
|
|
|
550,946
|
|
|
|
(74,638
|
)
|
|
|
(14
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
760,253
|
|
|
$
|
857,384
|
|
|
$
|
(97,131
|
)
|
|
|
(11
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
Rental income remained flat for the year ended December 31,
2008, as compared to the year ended December 31, 2007.
There were no changes to the terms of the two operating leases
during 2008, and thus our revenues did not change.
Operating
Expenses
Depreciation and amortization expenses remained flat during the
year ended December 31, 2008, as compared to the year ended
December 31, 2007. There were no additions or disposals of
fixed assets during 2008, and thus depreciation expense did not
significantly change.
The management advisory fee for the year ended December 31,
2008 decreased, as compared to the year ended December 31,
2007, primarily as a result of the decreased number of hours our
Advisers employees spent on our matters, coupled with a
decrease in overhead expenses incurred by our Adviser for our
benefit. There were more employee hours spent on the audit
during 2007. The management advisory fee consists of the
reimbursement of expenses, including direct allocation of
employee salaries and benefits, as well as general overhead
expense, to our Adviser in accordance with the terms of the
advisory agreement.
42
Professional fees, consisting primarily of legal and accounting
fees, increased during the year ended December 31, 2008, as
compared to the year ended December 31, 2007, primarily as
a result of fees incurred for an earnings and profit study of
Gladstone Land completed in 2008.
Taxes and licenses increased during the year ended
December 31, 2008, as compared to the year ended
December 31, 2007, primarily as a result of interest and
penalties due to the State of California for tax returns filed
during 2004. There are no more prior year tax issues outstanding
and we are current on all of our tax filings.
Insurance expense consists of the premiums paid for directors
and officers insurance coupled with liability insurance
premiums. Insurance expense increased for the year ended
December 31, 2008, as compared to the year ended
December 31, 2007, because of an increase in the premiums
paid for our commercial excess liability policy.
General and administrative expense increased for the year ended
December 31, 2008, as compared to the year ended
December 31, 2007, because of an increase in repairs and
maintenance of a well, located on the San Andreas property,
incurred during 2008.
Other
Income and Expense
Interest income from temporary investments decreased during the
year ended December 31, 2008, as compared to the year ended
December 31, 2007. The decrease was primarily a result of a
decrease in the average rate of interest earned on our money
market accounts during 2008, coupled with the decrease in our
average cash balances during the year ended December 31,
2008, as there was a dividend declared and paid in December 2008
of $4.8 million.
Interest income on the note receivable with our Adviser
decreased during the year ended December 31, 2008, as
compared to the year ended December 31, 2007. This decrease
was because there was no balance outstanding on the note
receivable for the duration of 2008.
Interest income on employee loans decreased during the year
ended December 31, 2008, as compared to the year ended
December 31, 2007. This decrease was primarily because the
interest rate on the note is based on the prime rate, and this
rate decreased substantially during 2008. In addition, the
employee loans were paid in full in December 2008.
Other income decreased during the year ended December 31,
2008, as compared to the year ended December 31, 2007,
primarily because of a settlement payment on a land easement
that we received in 2007, which was not received in 2008.
Interest expense decreased for the year ended December 31,
2008, as compared to the year ended December 31, 2007. This
was a result of the decrease in the outstanding principal
balance on our mortgage note due to amortizing principal
payments made throughout 2007 and 2008, which results in a
decrease in the amount of interest payable each month.
Net
Income
Net income decreased for the year ended December 31, 2008,
as compared to the year ended December 31, 2007. This
decrease was primarily a result of increased taxes and licenses,
professional fees, general and administrative expense and
insurance expense, coupled with a decrease in interest income as
discussed above.
Financial
Condition, Liquidity and Capital Resources
We are dependent upon the net proceeds received from this
offering to conduct our proposed activities. We intend to use
the capital we acquire in this offering and the proceeds of any
indebtedness that we may incur in the future, to purchase farms
and farm-related properties as well as to make mortgage loans.
We currently are considering the purchase
of
properties. However, because we have not entered into letters of
intent or definitive agreements to purchase any of these
properties, and because we have not yet completed our due
diligence investigation of any of these properties, we may not
be successful in acquiring any of these properties. For
information concerning the anticipated use of the net proceeds
from this offering, see Use of Proceeds and
Properties Under Consideration.
43
Our sources of funds will primarily be the net proceeds of this
offering, operating cash flows and borrowings. Immediately after
this offering (assuming no exercise of the underwriters
over-allotment option), we expect to have cash resources in
excess of $159.3 million, based on an assumed public
offering price of $15.00 per share, which is the midpoint of the
price range on the cover of this prospectus, and
$11.5 million of indebtedness as of June 30, 2010. We
believe that these cash resources will be sufficient to satisfy
our cash requirements for the foreseeable future, and we do not
anticipate a need to raise additional funds within the next
twelve months.
Operating
Activities
Net cash provided by operating activities during the years ended
December 31, 2009, 2008 and 2007 was approximately
$780,000, $1.2 million and $1.2 million, respectively.
The decrease in net cash provided by operating activities during
December 31, 2009 was primarily a result of an increase in
total operating expenses during 2009 coupled with a decrease in
interest income, partially offset by a decrease in interest
expense and our provision for income taxes. Net cash provided by
operating activities during the six months ended June 30,
2010 and 2009 was approximately $620,000 and $384,000,
respectively. The increase in net cash provided by operating
activities during June 30, 2010 was primarily a result of
the timing of rent payments received during 2009 and 2010. A
majority of cash from operating activities is generated from the
rental payments we receive from our tenants. We utilize this
cash to fund our property-level operating expenses and use the
excess cash primarily for debt and interest payments on our
mortgage note payable, management fees to our Adviser, income
taxes and other entity level expenses.
Investing
Activities
Net cash provided by investing activities during the years ended
December 31, 2009, 2008 and 2007 was approximately $0,
$2.3 million and $350,000, respectively. The cash provided
from investing activities in 2008 resulted from the repayment of
an outstanding employee loan of $2.8 million, partially
offset by the issuance of an employee loan of $0.5 million.
Cash provided by investing activities in 2007 was a result of
the net repayment of the note receivable from our Adviser. There
was no cash used in investing activities during the six months
ended June 30, 2010 and 2009.
Financing
Activities
Net cash used in financing activities for the years ended
December 31, 2009, 2008 and 2007 was approximately
$1.4 million, $4.6 million and $0.4 million which
primarily consisted of principal repayments on mortgage notes
payable and distributions paid to our stockholders. Net cash
used in financing activities for the six months ended
June 30, 2010 and 2009 was approximately $212,000 and
$198,000, respectively, which consisted of principal repayments
on mortgage notes payable.
The following table presents a summary of our significant
contractual obligations as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than 1
|
|
|
|
|
|
|
|
|
More than 5
|
|
Contractual Obligations
|
|
Total
|
|
|
Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
Years
|
|
|
Debt Obligations(1)
|
|
$
|
11,686,709
|
|
|
$
|
431,116
|
|
|
$
|
943,644
|
|
|
$
|
1,063,637
|
|
|
$
|
9,248,312
|
|
Interest on Debt Obligations(2)
|
|
|
5,864,161
|
|
|
|
689,302
|
|
|
|
1,297,193
|
|
|
|
1,177,199
|
|
|
|
2,700,467
|
|
Capital Lease Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,550,870
|
|
|
$
|
1,120,418
|
|
|
$
|
2,240,837
|
|
|
$
|
2,240,836
|
|
|
$
|
11,948,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Debt obligations represent borrowings under our line of credit
and mortgage note payable that were outstanding as of
December 31, 2009. The line of credit matures in December
2017. |
|
(2) |
|
Interest on debt obligations includes estimated interest on our
borrowings under our line of credit. The balance and interest
rate on our line of credit is variable, thus the amount of
interest calculated for purposes of this table was based upon
rates and balances as of December 31, 2009. |
44
Oxnard
Note
In February 2006, we entered into a new long-term note payable
with Rabo AgriFinance, under which we borrowed
$13.0 million. Our obligations under the note are secured
by the Oxnard farm. The note currently accrues interest at a
rate of 6.00% per year, which rate is subject to adjustment
every three years to the current market rate, as determined by
the lender. We have the option to prepay the note in whole or in
part at specified intervals over the life of the note. The note
matures on February 1, 2021. There was approximately
$11.7 million outstanding on the note as of
December 31, 2009.
Watsonville
Credit Facility
In November 2002, we entered into a $3.25 million revolving
credit agreement with Lend Lease Agri-Business, Inc., which
matures on December 1, 2017. Our obligations under the
credit agreement are secured by a mortgage on our Watsonville
property. The interest rate charged on the advances under the
facility is equal to the three-month London Interbank Offered
Rate, or LIBOR, in effect on the first day of each calendar
quarter, plus 2.25%. We may use the advances under the credit
facility for both general corporate purposes and the acquisition
of new investments. As of December 31, 2009, there was
$5,000 outstanding under the line of credit, the minimum
principal balance required under the credit agreement.
Any indebtedness we incur will likely be subject to continuing
covenants, and we will likely be required to make continuing
representations and warranties about our company in connection
with such debt. Moreover, some or all of our debt may be secured
by some or all of our assets. If we default in the payment of
interest or principal on any such debt, breach any
representation or warranty in connection with any borrowing or
violate any covenant in any loan document, our lender may
accelerate the maturity of such debt requiring us to immediately
repay all outstanding principal. If we are unable to make such
payment, our lender could foreclose on assets that are pledged
as collateral to such lender. The lender could also sue us or
force us into bankruptcy. Any such event would likely have a
material adverse effect on the value of an investment in our
common stock.
Advisory
and Administration Agreements
In addition to making investments in accordance with our
investment policies, we will also use our capital resources to
make payments to our Adviser pursuant to the terms of our
advisory agreement. Under the terms of the Advisory Agreement
that we will enter into upon completion of this offering, we
will reimburse our Adviser for all expenses incurred by our
Adviser for our direct benefit, such as offering, legal,
accounting, tax preparation, consulting and related fees. We
believe all of these charges will be incurred directly by us
rather than by our Adviser for our benefit. Accordingly, we do
not anticipate making any reimbursements to our Adviser for
these amounts.
In addition, we will reimburse our Adviser for all fees charged
by third parties that are directly related to our business,
which may include real estate brokerage fees, mortgage placement
fees,
lease-up
fees and transaction structuring fees that will be passed
through to us at the cost to our Adviser. The actual amount that
we will pay to our Adviser will depend largely upon the
aggregate costs of the properties we acquire, which in turn will
depend upon the net proceeds of this offering and the amount of
leverage we use in connection with our activities. Accordingly,
the amount of these fees is not determinable at this time.
Under the advisory agreement, we will also pay to our Adviser an
annual base management fee equal to 2.0% of our total
stockholders equity, less the recorded value of any
preferred stock, and an incentive fee based on funds from
operations, or FFO. Based on the expected net proceeds of this
offering, we estimate that this base management fee will be
approximately $3.5 million for the first twelve months
following the offering. Because the payment of the incentive fee
will be based on performance, we are currently unable to
estimate whether or when we will incur an incentive fee under
the terms of the agreement.
Under the Amended Administration Agreement, we will pay
separately for our allocable portion of the Administrators
overhead expenses in performing its obligations, including rent,
and our allocable portion of the salaries and benefits expenses
of its employees, including, but not limited to, our chief
financial officer, chief compliance officer, treasurer, internal
counsel, investor relations officer and their respective staffs.
We estimate that these expenses will be approximately $340,000
per year after the first twelve months following the offering.
45
Distributions
to Stockholders
We intend to begin making monthly distributions to our
stockholders within 120 days after we complete this
offering. In order to qualify as a REIT and to avoid
corporate-level tax on the income we distribute to our
stockholders, we are required to distribute at least 90% of our
ordinary income and short-term capital gains on an annual basis.
In addition, we will need to make additional distributions to
eliminate our pre-REIT earnings and profits by December 31,
2011, which we intend to make with existing cash on hand and
borrowings under our existing line of credit, if necessary.
Therefore, once the net proceeds we receive from this offering
are substantially fully invested, we will need to raise
additional capital in order to grow our business and acquire
additional properties. We anticipate borrowing funds to obtain
additional capital once the net proceeds of this offering have
been fully invested, but there can be no assurance that we will
be able to do so on terms acceptable to us, if at all. For
additional information regarding our distribution policies and
requirements and our strategy of borrowing funds following the
application of the proceeds from this offering, see
Distribution Policy and Investment Policies
and Policies with Respect to Certain Activities Use
of Leverage.
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 plan, we expect that the
primary market risk to which we will be exposed is interest rate
risk.
We may be exposed to the effects of interest rate changes,
primarily as a result of long-term debt used to maintain
liquidity and fund expansion of our real estate investment
portfolio and operations. Our interest rate risk management
objectives will be to limit the impact of interest rate changes
on earnings and cash flows and to lower overall borrowing costs.
To achieve our objectives, we will borrow primarily at fixed
rates or variable rates with the lowest margins available and,
in some cases, with the ability to convert variable rates to
fixed rates. We may also enter into derivative financial
instruments such as interest rate swaps and caps in order to
mitigate our interest rate risk on a related financial
instrument. We will not enter into derivative or interest rate
transactions for speculative purposes.
As of December 31, 2009, the fair value of our fixed rate
debt outstanding was approximately $12.0 million. Interest
rate fluctuations may affect the fair value of our fixed rate
debt instruments. If interest rates on our fixed rate debt
instruments, using rates at December 31, 2009, had been one
percentage point higher or lower, the fair value of those debt
instruments on that date would have decreased or increased by
approximately $700,000 and $800,000, respectively.
In addition to changes in interest rates, the value of our real
estate is subject to fluctuations based on changes in local and
regional economic conditions and changes in the creditworthiness
of lessees, which may affect our ability to refinance our debt
if necessary.
46
BUSINESS
AND PROPERTIES
Overview
We are an externally-managed corporation that currently owns two
farms in California that we lease to Dole Fresh. We intend to
acquire more farmland, which we will lease to farmers until such
time as the land may be sold to developers to be converted to
urban or suburban uses. We expect that most of our future
tenants and borrowers will be small and medium-sized farming
operations that are unrelated to us. To a lesser extent, we may
also acquire properties related to farming, such as coolers,
processing plants, packing buildings and distribution center, as
well as ground leases under these facilities. We intend to lease
our properties under triple net leases, an arrangement under
which the tenant maintains the property while paying us rent
plus taxes and insurance. We also intend to provide senior
secured first lien mortgages to farmers for the purchase of
farmland and properties related to farming. We expect these
mortgages to be secured by farming properties in operation for
over five years with a history of crop production and profitable
farming operations. We have currently
identified
specific properties to acquire, although we have not yet entered
into letters of interest or binding agreements to acquire these
properties. We also have not completed our due diligence of
these properties, and there can be no assurance that we will
acquire any of them. We have not currently identified any
properties for which to invest in mortgages. We are actively
seeking and evaluating properties in this regard. Please see
Properties Under Consideration. We may also provide
ancillary services to farmers through our wholly owned taxable
REIT subsidiary, Gladstone Land Advisers, Inc.
We were formed in 1997. Prior to 2004, we engaged in the owning
and leasing of farmland, as well as an agricultural operating
business whereby we engaged in the farming, contract growing,
packaging, marketing and distribution of fresh berries,
including commission selling and contract cooling services to
independent berry growers. In 2004, we sold our agricultural
operating business to Dole Fresh. Since 2004, our operations
have consisted solely of leasing our farms located in
Watsonville, California and Oxnard, California to Dole Fresh. We
also lease a small parcel on our Oxnard farm to an oil company.
We do not currently intend to enter the business of growing and
marketing farmed products. However, if we do so in the future we
will do so through a taxable REIT subsidiary.
We intend to elect to be taxed as a REIT under federal tax laws
beginning with the year ending December 31, 2011. Gladstone
Management Corporation serves as our adviser and manages our
real estate portfolio. There is a benefit to owning land in a
REIT rather than owning it directly, called the liquidity
premium. The liquidity premium reflects the ability to get in or
out of an investment as compared to less liquid but similar
investments. Owning a diversified portfolio of property through
a publicly traded REIT provides investors significantly more
liquidity than investing in real estate through a private equity
fund. Along with other factors, this liquidity premium has
provided REITs with higher annual returns than private equity
real estate funds. A 2010 analysis performed by the National
Association of Real Estate Investment Trusts (NAREIT) concludes
that publicly traded REITs have outperformed private equity real
estate funds through the last full real estate cycle from 1989
through 2007. During this cycle, REITs produced an average
annual return of 13.4%, while core, value-added and
opportunistic private real estate funds produced an average
annual return of 7.7%, 8.6% and 12.1% respectively. The NAREIT
analysis utilized data from the National Council of Real Estate
Investment Fiduciaries (NCREIF ) and the Townsend Group.
However, we cannot guarantee that you will receive a liquidity
premium if you buy stock in our company.
Industry
Overview and Our Opportunity
Agricultural real estate that is rented for farming has certain
features that distinguish it from other rental real estate.
First, because most of the property we own consists of land,
there is generally less concern about risks associated with
owning building structures susceptible to fires or other natural
disasters that may damage the buildings. Second, farmland has
historically maintained relatively low vacancy rates when
compared to other types of rental real estate and we believe
that it is rare for choice farmland not to be farmed. As a
result, we believe there is a reduced risk of being unable to
lease our properties. We believe that none of the farmland in
the areas where we intend to purchase property has been vacant
to any significant degree during the past ten years. Third, most
farmland that we intend to buy is leased pursuant to short-term
leases, and we plan to lease our property under short-term
leases. By entering into short-term leases, we believe that we
will be in a position to renegotiate increased rental rates when
the leases are renewed, which could result in materially higher
rents.
47
World
Supply of Farmland
Domestic and global population growth is the major driver behind
increased demand for farmland. The U.S. Census bureau
estimates that the U.S. population will grow by 10.3% over
the next 10 years to 338 million people and the global
population will grow by 11.8% over the same period thereby
nearing 8 billion people worldwide.
In addition to population growth spurring demand for farmland,
changing consumption patterns also contributes to the increasing
value of farmland. As large nations such as China and India
modernize, their consumption of meat protein continues to
increase dramatically. It takes over five times the amount of
grain to produce an equivalent amount of calories in meat
protein, so as the demand for meat protein increases it is
expected that the demand for grains will increase dramatically.
At the same time that that there is demand for more food to feed
an increasing population, there is increasing demand for urban
and suburban uses of farmland. The increased demand due to
population growth and changing consumption patterns, coupled
with the development of agricultural land for urban and
industrial purposes, could result in significant upward pressure
on farmland prices. This is the major investment thesis of our
business. Figure 1 below shows the historical and projected
decline of arable land per capita, as illustrated in the chart
from 2000 below from the Food and Agricultural Organization of
the United Nations:
Figure 1
United
States Farmland
The USDAs 2007 Census of Agriculture estimated there were
approximately 2.2 million farms on 922.1 million acres
of land in the United States. Out of this total there were
1.7 million farms dedicated to producing crops. Crop farms
utilize 406.4 million acres of land with approximately
241 acres per farm. The total estimated annual market value
of crops harvested in the United States according to the
USDAs 2007 Census of Agriculture is $143.7 billion.
Crops can be broken down into two
sub-categories:
annual crops and permanent crops. Annual crops are planted and
harvested annually. Examples include strawberries, corn and
soybeans. Permanent crops have plant structures that produce
annually without being replanted. Examples include citrus,
almonds and grapes. We seek to acquire and lease farmland for
the purpose of harvesting annual crops, but we will also invest
in some farmland for the purpose of harvesting permanent crops.
48
The USDAs Agricultural Projections to 2018 anticipates
continued upward pressure on domestic farm income, despite the
current global economic slowdown. Figure 2 below illustrates the
continued trend of increasing farm income projected by the USDA
from 2008 onward. In very general terms it takes about one acre
of land to feed one person for one year.
Figure 2
According to the USDA, cropland values have increased 112% over
a 10 year period ending December 31, 2008. As an
investment, U.S. farmland has performed well in recent
years compared to other asset classes. Farmland in the United
States has provided investors with a safe haven during the
recent turbulence in the financial markets. Figure 3 below
illustrates the returns farmland has experienced compared to
domestic REITs and public equity:
Figure 3
Market
Index Comparisons
Annual
Returns
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Average
|
|
|
NCREIF* Farmland Index
|
|
|
7.0
|
%
|
|
|
2.0
|
%
|
|
|
6.9
|
%
|
|
|
9.7
|
%
|
|
|
20.5
|
%
|
|
|
33.9
|
%
|
|
|
21.2
|
%
|
|
|
15.9
|
%
|
|
|
15.8
|
%
|
|
|
6.3
|
%
|
|
|
13.9
|
%
|
NAREIT+
REIT Index
|
|
|
25.9
|
%
|
|
|
15.5
|
%
|
|
|
5.2
|
%
|
|
|
38.5
|
%
|
|
|
30.4
|
%
|
|
|
8.3
|
%
|
|
|
34.4
|
%
|
|
|
(17.8
|
)%
|
|
|
(37.3
|
)%
|
|
|
27.5
|
%
|
|
|
13.0
|
%
|
S&P 500 Index Total Returns
|
|
|
(9.0
|
)%
|
|
|
(11.9
|
)%
|
|
|
(22.0
|
)%
|
|
|
28.4
|
%
|
|
|
10.7
|
%
|
|
|
4.8
|
%
|
|
|
15.6
|
%
|
|
|
5.5
|
%
|
|
|
(36.6
|
)%
|
|
|
25.9
|
%
|
|
|
1.2
|
%
|
|
|
|
* |
|
NCREIF is the National Council of Real Estate Investment
Fiduciaries. |
|
+ |
|
NAREIT is the National Association of Real Estate Investment
Trusts. |
The findings from the 2007 National Resources Inventory (NRI)
serve as a reminder that our nations agricultural land
base is diminishing at a rapid pace. The NRI is a survey of the
nations non-federal lands conducted by the USDA Natural
Resources Conservation Service in cooperation with Iowa State
University since 1982. It documents natural resource conditions
and trends, including the conversion of agricultural land to
developed uses, and is the most comprehensive natural resource
database in the nation.
According to the 2007 NRI, 4,080,300 acres of active
agricultural land were converted to developed uses between 2002
and 2007. This represents an area roughly the size of
Massachusetts. More troubling, the nation has lost
23,163,500 acres of agricultural land between 1982 and
2007. In addition, there was a nationwide 13,773,400-
49
acre decline in prime farmland between 1982 and 2007. Prime
farmland soils are best suited to produce food and other
agricultural crops with the fewest inputs and the least amount
of soil erosion.
During the
25-year span
of the NRI, every state lost prime farmland. States with the
biggest loss of acres included Texas (1,500,000), Ohio
(796,000), North Carolina (766,000), California (616,000) and
Georgia (566,000). The following states lost the greatest
percentage of their prime land during the same reporting period:
Arizona (36 percent), Nevada (34 percent), New Mexico
(33 percent), New Jersey (30 percent) and
Massachusetts (24 percent).
Figure 4 below illustrates the increase in domestic cropland
value over the last 10 years:
Figure 4
Farmland in the United States has continued to improve from a
balance sheet perspective. In general, the farming sector is not
heavily leveraged, as illustrated in Figure 5 below. Farmland
has maintained low debt levels during a period of unprecedented
leverage in other asset classes. As a result, farm values and
income have not experienced the extreme volatility seen in other
asset classes. Although there can be no assurance that we can
duplicate the statistics set out below, this consistency
increases our confidence in evaluating prospective individual
farm acquisitions including projecting the income that may be
generated from these specific properties.
Figure 5
Balance
Sheet of the U.S. Farming Sector
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009P
|
|
|
2010F
|
|
|
|
$ in Millions
|
|
|
Farm Assets
|
|
$
|
1,923,596
|
|
|
$
|
2,055,276
|
|
|
$
|
2,005,473
|
|
|
$
|
1,943,739
|
|
|
$
|
1,875,865
|
|
Real estate
|
|
$
|
1,625,835
|
|
|
$
|
1,751,386
|
|
|
$
|
1,692,727
|
|
|
$
|
1,633,837
|
|
|
$
|
1,570,159
|
|
Total Farm Debt
|
|
$
|
203,581
|
|
|
$
|
214,063
|
|
|
$
|
238,875
|
|
|
$
|
249,493
|
|
|
$
|
232,526
|
|
Total Farm Equity
|
|
$
|
1,720,015
|
|
|
$
|
1,841,213
|
|
|
$
|
1,766,598
|
|
|
$
|
1,694,246
|
|
|
$
|
1,643,339
|
|
Debt/Assets
|
|
|
10.6
|
%
|
|
|
10.4
|
%
|
|
|
11.9
|
%
|
|
|
12.8
|
%
|
|
|
12.4
|
%
|
Debt/Real Estate
|
|
|
12.5
|
%
|
|
|
12.2
|
%
|
|
|
14.1
|
%
|
|
|
15.3
|
%
|
|
|
14.8
|
%
|
Source: USDA
F = forecast & P = preliminary
50
Arable land continues to decrease in the United States at a
significant rate as detailed in the USDAs latest National
Resource Inventory report dated December 2009. According to the
report cropland acreage, which makes up 18% of all of the U.S.,
declined from 420 million acres in 1982 to 357 million
acres in 2007, a 15 percent decrease. There were
325 million acres of prime farmland in 2007, compared to
339 million acres in 1982, a decline of 4%. The acreage of
prime farmland converted to other uses during this period is
greater than the combined area of Vermont and New Hampshire.
While domestic demand for food increases with population growth,
the supply of cropland decreases as it is converted to other
uses. We believe this will create positive pressure on farmland
prices for the foreseeable future.
California
Farmland
Within the United States, we believe California provides very
favorable conditions for long term investing in farmland.
Initially we will focus on farmland investment opportunities in
California. Along the California coast, and in the valleys of
California there are over 61,000 farms dedicated to growing
crops on over 9,000,000 acres of land according to the
USDAs Census of Agriculture. Total annual market value of
crops harvested in California is $22.9 billion, according
to the USDA, which accounts for 16% of the national output in
the U.S. In addition, there are significant additional
acres devoted to agricultural businesses, such as packing and
cooling. Much of this farmland and agricultural real estate is
in the path of urban growth where, at some time in the future
some of this acreage will eventually be converted into urban or
suburban uses such as homes or businesses. We believe there is
an opportunity for us to acquire substantial agricultural real
estate in California and rent the land to farmers while we wait
for a time in the future to sell the land to buyers seeking to
convert that farmland to more intensive uses.
California Farmland conversion. The most
recent California Farmland Conversion Report published in
2008 states that California is losing approximately
88,000 acres of farm and grazing land annually.
Approximately 46% of farm and grazing land lost is the highest
quality farmland, known as prime farmland. Of the
88,000 acres of California farmland lost annually,
51,000 acres are converted to urban land use. We believe
this conversion trend will continue well into the future as
Californias population and economy continue to grow.
Prime farmland has decreased and urban/suburban land has
increased over each of the two year periods between 1984 and
2006 as measured by the California Department of Conservation,
or CDC. Southern California continues to lead the state in urban
development, comprising 47% of developed acres in California
during the last 2 years measured. The San Joaquin
Valley comprised 23 percent of urban/suburban development
and the Sacramento metropolitan area accounted for
16 percent. The San Francisco Bay area continues to
see less urban development than the rest of the state. Housing
is the largest component of urban development. New industrial
facilities, airport construction and water evaporation ponds
also contribute to the land conversion trends in the state.
Figure 6 below shows the land conversion trends over the last
20 years recorded by the CDC. The red bars illustrate
51
the increase in urban land over each measurement period, while
the green bars illustrate the reduction in farmland over the
same period:
Figure 6
Data from the USDAs Census of Agriculture, which is taken
every five years, also illustrates the reduction in farms and
agricultural land taking place as more land is converted to
residential and commercial uses as seen in Figure 7:
Figure 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 Year
|
|
State of California
|
|
1997
|
|
|
2002
|
|
|
2007
|
|
|
Change
|
|
|
|
(all units in thousands)
|
|
|
# of Farms
|
|
|
88
|
|
|
|
80
|
|
|
|
81
|
|
|
|
(7.9
|
)%
|
Total Farmland (acres)
|
|
|
28,796
|
|
|
|
27,589
|
|
|
|
25,365
|
|
|
|
(11.9
|
)%
|
Total Cropland (acres)
|
|
|
10,804
|
|
|
|
10,944
|
|
|
|
9,465
|
|
|
|
(12.4
|
)%
|
Source: USDA Census of Agriculture
Farmland valuation. As an owner of and
mortgage lender on farmland, we intend to pay cash distributions
to our stockholders from rents and interest income. Figure 8
below illustrates the cropland rental rates in California and
the United States as a whole:
Figure 8
Average
Cash Rent per Acre of Cropland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar Year
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
California
|
|
$
|
330
|
|
|
$
|
320
|
|
|
$
|
340
|
|
|
$
|
360
|
|
|
$
|
360
|
|
United States
|
|
$
|
78
|
|
|
$
|
80
|
|
|
$
|
78
|
|
|
$
|
86
|
|
|
$
|
90
|
|
Source: USDA, NASS
52
When we sell a property, we expect the underlying value of the
land will have appreciated since our acquisition. Figure 9 below
illustrates the trends in cropland value per acre for California
and the United States as a whole:
Figure 9
Average
Value per Acre of Cropland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar Year
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
California
|
|
$
|
7,730
|
|
|
$
|
8,290
|
|
|
$
|
9,700
|
|
|
$
|
9,880
|
|
|
$
|
9,400
|
|
United States
|
|
$
|
2,060
|
|
|
$
|
2,300
|
|
|
$
|
2,530
|
|
|
$
|
2,760
|
|
|
$
|
2,650
|
|
Source: USDA, NASS
In 2008, there was a modest decline in cropland value for both
California and the United States as a whole. We believe this is
attributable to the collapse of the financial markets and a
general lack of mortgages for farmland transactions. The
intrinsic value of an asset, such as land, is determined by its
ability to generate cash flow. As demonstrated by the cash rents
in Figure 8 above, farmland did not experience a decline in its
ability to generate cash flow. However, we believe farmland and
other real estate assets suffered a decline in value as buyers
were unable to secure mortgages on the property they wanted to
buy.
To give a better indication of the changes occurring in the
California farmland, the State of California publishes
statistics on various regions of that state. The map in Figure
10 below shows the geographic districts that the state surveys.
Figure 10
53
Our two farms are located in Region 6. The statistics for farms
in Region 6 are as follows in Figure 11:
Figure
11
Row Crop
Farmland Region 6
|
|
|
|
|
|
|
|
|
|
|
2008 Value per
|
|
2008 Rent per
|
County
|
|
Acre
|
|
Acre
|
|
Monterey
|
|
$
|
20,000 - $50,000
|
|
|
$
|
750 - $2,500
|
|
Santa Cruz
|
|
$
|
15,000 - $50,000
|
|
|
$
|
1,500 - $2,300
|
|
San Benito
|
|
$
|
11,000 - $32,000
|
|
|
$
|
500 - $ 900
|
|
San Luis Obispo
|
|
$
|
25,000 - $55,000
|
|
|
$
|
750 - $2,500
|
|
Santa Barbara
|
|
$
|
25,000 - $55,000
|
|
|
$
|
750 - $2,500
|
|
Ventura
|
|
$
|
45,000 - $75,000
|
|
|
$
|
1,800 - $3,200
|
|
Source: American Society of Farm Managers and Rural Appraisers
In addition to farmland on the coast of California, there are
millions of acres of farmland in other parts of California. We
intend to acquire properties and make mortgage loans secured by
that farmland also. Additionally, we intend to seek farmland in
other parts of the U.S. and Canada. The map in Figure 12
below is from the USDA National Agricultural Statistics Service,
or NASS. It shows that the most expensive farmland in the
U.S. is in California, with Iowa and Florida being similar.
Figure 12
Types of Farmland. Much of the farmland in the
areas where we intend to purchase properties is used for farming
annual crops. Annual crops are planted anew each year. By
contrast, vineyards or tree crops known as permanent crops (such
as lemons, oranges, cherries, peaches, nuts, etc.) require a
large investment in vines or trees which, once planted, must be
harvested for many years in order to realize a return on the
capital invested in the trees or vines. If, during the
intervening years, the supply of grapes or tree crops increases
dramatically, as has the supply of grapes from time to time, or
if the demand for such crops declines, it is very costly to
remove the vines or trees and start over with a different crop.
Unlike vineyard and tree crops, which can generally only be used
for a single crop,
54
land used to farm annual crops can produce a variety of crops,
such as strawberries, tomatoes, lettuce, onions, peppers, beans
and others. We intend to lease most of the land that we purchase
for the production of annual crops and do not expect in the
early years to buy a substantial amount of land that will be
used for vineyards or tree crops. Members of our management team
have experience in leasing land that is used for annual crops,
especially strawberries and tomatoes. We believe that this
strategy will provide us with an opportunity to lease the land
to a wide variety of different farmers from year to year, rather
than being tied to one crop for many years, as is necessary to
produce crops such as grapes, cherries, peaches, lemons, oranges
and many nuts. In addition, we initially intend to purchase land
in California. The cool summer breezes and mild winters in the
central coast of California provide prime growing conditions for
the annual crops that we expect will be farmed on our
properties. Figure 13 below illustrates the favorable returns of
California cropland:
Figure 13
Land
Value, Annualized Returns
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2009
|
|
1 Yr
|
|
2 Yrs
|
|
3 Yrs
|
|
4 Yrs
|
|
5 Yrs
|
|
6 Yrs
|
|
7 Yrs
|
|
8 Yrs
|
|
9 Yrs
|
|
10 Yrs
|
|
U.S. Farmland
|
|
|
6.3
|
%
|
|
|
11.0
|
%
|
|
|
12.6
|
%
|
|
|
14.7
|
%
|
|
|
18.3
|
%
|
|
|
18.7
|
%
|
|
|
17.3
|
%
|
|
|
16.0
|
%
|
|
|
14.3
|
%
|
|
|
13.6
|
%
|
U.S. Row Cropland
|
|
|
6.7
|
%
|
|
|
11.1
|
%
|
|
|
13.1
|
%
|
|
|
13.3
|
%
|
|
|
15.3
|
%
|
|
|
15.7
|
%
|
|
|
14.6
|
%
|
|
|
13.7
|
%
|
|
|
12.8
|
%
|
|
|
12.4
|
%
|
California Farmland
|
|
|
5.6
|
%
|
|
|
9.0
|
%
|
|
|
10.3
|
%
|
|
|
13.7
|
%
|
|
|
21.1
|
%
|
|
|
21.9
|
%
|
|
|
20.1
|
%
|
|
|
18.5
|
%
|
|
|
16.1
|
%
|
|
|
15.5
|
%
|
California Row Cropland
|
|
|
2.0
|
%
|
|
|
5.6
|
%
|
|
|
9.9
|
%
|
|
|
9.9
|
%
|
|
|
15.5
|
%
|
|
|
17.1
|
%
|
|
|
16.2
|
%
|
|
|
15.0
|
%
|
|
|
13.8
|
%
|
|
|
13.4
|
%
|
Source: NCREIF Farmland Index
Farmland soil is made up of sand, silt and clay. In addition
there are water molecules and organic matter. The organic matter
is teaming with living organisms that are breaking down the soil
and the organic matter itself. One teaspoon of organic matter
may have millions of living organisms. The composition of the
soil determines what will grow best in the soil. When buying
farmland we will have tests run by soil experts to determine
what is in the soil and what it can be used to grow. This test
will be used to confirm whether or not the soil is optimal for
growing annual crops. There are about 70,000 categories of soil
but a smaller number are used in farmland.
Along the California coast where we currently own farms, there
are millions of acres of farmland and thousands of acres of
other real estate devoted to agricultural businesses. We intend
to buy this type of farmland and to make mortgage loans to
owners of farmland. We intend to lease the farmland we own to
farmers. We expect that over time rental income will increase
and therefore our net income will increase. We believe that the
value of this farmland will increase at a rate that is equal to
or greater than the rate of inflation. There can be no guarantee
of these expectations. We will also purchase some smaller amount
of business real estate that is used by farmers for their crops.
These types of business real estate include processing plants,
freezers, coolers, storage sheds, box barns and other similar
real estate. We expect to lease this type of real estate,
through what we call triple net leases, to businesses or farmers
such that the owner of the business, the tenant, pays us rent,
maintains the properties and pays the taxes and insurance. We
also expect that much of this farmland and other agricultural
real estate is in the path of urban growth where, at some time
in the future, we believe it is likely to be converted into
urban uses such as homes or commercial buildings. We believe
there is an opportunity for us to acquire substantial
agricultural real estate in the California counties between Los
Angeles and San Francisco and rent it to farmers while we
wait for the time to come to sell the property to developers to
convert the farmland to urban and suburban uses. While we are
waiting for the conversion of the farmland, we intend to rent
the farmland to independent farmers. The rent and interest
payments we receive from the farmers will be the primary source
of dividends to our stockholders.
In addition we will provide mortgage loans on farmland and
businesses real estate related to farming. We expect these
mortgages will be at rates and on terms that will initially
provide us with more income than we would receive from owning
and renting farmland. We believe that lending by banks and other
financial institutions is at a very low point at this time and
that there is substantial opportunity for us to provide
financing at attractive rates of return. By providing a mortgage
on the farmland, we believe we will also be in a good position
to purchase the farmland should the owner wish to sell the land.
55
Our
Approach to Investing in Farmland
We will initially seek to invest in farmland in California,
which is where our two existing farms are located. We have
chosen California for the favorable trends described above and
below, as well as our experience investing in the state. We will
seek to acquire annual cropland rather than permanent cropland
because annual crops are less expensive to replace and less
susceptible to disease than permanent crops. We intend to lease
to independent farmers with sufficient experience and capital.
This gives us flexibility to replace tenants if needed and
increase annual rents. We do not have resources to farm the land
we acquire but our Adviser knows farmers who have these
resources. Finally, we seek to acquire cropland in multiple
locations throughout the State of California. This will provide
diversification of climate conditions and water sources. The
left side of the chart below summarizes the risk profile we are
seeking:
|
|
|
Lower Risk
|
|
Higher Risk
|
|
Annual Crops
|
|
Permanent Crops
|
Leased Property
|
|
Operated Property
|
Many Locations
|
|
Few Locations
|
Agricultural real estate that is rented for farming has certain
features that distinguish it from other rental real estate.
First, because almost all of the property consists of land,
there is generally less concern about risks associated with
fires or other natural disasters that may damage the property.
Since the property has few or no buildings or structures there
is less risk of destruction. Second, we believe farmland has
historically maintained relatively low vacancy rates when
compared to other types of rental real estate and we believe
that it is rare for good farmland not to be leased and farmed.
As a result, we believe there is a reduced risk of being unable
to lease our properties. Based on a survey we have taken of real
estate agents, a low percentage of the farmland in the areas
that we intend to purchase property has remained un-rented
during the past ten years. Third, most farmland in the areas we
intend to buy land is leased on short-term leases and we plan to
lease our property on short-term leases. By entering into
short-term leases, we believe we will be in a position to
increase our rental rates when the leases are renewed, which
could result in materially higher rents. Conversely there is the
possibility that the land cannot be rented. Members of our
management team have experience in leasing land that could be
used for strawberries, raspberries, tomatoes, beans, peppers,
lettuce and other annual crops which produce for one season and
are then replaced with newly planted crops. We believe that this
strategy will provide us with an opportunity to lease the land
to a wide variety of different farmers from year to year and
avoids the risk of owning land dedicated to a single crop.
Most real estate is considered to be a hedge against inflation
by investors. One reason real estate prices rise is due to the
income that can be made from using that real estate. The real
estate that we purchase will mostly be used to produce row
crops, which grow fruits and vegetables. As can be seen by the
chart below, fruits and vegetables have the highest rate of
inflation in price when compared to other food items in the
consumer price index. Fruits and
56
vegetables have increased in price by more than 300% since 1980
according to the Bureau of Labor Statistics. There can be no
assurance that the rate of inflation as reported and seen in the
chart below will continue.
We also believe that much of the real estate we are seeking to
acquire is owned by families and farming businesses who would
like to sell their property for cash or for interests in our
Operating Partnership. According to the United States Department
of Agriculture, or USDA, approximately 87% of farms in the
United States are owned by families. Some of these sellers may
wish to simultaneously lease their property back and continue
their agricultural businesses under short term, net leases.
Sellers in these sale-leaseback transactions can
then use the freed up cash to repay existing indebtedness or for
growth of their farming operations. Other sellers may wish to
use the cash proceeds for retirement or other business
endeavors. Therefore, we believe that the real estate that we
acquire and do not simultaneously lease back to the seller can
be leased at attractive rental rates to other independent
farmers, while we wait for the time in the future when these
properties may be sold for urban or suburban development.
As an alternative to selling their real estate to us for cash,
we believe that many of these farm owners may be interested in
exchanging their farmland for Units in our Operating Partnership
in order to retain the ability to participate in the upside
potential of a growth company and the future conversions of
farmland to urban uses. 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 Units is a tax free exchange. In
addition, because we intend to make cash distributions each
month, Unit holders would receive regular monthly cash
distributions as well as participate in the future plans of our
company. Finally, Unit holders would have the flexibility to
redeem their 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 receive the
value of their property in a tax efficient manner.
OUR
APPROACH TO INVESTING
Overview
Once we have invested the net proceeds of this offering, we
intend that substantially all of our investments will be
income-producing agricultural real property and mortgages on
agricultural real estate. When we buy agricultural real estate,
we expect that the vast majority of our investments will be
structured as triple net leases, which require the tenants to
pay operating expenses, maintenance insurance, and taxes,
although some leases may not be made on a triple net basis. When
we make mortgage loans we expect the loan to value of the real
estate to be greater than for conventional mortgage loans on
farms and the interest rate to be higher. Investments will not
be restricted as to geographical areas, but we expect that
substantially all of our properties will initially be located in
the State of
57
California. Prospective investors will not be afforded the
opportunity to evaluate the economic merits of our investments
or the terms of any dispositions of properties. See Risk
Factors Our success will depend on the performance
of our Adviser and if our Adviser makes inadvisable investment
or management decisions, our operations could be materially
adversely impacted.
We anticipate that we will make substantially all of our
investments through our Operating Partnership. Our Operating
Partnership may acquire interests in real property in exchange
for the issuance of Units, for cash or through a combination of
both. Units issued by our Operating Partnership will be
redeemable for cash or, at our election, shares of our common
stock on a
one-for-one
basis at any time after the first anniversary of the completion
of this offering. However, we may in the future hold some of our
interests in real properties through one or more wholly owned
subsidiaries, each classified as a qualified REIT
subsidiary or QRS.
Property
Acquisitions and Net Leasing
We anticipate that a majority of the properties we purchase will
be acquired from farmers or agricultural companies and that they
or an independent farmer will simultaneously lease the
properties from us. These transactions will provide the tenants
with an alternative to other financing sources such as
borrowing, mortgaging real property, or selling securities. We
anticipate that some of our transactions will be in conjunction
with acquisitions, recapitalizations or other corporate
transactions affecting our tenants. We may act as one of several
sources of financing for these transactions by purchasing one or
more properties from the tenant and by net leasing it to the
tenant or its successor in interest. For a discussion of the
risks associated with leasing property to leveraged tenants, see
Risk Factors Highly leveraged tenants may be
unable to pay rent, which could adversely affect our cash
available to make distributions to our stockholders.
We intend to own primarily single-tenant agricultural real
property. Generally, we will lease properties to tenants that
our Adviser deems creditworthy under leases that will be full
recourse obligations of our tenants or their affiliates. We will
seek to enter into short term leases of only one or two years,
which is customary within the California farming industry. While
we expect that we will renew most of these leases at the end of
their terms, we believe that this strategy will permit us to
take advantage of increasing rental rates from year to year.
However, there can be no assurance that this strategy will
result in increasing rents upon renewal, and may in fact result
in decreasing rents.
We believe that most of the farmland that we are interested in
purchasing can be rented at annual rental rates ranging from 4%
to 6% of the properties market values. However, there can
be no assurance that we will be able to achieve this level of
rental rates. Since rental contracts in the farming business are
customarily short-term agreements, rental rates are renegotiated
regularly. We expect that we will be able to increase the rental
rates on our properties by 2% to 4% each year, although there
can be no guarantee that we will be able to increase rents on
any farmland to this extent or at all.
All of our leases will be approved by our Advisers
investment committee. Our Board of Directors has adopted a
policy that we will not make an investment in any individual
property with a cost in excess of 20% of our total assets at the
time of investment. However, our Board of Directors may amend or
waive this policy at any time or from time to time.
Underwriting
Criteria and Due Diligence Process
Selecting
the Property
We consider selecting the right properties to purchase or
finance as the most important aspect of our business. Buying
good farmland that can be used for many different crops and that
is located in desirable locations is essential to our success.
Our management team and their real estate contacts in California
are very familiar with the properties located in our general
farming areas. We believe that our management team is
experienced in selecting good farmland and
58
will use this expertise to identify promising properties. The
following is a list of items we believe are important in the
selection of farmland:
|
|
|
|
|
Water located on or near the
property. Availability of water is essential to
farming. Because of the dearth of rainfall in many areas of
California where we intend to purchase properties, we will seek
to purchase properties with ample access to water. We do not
intend to buy or finance any property that does not have an
operating water well on it or rights to use a well or other
source that is located nearby.
|
|
|
|
Soil composition. In addition to water, for
farming efforts to be successful the soil must be suitable for
growing crops. We will not buy or finance any real property that
does not have soil conditions that we believe are favorable for
growing annual crops, except to the extent that a portion of an
otherwise suitable property, while not favorable for growing
annual crops, may be utilized to build coolers, freezers,
packing houses or other properties used in farming businesses.
|
|
|
|
Location. Farming annual crops also requires
optimal climate. Initially we intend to purchase and finance
properties that are located near the Pacific coast in order to
take advantage of the cool summer winds and low temperatures
needed to grow crops in summer and in the mild winters. Some
properties may be inland but that is not our initial target
area. We also intend to purchase properties that are located in
close proximity to our current farmland in the Watsonville and
Oxnard, California areas in order to take advantage of the
proximity to current locations. Finally, we only intend to
purchase or finance properties that we believe we will be able
to sell in connection with their conversion to more intensive
uses, such as commercial or residential developments, in the
future. Once we acquire some properties in California, we expect
to expand offices to northern Florida, other areas of the
Southeast and the Mid-Atlantic.
|
|
|
|
Price. We intend to purchase and finance
properties that we believe are a good value and that we will be
able to profitably rent for farming. Generally, the closer that
a property is located to urban developments, the higher the
value of the property. As a result, properties that are located
in close proximity to urban developments, and therefore nearly
ready to be converted to urban use, are likely to be too
expensive to justify farming over an extended period of time.
|
On our behalf, our Adviser will perform a due diligence review
with respect to each property. Such review will include an
evaluation of the physical condition of a property and an
environmental site assessment to determine potential
environmental liabilities associated with a property prior to
its acquisition. However, despite the conduct of these reviews,
there can be no assurance that hazardous substances or wastes
(as defined by present or future federal or state laws or
regulations) will not be discovered on the property after we
acquire it. See Risk Factors Potential
liability for environmental matters could adversely affect our
financial condition.
Our Adviser will also physically inspect each property and the
real estate surrounding it in order to determine its value. Our
Advisers due diligence will be primarily focused on
determining the valuation of each property independently of its
rental value to particular tenants to whom we plan to rent. The
real estate valuations our Adviser performs will consider one or
more of the following items, but may not consider all of them:
|
|
|
|
|
The comparable value of similar real estate in the same general
area of the prospective property. In this regard, comparable
property is hard to define since each piece of real estate has
its own distinct characteristics. But to the extent possible,
comparable property in the area that has sold or is for sale
will be used to determine if the price being paid for the
property is reasonable.
|
|
|
|
The comparable real estate rental rates for similar properties
in the same area of the prospective property.
|
|
|
|
Alternative uses for the property in order to determine if there
is another use for the property that would give it higher value,
including potential future conversion to urban uses such as
commercial or residential development.
|
|
|
|
The assessed value as determined by the local real estate taxing
authority. Under California law many farms are protected from
excessive California taxes.
|
In addition, our Adviser will supplement its valuation with an
independent real estate appraisal in connection with each
investment that we consider. These appraisals may take into
consideration, among other things, the terms
59
and conditions of the particular lease transaction, the quality
of the tenants credit and the conditions of the credit
markets at the time the lease transaction is negotiated. The
actual sale price of a property, if sold by us, may be greater
or less than its appraised value.
When appropriate, our Adviser may engage experts to undertake
some or all of the due diligence efforts described above.
Underwriting
the Tenant
In addition to property selection, underwriting the tenant that
will lease the property will also be an important aspect of many
of our investments. Our Adviser will carefully evaluate the
creditworthiness of the tenant and assess its ability to
generate sufficient cash flow from its agricultural operations
to make payments to us pursuant to our lease. The following is a
list of criteria that our Adviser will consider when evaluating
potential tenants for our properties (all criteria may not be
present for each lease):
|
|
|
|
|
Experience. We believe that experience is the
most significant characteristic when determining the
creditworthiness of a tenant. Therefore, we will seek to rent
our properties to farmers that have an extensive track record of
farming their particular crops.
|
|
|
|
Financial Strength. We will seek out those
farmers that have financial resources to invest in planting and
harvesting their crops. Many farmers do not have the financial
wherewithal to do so, and therefore from time to time we may
rent to farmers that finance their crops. We will generally
require annual financial statements of the tenant in order to
continuously monitor performance of the property and evaluate
the financial capability of the tenant and its ability to
perform its obligations under the lease.
|
|
|
|
Adherence to Quality Standards. We intend to
lease our properties only to those farmers that are committed to
farming in a manner that will generate only high quality produce.
|
While our Adviser will select tenants it believes to be
creditworthy, tenants will not be required to meet any minimum
rating established by an independent credit rating agency. Our
Advisers standards for determining whether a particular
tenant is creditworthy will vary in accordance with a variety of
factors relating to specific prospective tenants. The
creditworthiness of a tenant will be determined on a tenant by
tenant and case by case basis. Therefore, general standards for
creditworthiness cannot be applied.
Diversification
Our Adviser will attempt to diversify our portfolio to avoid
dependence on any one particular tenant or geographic location.
By diversifying our portfolio, our Adviser intends to reduce the
adverse effect on our portfolio of a single under-performing
investment or a downturn in any particular geographic region.
However, because we initially intend to invest only in
properties located in California, we will be exposed to the
weather and other natural aspects that might affect that state.
Many of the areas in which we purchase or finance properties are
likely to have their own microclimates and will not be similarly
affected by weather or other natural aspects at the same time.
For example, we currently lease land in California as far south
as Oxnard and as far north as Watsonville, which are over
400 miles apart, each of which have distinct weather and
other characteristics. Once we acquire some properties in
California, we expect to expand offices to northern Florida,
other areas of the Southeast and the Mid-Atlantic.
Lease
and Mortgage Provisions that Enhance and Protect
Value
When appropriate, our Adviser will attempt to include provisions
in our leases and mortgages that require our consent to
specified activity or require the tenant or borrower to satisfy
specific operating tests. These provisions may include, for
example, operational or financial covenants, as well as
indemnification of us by the tenant or borrower against
environmental and other contingent liabilities. We believe that
these provisions will protect our investments from changes in
the operating and financial characteristics of a tenant or
borrower that may impact its ability to satisfy its obligations
to us or that could reduce the value of our properties. We will
also seek covenants requiring tenants or borrowers to receive
our consent prior to any change in control.
60
Credit
Enhancement
Our Adviser may also seek to enhance the likelihood of a
tenants lease obligations being satisfied through a
cross-default with other tenant obligations, a letter of credit
or a guaranty of lease obligations from the tenants
corporate affiliates, if any. We believe that this credit
enhancement will provide us with additional financial security.
These same enhancements may apply to our mortgage terms.
Additional
Investment Considerations for Mortgage Loans
We believe our mortgage loans, if any, will be made initially at
interest rates between 6.50% and 8.00% per annum.
Borrower
Selection
Our value-oriented investment philosophy is primarily
focused on maximizing yield relative to
risk. Upon identifying a potential mortgage
opportunity, our Adviser will perform an initial screen to
determine whether pursuing intensive due diligence is merited.
As part of this process, we have identified several criteria we
believe are important in evaluating and investing in prospective
borrowers. These criteria provide general guidelines for our
investment decisions. However, each prospective borrower may not
meet all of these criteria.
Value oriented/positive cash flow. Our
investment philosophy places a premium on fundamental credit
analysis and has a distinct value orientation. We intend to
generally focus on borrowers to which we can lend at relatively
low multiples of operating cash flow and that are profitable at
the time of investment on an operating cash flow basis. Although
we will obtain liens on the underlying real estate and other
collateral, we are primarily focused on the predictability of
future cash flow from their operations.
Seasoned management with significant equity
ownership. Strong, committed management teams are
important to the success of any farm and we intend to invest in
farm businesses where strong management teams are already in
place.
Strong competitive position. We seek to lend
to farm businesses that have developed competitive advantages
and defensible market positions within their respective markets
and are well positioned to capitalize on growth opportunities.
Exit strategy. We seek to lend to farm
businesses that we believe will generate consistent cash flow to
repay our loans and reinvest in their respective businesses. We
expect such internally generated cash flow in these farms to be
a key means by which we exit from our loans.
Specifics
about mortgage loans.
Loan to value. We will consider the appraised
value of each property when we consider a mortgage on that
property. Our goal is to loan an amount that is no more than 75%
of the appraised value of the real estate. However, there may be
circumstances in which we may increase the percentage, such as
for land that we would like to own or for a borrower that is
very well capitalized.
Cash flow coverage. We expect most borrowers
to have a farming operation that has and is expected to have
substantial cash flow from its operations. We will seek to have
cash flow generated by the businesses to be at least 1.2 times
the amount of the mortgage payments. However, there may be
circumstances in which we may lower that ratio below 1.2, such
as for land we would like to own and for borrowers that have
cash flow from other operations.
Mortgage Term. In general we expect to accept
mortgages of three to five years that will be interest only,
with the entire principal amount due at the end of the term.
Guarantees. In general we do not expect the
owner of the property to personally guarantee the mortgage.
However, we do expect the owner to pledge any assets or crops
planted on the property as collateral for the loan.
61
Standard review. We expect to perform a
standard review of the property that will be collateral for the
mortgage including most of the following:
|
|
|
|
|
an independent appraisal;
|
|
|
|
land record searches for possible restrictions;
|
|
|
|
water samples and availability;
|
|
|
|
soil samples;
|
|
|
|
environmental analysis;
|
|
|
|
zoning analysis;
|
|
|
|
crop yields;
|
|
|
|
possible future uses of the property; and
|
|
|
|
government regulation impacting the property including taxes and
restrictions.
|
Underwriting
the Borrower
We view underwriting a borrower in the same way as underwriting
a tenant. That is, for assessing credit risk, a borrower and
tenant are functionally the same: they each are operating a farm
business and each will owe us money (either rent or interest and
principal). Please see Underwriting the Tenant above.
Other
Investments
From time to time, we may purchase cooling buildings, freezer
buildings and similar improved property to rent to independent
farmers in connection with the services provided to independent
farmers. We may also build a freezer or cooler on property that
we purchase if there is sufficient business to make this
worthwhile. To a lesser extent, we may buy packing houses to
clean and pack fresh vegetables. We do not expect this to be a
material portion of the land and buildings that we purchase.
Temporary
Investments
There can be no assurance as to when our capital may be fully
invested in real properties or mortgages. Pending investment in
real properties or mortgages, we intend to invest the balance of
the net proceeds of this offering in permitted temporary
investments, which include short-term U.S. Government
securities, bank certificates of deposit and other short-term
liquid investments. We also may invest in securities that
qualify as real estate assets and produce qualifying
income under the REIT provisions of the Code.
If at any time the character of our investments would cause us
to be deemed an investment company for purposes of
the Investment Company Act of 1940, we will take the necessary
action to ensure that we are not deemed to be an
investment company. Our Adviser will continually
review our investment activity and the composition of our
portfolio to ensure that we do not come within the application
of the Investment Company Act. Our working capital and other
reserves will be invested in permitted temporary investments.
Our Adviser will evaluate the relative risks and rates of
return, our cash needs and other appropriate considerations when
making short-term investments on our behalf. The rates of return
of permitted temporary investments may be less than or greater
than would be obtainable from real estate investments.
Qualified
REIT Subsidiaries
While we intend to conduct substantially all of our investment
activities through our Operating Partnership, we may establish
one or more entities called qualified REIT
subsidiaries to purchase properties. These entities would
be formed for the sole purpose of acquiring a specific property
or properties and would have organizational documents:
|
|
|
|
|
that are substantially similar in all relevant ways to our
organizational documents;
|
62
|
|
|
|
|
that comply with all applicable state securities laws and
regulations; and
|
|
|
|
that comply with the applicable terms and conditions set forth
in this prospectus.
|
Joint
Ventures
We may enter into joint ventures, partnerships and other mutual
arrangements with real estate developers, property owners and
others for the purpose of obtaining an equity interest in a
property in accordance with our investment policies. Many REITs
have used joint ventures as sources of capital during periods
where debt or equity capital was either unavailable or not
available on favorable terms. Joint venture investments could
permit us to own interests in large properties without unduly
restricting the diversity of our portfolio. We will not enter
into a joint venture to make an investment that we would not
otherwise be permitted to make on our own. We expect that in any
joint venture the cost of structuring joint investments would be
shared ratably by us and the other participating investors.
Taxable
REIT Subsidiaries
While we intend to conduct substantially all of our investment
activities through our Operating Partnership, we may establish
one or more wholly-owned subsidiaries that are taxable
REIT subsidiaries or TRSs. A TRS is a wholly owned
subsidiary that is consolidated with us for financial accounting
purposes but that is fully taxable as a corporation. TRSs may
provide services and earn revenues that would potentially
disqualify us from satisfying the REIT requirements under
applicable tax law if we earned them directly.
To the extent that any TRS that we may establish in the future
has after-tax income, its Board of Directors could, but would
not be required to, declare a dividend to be paid to us as its
sole stockholder. That dividend would then become income to us
and we would generally pay this income out to our stockholders
as a distribution.
Use of
Leverage
Non-recourse
financing
Our strategy is to use borrowings as a financing mechanism in
amounts that we believe will maximize the return to our
stockholders. We generally expect to enter into borrowing
arrangements directly or indirectly through our Operating
Partnership. We will seek to structure all borrowings as
non-recourse loans. The use of non-recourse financing allows us
to limit our exposure to the amount of equity invested in the
properties pledged as collateral for our borrowings.
Non-recourse financing generally restricts a lenders claim
on the assets of the borrower and, as a result, the lender
generally may look only to the property securing the debt for
satisfaction of the debt. We believe that this financing
strategy, to the extent available, will protect our other
assets. However, we can provide no assurance that non-recourse
financing will be available on terms acceptable to us, or at
all, and there may be circumstances where lenders have recourse
to our other assets. There is no limitation on the amount we may
borrow against any single investment property. Neither our
certificate of incorporation nor our bylaws impose any
limitation on our borrowing, but our Board of Directors has
adopted a policy limiting our aggregate borrowings to two times
our total equity. Our Board of Directors may change this policy
at any time.
We believe that, by operating on a leveraged basis, we will have
more funds available and, therefore, will make more investments
than would otherwise be possible. We believe that this will
result in a more diversified portfolio. Our Adviser will use its
best efforts to obtain financing on the most favorable terms
available to us.
We anticipate that prospective lenders may also seek to include
in loans to us provisions whereby the termination or replacement
of our Adviser would result in an event of default or an event
requiring the immediate repayment of the full outstanding
balance of the loan. We will generally seek to avoid the
inclusion of these provisions and will attempt to negotiate loan
terms that allow us to replace or terminate our Adviser if the
action is approved by our Board of Directors. The replacement or
termination of our Adviser may, however, require the prior
consent of a lender.
We may refinance properties during the term of a loan when, in
the opinion of our Adviser, a decline in interest rates makes it
advisable to prepay an existing mortgage loan, when an existing
mortgage loan matures or if an
63
attractive investment becomes available and the proceeds from
the refinancing can be used to make such investment. The
benefits of the refinancing may include an increase in cash flow
resulting from reduced debt service requirements, an increase in
distributions to stockholders from proceeds of the refinancing,
if any, or an increase in property ownership if some refinancing
proceeds are reinvested in real estate.
Other
Investment Policies
Working
Capital Reserves
We may establish a working capital reserve in an amount equal to
one percent of the gross offering proceeds, which we anticipate
to be sufficient to satisfy our liquidity requirements. Our
liquidity could be adversely affected by unanticipated costs,
greater-than-anticipated
operating expenses or cash shortfalls in funding our
distributions. To the extent that the working capital reserve is
insufficient to satisfy our cash requirements, additional funds
may be produced from cash generated from operations or through
short-term borrowings. In addition, subject to limitations
described in this prospectus, we may incur indebtedness in
connection with:
|
|
|
|
|
the acquisition of any property;
|
|
|
|
the refinancing of the debt upon any property; or
|
|
|
|
the leveraging of any previously unleveraged property.
|
For additional information regarding our borrowing strategy, see
Investment Policies and Policies with Respect to Certain
Activities Additional Investment
Considerations Use of Leverage.
Holding
Period For and Sale of Investments; Reinvestment of Sale
Proceeds
We intend to hold each property we acquire for an extended
period until it can be sold for conversion into urban or
suburban uses in connection with residential or commercial
development. However, circumstances might arise which could
result in the earlier sale of some properties. We may sell a
property before the end of its expected holding period if in the
judgment of our Adviser the sale of the property is in the best
interest of our stockholders. The determination of whether a
particular property should be sold or otherwise disposed of will
be made after consideration of all relevant factors, including
prevailing economic conditions, with a view to achieving maximum
capital appreciation. No assurance can be given that the
foregoing objective will be realized. The selling price of a
property which is subject to a net lease will be determined in
large part by the amount of rent payable under the lease and the
creditworthiness of the tenant. In connection with our sales of
properties we may lend the purchaser all or a portion of the
purchase price. In these instances, our taxable income may
exceed the cash received in the sale, which could cause us to
delay required distributions to our stockholders. See
Federal Income Tax Consequences of our Status as a
REIT Distribution Requirements.
The terms of any sale will be dictated by custom in the area in
which the property being sold is located and the then-prevailing
economic conditions. A decision to provide financing to any
purchaser would be made only after an investigation into and
consideration of the same factors regarding the purchaser, such
as creditworthiness and likelihood of future financial
stability, as are undertaken when we consider a net lease
transaction. We may continually reinvest the proceeds of
property sales in investments that either we or our Adviser
believe will satisfy our investment policies.
Investment
Limitations
There are numerous limitations on the manner in which we may
invest our funds. We have adopted a policy that without the
permission of our Board of Directors, we will not:
|
|
|
|
|
invest 20% or more of our total assets in a particular property
or mortgage at the time of investment;
|
|
|
|
invest in real property owned by our Adviser, any of its
affiliates or any business in which our Adviser or any of its
affiliates have invested;
|
64
|
|
|
|
|
invest in commodities or commodity futures contracts, with this
limitation not being applicable to futures contracts when used
solely for the purpose of hedging in connection with our
ordinary business of investing in properties and making mortgage
loans;
|
|
|
|
invest in contracts for the sale of real estate unless the
contract is in recordable form and is appropriately recorded in
the chain of title;
|
|
|
|
make investments in unimproved property or indebtedness secured
by a deed of trust or mortgage loan on unimproved property in
excess of 10% of our total assets. Unimproved real
property means property which has the following three
characteristics:
|
|
|
|
|
|
the property was not acquired for the purpose of producing
rental or other operating income;
|
|
|
|
no development or construction is in process on the
property; and
|
|
|
|
no development or construction on the property is planned in
good faith to commence on the property within one year of
acquisition;
|
|
|
|
|
|
issue equity securities on a deferred payment basis or other
similar arrangement;
|
|
|
|
grant warrants or options to purchase shares of our stock to our
Adviser or its affiliates;
|
|
|
|
engage in trading, as compared with investment activities, or
engage in the business of underwriting, or the agency
distribution of, securities issued by other persons;
|
|
|
|
invest more than 5% of the value of our assets in the securities
of any one issuer if the investment would cause us to fail to
qualify as a REIT;
|
|
|
|
invest in securities representing more than 10% of the
outstanding securities (by vote or value) of any one issuer if
the investment would cause us to fail to qualify as a REIT;
|
|
|
|
acquire securities in any company holding investments or
engaging in activities prohibited in the foregoing
clauses; or
|
|
|
|
make or invest in mortgage loans that are subordinate to any
mortgage or equity interest of any of our affiliates.
|
Conflict
of Interest Policy
We have adopted policies to reduce potential conflicts of
interest. In addition, our directors are subject to certain
provisions of Delaware law that are designed to minimize
conflicts. However, we cannot assure you that these policies or
provisions of law will reduce or eliminate the influence of
these conflicts. We have adopted a policy that, without the
approval of a majority of our disinterested directors, we will
not:
|
|
|
|
|
acquire from or sell to any of our officers, directors or
employees, or any entity in which any of our officers, directors
or employees has an interest of more than 5%, any assets or
other property;
|
|
|
|
loan to or borrow from any of our directors, officers or
employees, or any entity in which any of our officers, directors
or employees has an interest of more than 5%; or
|
|
|
|
engage in any other transaction with any of our directors,
officers or employees, or any entity in which any of our
directors, officers or employees has an interest of more than 5%.
|
Consistent with the provisions of the Sarbanes-Oxley Act of
2002, we will not extend credit, or arrange for the extension of
credit, to any of our directors and officers. Under Delaware
law, a contract or other transaction between us and one of our
directors or officers or any other entity in which one of our
directors or officers is also a director or officer or has a
material financial interest is not void or voidable solely on
the grounds of the common directorship or interest, the fact
that the director or officer was present at the meeting at which
the contract or transaction was approved or the fact that the
directors vote was counted in favor of the contract or
transaction if:
|
|
|
|
|
the fact of the common directorship or interest is disclosed to
our Board of Directors or a committee of our board, and our
board or the committee in good faith authorizes the contract or
transaction by the affirmative
|
65
|
|
|
|
|
vote of a majority of the directors not interested in the
contract or transaction, even if the disinterested directors do
not constitute a quorum of the Board or committee;
|
|
|
|
|
|
the fact of the common directorship or interest is disclosed to
our stockholders entitled to vote on the contract or
transaction, and the contract or transaction is approved in good
faith by a majority of the votes cast by the stockholders
entitled to vote on the matter; or
|
|
|
|
the contract or transaction is fair and reasonable to us as of
the time authorized, approved or ratified by the Board of
Directors, a committee or the stockholders.
|
Our policy also prohibits us from purchasing any real property
owned by or co-investing with our Adviser, any of its affiliates
or any business in which our Adviser or any of its subsidiaries
have invested, except that we may lease property to existing and
prospective portfolio companies of current or future affiliates,
such as Gladstone Capital or Gladstone Investment and other
entities advised by our Adviser, so long as that entity does not
control the portfolio company and the transaction is approved by
both companies board of directors. If we decide to change
this policy on co-investments with our Adviser or its
affiliates, we will seek approval of our independent directors.
Future
Revisions in Policies and Strategies
Our independent directors will review our investment policies at
least annually to determine that the policies we are following
are in the best interest of our stockholders. The methods of
implementing our investment policies also may vary as new
investment techniques are developed. The methods of implementing
our investment procedures, objectives and policies, except as
otherwise provided in our bylaws or certificate of
incorporation, may be altered by a majority of our directors
(including a majority of our independent directors) without the
approval of our stockholders, to the extent that our Board of
Directors determines that such modification is in the best
interest of the stockholders.
Among other factors, developments in the market which affect the
policies and strategies mentioned in this prospectus or which
change our assessment of the market may cause our Board of
Directors to revise our investment policies and strategies.
OUR
PROPERTIES
We currently own an aggregate of 959 acres of farmland in
California, of which 737 acres are leased to Dole Fresh.
Dole Fresh actively manages the operations of these facilities
to plant, harvest and sell strawberries and vegetables.
Watsonville
We acquired 306 acres of farmland in Watsonville,
California in 1997, which is held through our wholly owned
subsidiary San Andreas Road Watsonville, LLC, for a
purchase price of approximately $4.4 million. We currently
lease 237 of these acres to Dole Fresh on a net lease basis
under a lease that expires on December 31, 2010. Dole Fresh
also pays taxes, insurance and maintenance on this property.
During 2009, we earned gross rental income on this property of
$405,000. The remaining 69 acres are considered not
currently suitable for farming.
In November 2002, we entered into a $3.25 million revolving
credit agreement with Lend Lease Agri-Business, Inc., which
matures on December 1, 2017. Our obligations under the credit
agreement are secured by a mortgage on our Watsonville property.
The interest rate charged on the advances under the facility is
equal to the three-month London Interbank Offered Rate, or
LIBOR, in effect on the first day of each calendar quarter, plus
2.85%. We may use the advances under the credit facility for
both general corporate purposes and the acquisition of new
investments. As of June 30, 2010, there was $5,000 outstanding
under the line of credit, the minimum principal balance required
under the credit agreement. Currently we carry adequate
insurance on the property, and our tenant is also required to
carry insurance on the property. We have no immediate plans to
improve the property.
66
Oxnard
We acquired 653 acres of farmland in Oxnard, California in 1998,
which is held through our wholly owned subsidiary West Gonzales
Road Oxnard, LLC, for a purchase price of approximately $9.9
million. We currently lease 500 acres, including a cooler
operation, a box barn, and other buildings, to Dole Fresh on a
net lease basis under a lease that expires on December 31, 2013.
The remaining property is currently considered not suitable for
farming. The lease contains a provision for market rental
increases at specified intervals, at which time Dole Fresh and
us will mutually agree on the new market rent. Dole Fresh also
pays taxes, insurance and maintenance on this property. During
2009, we earned gross rental income on this property of $2.0
million.
We also have a small lease to an oil company from which we
receive approximately $25,000 in annual rental income on this
property.
In February 2006, we entered into a new long-term note payable
with Rabo AgriFinance, under which we borrowed $13.0 million.
Our obligations under the note are secured by the Oxnard farm.
The note currently accrues interest at a rate of 6.00% per year,
which rate is subject to adjustment every three years to the
current market rate, as determined by the lender. We have the
option to prepay the note in whole or in part at specified
intervals over the life of the note. The note matures on
February 1, 2021. There was approximately $11.5 million
outstanding on the note as of June 30, 2010. Currently we carry
adequate insurance on the property, and our tenant is also
required to carry insurance on the property. We have no
immediate plans to improve the property.
The following table sets forth information, as of June 30,
2010, regarding our current portfolio of properties.
Current
Portfolio Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Initial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acres/
|
|
|
Initial
|
|
|
|
|
|
Lease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
Annual
|
|
|
|
|
|
Term/
|
|
|
|
|
|
Tenant
|
|
Property Name
|
|
Purchase
|
|
|
|
|
|
|
|
|
|
|
Planted
|
|
|
Base
|
|
|
Straight-
|
|
|
Renewal
|
|
|
Principal
|
|
|
Repurchase
|
|
and Location
|
|
Price
|
|
|
Seller
|
|
Tenant
|
|
|
Type
|
|
|
Acres
|
|
|
Rent
|
|
|
Line Rent
|
|
|
Term
|
|
|
Varieties
|
|
|
Right
|
|
|
Watsonville
|
|
$
|
4,400,000
|
|
|
Monsanto Co.
|
|
|
Dole
|
|
|
|
Farm
|
|
|
|
306/237
|
|
|
$
|
405,000
|
|
|
$
|
405,000
|
|
|
|
6 years, None
|
|
|
|
Strawberries
|
|
|
|
None
|
|
Oxnard
|
|
$
|
9,200,000
|
|
|
McGrath Family
|
|
|
Dole
|
|
|
|
Farm
|
|
|
|
653/500
|
|
|
$
|
2,000,000
|
|
|
$
|
2,000,000
|
|
|
|
9 years, None
|
|
|
|
Strawberries
|
|
|
|
None
|
|
Total
|
|
$
|
13,600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
959/737
|
|
|
$
|
2,405,000
|
|
|
$
|
2,405,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
Expiration
The following table sets forth information regarding lease
expirations at our current properties as of June 30, 2010.
Lease
Expiration Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiring
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
|
|
|
% of Total
|
|
|
|
Number of
|
|
|
|
|
|
Annual
|
|
|
Initial
|
|
|
|
Expiring
|
|
|
Expiring
|
|
|
Base
|
|
|
Annual Base
|
|
Lease Expiration Year
|
|
Leases
|
|
|
Planted Acreage
|
|
|
Rent
|
|
|
Rent
|
|
|
2010
|
|
|
1
|
|
|
|
237
|
|
|
$
|
405,000
|
|
|
|
17
|
%
|
2013
|
|
|
1
|
|
|
|
500
|
|
|
$
|
2,000,000
|
|
|
|
83
|
%
|
Total
|
|
|
2
|
|
|
|
737
|
|
|
$
|
2,405,000
|
|
|
|
100
|
%
|
PROPERTIES
UNDER CONSIDERATION
The following descriptions set forth certain information
regarding each property that we have identified as a potential
acquisition target. We continue to evaluate these properties and
have not reached a final investment decision on any of them, nor
have we entered into any letters of intent or definitive
purchase agreements to acquire any of these properties. The only
relationship between us and each prospective seller is that we
have provided the prospective seller with a non-binding
expression-of-interest.
The purchase of each of those properties is subject to, among
other factors, the satisfactory completion of our due diligence
investigations, the negotiation of definitive
67
acquisition terms and the structure and receipt of necessary
consents. If we purchase any of these properties, we expect the
purchase price to be cash proceeds from this offering. If we are
successful in acquiring all of these properties, then following
the closing of this offering and the purchase of these
properties, the investments described below, along with our two
existing farms in Watsonville, California and Oxnard,
California, will be our only investments. In the aggregate, they
will represent no more than % of
our assets and no single investment will represent more
than % of our total assets upon
completion of this offering. Any additional purchases and
investments will be made in accordance with our investment
policies and procedures.
Based on our due diligence investigations conducted to date, we
believe that each of our potential real property acquisitions
described below will satisfy our general acquisition criteria.
For each acquisition, one of our management professionals, David
Gladstone, and one or more of our principals has screened the
potential tenant and the property to determine satisfaction of
our general acquisition criteria. Subsequently, we have
initiated a due diligence investigation of the potential tenant
and the property and delivered to the prospective seller a
non-binding
expression-of-interest.
With respect to each of these non-binding
expressions-of-interest,
we will only agree to purchase the real property if, among other
things, the results of our due diligence investigations are
satisfactory to us, the terms and structure of the acquisition
agreements are acceptable to us and we have received all
necessary consents. If, for any reason, we do not wish to make
any one of the acquisitions, we will not be obligated to do so.
Similarly, none of the prospective sellers are obligated to sell
to us. Our management has initiated its due diligence of these
businesses, however, there can be no assurance that we will not
discover facts in the course of our due diligence that would
render these acquisitions imprudent nor that any of the
acquisitions described below will actually be made.
[Property
A]
We have provided a non-binding
expression-of-interest
to purchase the property located at
[ ]
from
[ ]
for approximately
[ ].
This property has
[ ] acres
and
[ ]
are farmed today.
[Property
B]
We have provided a non-binding
expression-of-interest
to purchase the property located at
[ ]
from
[ ]
for approximately
[ ].
This property has
[ ] acres
and
[ ]
are farmed today.
[Property
C]
We have provided a non-binding
expression-of-interest
to purchase the property located at
[ ]
from
[ ]
for approximately
[ ].
This property has
[ ] acres
and
[ ]
are farmed today.
[Property
D]
We have provided a non-binding
expression-of-interest
to purchase the property located at
[ ]
from
[ ]
for approximately
[ ].
This property has
[ ] acres
and
[ ]
are farmed today.
[Property
E]
We have provided a non-binding
expression-of-interest
to purchase the property located at
[ ]
from
[ ]
for approximately
[ ].
This property has
[ ] acres
and
[ ]
are farmed today.
OUR REAL
ESTATE INVESTING EXPERIENCE
The information contained in this section shows summary
information concerning the REITs with which Mr. Gladstone
was involved in the past and Gladstone Commercial, a REIT that
is managed by our Adviser. The purpose of providing this
information is to enable investors to further evaluate the
experience of our sponsors in real estate programs. The
following summary is intended to briefly summarize the
objectives and performance of the prior real estate programs
sponsored by Mr. Gladstone and our Adviser and to disclose
any material adverse business developments affecting those
programs.
68
The prior programs described below were occasionally adversely
affected by the cyclical nature of the real estate market. We
expect that our business will be affected by similar conditions.
Accordingly, no assurance can be made that Gladstone Land or any
other program sponsored by Mr. Gladstone, our Adviser or
their affiliates will ultimately be successful in meeting their
investment objectives. For additional information regarding the
risks relating to Gladstone Land, see the Risk
Factors section of this prospectus.
Mr. Gladstones
Real Estate Investing Experience
From 1997 to 2004 Mr. Gladstone, our chairman and chief
executive officer, owned Coastal Berry, one of the largest
strawberry producers in the United States. In 2004
Mr. Gladstone sold Coastal Berry to Dole Fresh but kept two
of the farms that we now rent to Dole Fresh. Mr. Gladstone
has many relationships in the farming areas of California. Since
selling Coastal Berry Mr. Gladstone has been a farm owner
in California and has been working on developing our company
into a REIT for agricultural land. He is the sole owner of our
company.
From 2003 to the present, Mr. Gladstone has been the
chairman and chief executive officer of Gladstone Commercial. A
discussion of Gladstone Commercials real estate investing
activities is described below under Our Advisers
Real Estate Investing Experience.
From 1992 until 1997, Mr. Gladstone served as CEO of two
REITs, Allied Capital Commercial Corporation, or Allied Capital
Commercial, and Business Mortgage Investors, Inc., or Business
Mortgage Investors. Allied Capital Commercial was a publicly
held commercial mortgage REIT, and Business Mortgage Investors
was a privately held commercial mortgage REIT. Each of these
REITs was managed, from its inception through 1997, by Allied
Capital Advisers, Inc., or Allied Capital Advisers, a publicly
held investment adviser for whom Mr. Gladstone served as
chairman and chief executive officer until 1997. These two REITs
co-invested with one another and therefore had substantially
similar investment portfolios. With respect to individual
mortgage loans, Allied Capital Commercial would provide an
average of approximately 75% of the funding and Business
Mortgage Investors would provide an average of approximately 25%
of the funding. As mortgage REITs, each of these companies had
investment strategies that were different from our triple net
leasing strategy. Mortgage REITs typically produce different
returns to investors than triple net equity REITs like us, and
the timing of such returns may be different than the timing of
distributions from triple net equity REITs.
The initial amount of funds Allied Capital Commercial raised
from investors was approximately $178 million before
customary underwriters discount of 7% of the gross
offering proceeds. Allied Capital Commercial had approximately
16,800 beneficial stockholders at the time that the company was
merged into Allied Capital Corporation in 1997. The assets on
the books of Allied Capital Commercial at the time it was merged
into Allied Capital were approximately $370 million. The
total amount of funds raised from investors by Business Mortgage
Investors was approximately $30 million after offering
costs and approximately ten significant investors, held
approximately 99% of the economic interests in the REIT. The
maximum amount of invested assets for Business Mortgage
Investors was approximately $60 million.
The capital raised for Allied Capital Commercial and Business
Mortgage Investors was raised at a time when economic conditions
were substantially the same as they are today. Due to the
substantially different nature of an investment in our common
stock, there can be no assurance that Gladstone Land will be as
successful at investing this capital as Mr. Gladstone was
with the REITs described above.
As of December 31, 1996, the end of the last fiscal year in
which Mr. Gladstone was affiliated with them, the aggregate
invested assets of Allied Capital Commercial and Business
Mortgage Investors totaled approximately $400 million. Of
this amount, approximately 39% was invested in mortgage loans
secured by hotels, approximately 25% was invested in loans
secured by office buildings, approximately 12% was invested in
loans secured by retail operations and approximately 6% was
invested in loans secured by warehouses. As of December 31,
1996, the real estate securing the loans held by these REITs was
located in the following regions of the United States:
Northeast, 20%; Southeast, 40%; Central, 3%; Southwest, 14% and
West, 17%.
As noted above, each of these REITs was managed by Allied
Capital Advisers, which earned advisory and management fees that
approximated 2.5% of the invested assets and 0.5% of the interim
investments, cash and cash equivalents of Allied Capital
Commercial and Business Mortgage Investors.
69
From 1995 to 1997, Mr. Gladstone was a board member of
Capital Automotive REIT. That REIT invested in automotive real
estate in the United States. The public company was sold at a
substantial profit in 2007.
Our
Advisers Real Estate Investing Experience
Our Adviser serves as the adviser to Gladstone Commercial
Corporation (NASDAQ: GOOD), which is a publicly held REIT that
was formed to net lease commercial and industrial real property
and selectively make mortgage loans secured by industrial and
commercial real property. Gladstone Commercial completed its
initial public offering in August 2003, raising an aggregate of
approximately $105 million in net proceeds after customary
underwriters discount of 7% of the gross offering proceeds
and offering expenses. Gladstone Commercial completed additional
public offerings of its preferred stock in January 2006 and
October 2006, raising an aggregate of approximately
$51.1 million in net proceeds after customary
underwriters discount of 7% of the gross offering proceeds
and offering expenses. Gladstone Commercial has approximately
9,788 beneficial stockholders. As of December 31, 2009,
Gladstone Commercial had approximately $417 million in
assets. To date, Gladstone Commercial has purchased 67
industrial and commercial properties, three of which were
subsequently sold, and has made one mortgage loan.
Our Adviser will provide, upon request, for no fee, the most
recent Annual Report on
Form 10-K
filed with the SEC by Gladstone Commercial and, for a reasonable
fee, the exhibits to that report.
Our
Adviser and Administrator
Our Adviser, is led by a management team which has extensive
experience in our lines of business. Our Adviser is controlled
by David Gladstone, our chairman and chief executive officer.
Mr. Gladstone is also the chairman and chief executive
officer of our Adviser. Terry Lee Brubaker, our vice chairman,
chief operating officer, secretary and director, is a member of
the Board of Directors of our Adviser, and its vice chairman and
chief operating officer, George Stelljes III, our president,
chief investment officer and director, is a member of the board
of directors of our Adviser and its president and chief
investment officer. Gladstone Administration, LLC, or the
Administrator, which is an affiliate of our Adviser, employs our
chief financial officer, chief compliance officer, treasurer,
internal counsel, investor relations officer and their
respective staffs.
Our Adviser and Administrator also provide investment advisory
and administrative services to our affiliates, Gladstone
Capital, Gladstone Commercial and Gladstone Investment. All of
our executive officers serve as either directors or executive
officers, or both, of Gladstone Capital, Gladstone Commercial
and Gladstone Investment. In the future, our Adviser may provide
investment advisory and administrative services to other funds,
both public and private, of which it is the sponsor.
Payment
to Our Adviser
The management fee structure has been structured to incentivize
the Adviser to make long-term, income oriented investments.
Unlike many other REITs, there are no payments to our Adviser
for buying or selling properties. In addition, there are
incentive fees based on our funds from operation, or FFO. Since
we pay distributions to stockholders from FFO, we believe it is
important to place our Advisers incentive on creating FFO.
70
OUR
STRUCTURE
The following diagram depicts our ownership structure upon
completion of this offering. Our Operating Partnership will own
our real estate investments directly or indirectly, in some
cases through special purpose entities that we may create in
connection with the acquisition of real property.
Competition
Competition to our efforts to acquire farmland can come from
many different entities. Developers, municipalities, individual
farmers, agriculture corporations, institutional investors and
others vie for farmland acreage. Other investment firms that we
might compete directly against could include agricultural
investment firms such as Hancock Agricultural Investment Group,
or Hancock, and UBS Agrivest LLC, or UBS Agrivest. Hancock is a
large institutional manager of agricultural real estate and has
reported that it owns approximately 165,000 acres of prime
farmland. UBS Agrivest has reported that it has over
25 years of farmland investment management experience and
engages in the acquisition, asset management, valuation and
disposition of all types of farmland properties. In addition to
competition for direct investment in farmland we also expect to
compete for mortgages with many local and national banks such as
Rabobank, N.A., Bank of America, N.A., Wells Fargo Foothill,
Inc., and others.
Legal
Proceedings
We are not currently subject to any material legal proceeding,
nor, to our knowledge, is any material legal proceeding
threatened against us.
Our
Corporate Information
Our executive offices are located at 1521 Westbranch Drive,
Second Floor, McLean, Virginia 22102. We also have an office in
Oxnard, California near the location of one of our current
properties. Our telephone number at our executive offices is
(703) 287-5800
and our corporate website will be www.GladstoneLand.com.
The information contained on, or accessible through, our website
is not incorporated into this prospectus.
Employees
We do not currently have any employees and do not expect to have
any employees in the foreseeable future. Currently, services
necessary for our business are provided by individuals who are
employees of our Adviser and our Administrator pursuant to the
terms of the Advisory Agreement and the Administration
Agreement,
71
respectively. Each of our executive officers is an employee or
officer, or both, of our Adviser or our Administrator. No
employee of our Adviser or our Administrator will dedicate all
of his or her time to us. However, we expect that 10% of the
full time employees of our Adviser or our Administrator will
spend substantial time on our matters during calendar year 2010.
To the extent that we acquire more investments, we anticipate
that the number of employees of our Adviser and our
Administrator who devote time to our matters will increase and
the number of our Advisers employees working out of local
offices, if any, where we buy land will also increase.
As of June 30, 2010, our Adviser and our Administrator
collectively had 50 full-time employees. A breakdown of
these employees is summarized by functional area in the table
below:
|
|
|
|
|
Number of
|
|
|
Individuals
|
|
Functional Area
|
|
|
10
|
|
|
Executive Management
|
|
31
|
|
|
Investment Management, Portfolio Management and Due Diligence
|
|
9
|
|
|
Administration, Accounting, Compliance, Human Resources, Legal
and Treasury
|
Government
Regulation
Farming
Regulation
The farmland that we own is subject to regulations by the state,
county and federal governments. Farmland is on the one hand
protected by these regulations, but on the other hand it has
been subject to regulations involving usage, water rights,
treatment methods, disturbance, environmental and eminent domain.
In the State of California, farmland is principally subject to
environmental regulations. Each governmental jurisdiction has
their own distinct environmental regulations governing the use
of farmland. Primarily these regulations seek to regulate water
usage and water runoff. These focused regulations result from
the fact that water is in limited supply in the farming
districts within California. However, runoff of water coming
from rain or from water pumped from underground is governed by
regulations from the state, county and federal governments.
Additionally, if any of the water used on our farms flows to any
rivers, ponds or the ocean, then there are specific regulations
governing the amount of sediment, pesticides, etc. that such
water may contain.
Currently, each of our two farms located within California have
their own wells, which provide sufficient amounts of water
necessary for our farming operations at each location. However,
should the need arise for additional wells from which to obtain
water, we would be required to obtain additional permits prior
to drilling such wells. Permits for drilling water wells are
required by state and county regulations and such permits may be
difficult to obtain due to the limited supply of water within
the farming districts of California and other reasons. Several
farmland properties that we have reviewed and considered for
possible acquisitions have access to adequate water supplies
provided either by cooperative organizations that have access to
deep water wells with plentiful supplies of water or access to
river water. We maintain our two California farms in compliance
with all state, county and federal environmental regulations.
In addition to the regulation of water usage and water runoff,
the state, county and federal governments also seek to regulate
the type, quantity and method of use of chemicals in growing
crops. 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 the homes. Further, recent regulations
have strictly forbidden the use of certain chemicals, while the
use of others has been significantly limited. A permit must be
obtained from each governmental authority before most chemicals
are used on farmland and crops, and reports on the usage of such
chemicals must be submitted pursuant to the terms of the
specific permits. Failure to obtain such permits or to comply
with the terms of such permits could result in fines and
imprisonment.
The use of farmland in California 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 properties must comply
with regulations related to the use of chemicals and avoid
disturbing the habitat, wetlands or other protected areas.
72
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.
Real
Estate Industry Regulation
Generally, the ownership and operation of real properties is
subject to various laws, ordinances and regulations, including
regulations relating to zoning, land use, water rights and the
handling of waste water and lien sale rights and procedures.
Changes in any of these laws or regulations, as well as changes
in laws, such as the Comprehensive Environmental Response and
Compensation Liability Act, or CERCLA, increasing the potential
liability for environmental conditions or circumstances existing
or created by tenants or others on properties or laws affecting
upkeep, safety and taxation requirements may result in
significant unanticipated expenditures, loss of our properties
or other impairments to operations, which would adversely affect
our cash flows from operating activities.
Our property management activities, to the extent we are forced
to engage in them due to lease defaults by tenants or vacancies
on certain properties, will likely be subject to state real
estate brokerage laws and regulations as determined by the
particular real estate commission for each state.
Environmental
Matters
Our operations are subject to federal, state and local
environmental laws and regulations, including laws relating to
water, air, solid waste and hazardous substances and the
requirements of the federal Occupational Safety and Health Act
and comparable state statutes relating to the health and safety
of our employees. Although we believe that we 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 property, resulting from our operations or the
operations of our tenants. We intend to periodically conduct
regular and internal and independent third-party audits of our
properties to monitor compliance with these laws and regulations.
Insurance
Under the terms and conditions of the leases on our current
properties, tenants are generally required, at the tenants
expense, to obtain and keep in full force during the term of the
lease, liability and property damage insurance policies. These
policies include liability coverage for bodily injury and
property damage arising out of the ownership, use, occupancy or
maintenance of the properties and all of their appurtenant areas.
73
MANAGEMENT
Our business and affairs are managed under the direction of our
Board of Directors. Our Board has retained our Adviser to manage
our
day-to-day
real estate operations, and the acquisition and disposition of
investments, subject to our Boards oversight. We currently
have three directors and we intend to expand the Board prior to
the completion of this offering to seven. Our Board of Directors
elects our officers, who serve at the discretion of our Board of
Directors. The address of each of our executive officers and
directors is
c/o Gladstone
Land Corporation, 1521 Westbranch Drive, Second Floor,
McLean, Virginia 22102.
Our
Directors and Executive Officers
Our directors and executive officers and their positions are as
follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Office
|
|
David Gladstone
|
|
|
68
|
|
|
Chairman of our Board of Directors and Chief Executive Officer(3)
|
George Stelljes III
|
|
|
48
|
|
|
President, Chief Investment Officer and Director
|
Terry Brubaker
|
|
|
66
|
|
|
Vice Chairman of our Board of Directors and Chief Operating
Officer(3)
|
Danielle Jones
|
|
|
33
|
|
|
Chief Financial Officer
|
Gary Gerson
|
|
|
45
|
|
|
Treasurer
|
Michela A. English
|
|
|
60
|
|
|
Director(1)(2)(5)(6)
|
Anthony W. Parker
|
|
|
64
|
|
|
Director(2)(3)(5)(6)
|
Paul W. Adelgren
|
|
|
67
|
|
|
Director(1)(4)(5)(6)
|
John Outland
|
|
|
64
|
|
|
Director(1)(2)(4)(5)(6)
|
|
|
|
(1) |
|
Member of the Compensation Committee. |
|
(2) |
|
Member of the Audit Committee. |
|
(3) |
|
Member of the Executive Committee. |
|
(4) |
|
Member of the Ethics, Nominating and Corporate Governance
Committee. |
|
(5) |
|
Has agreed to join the Board prior to the completion of this
offering. |
|
(6) |
|
Independent. |
The following is a summary of certain biographical information
concerning our directors and executive officers, many of whom
also serve as directors and executive officers of our Adviser,
and as the managing directors and principals of our Adviser:
David Gladstone. Mr. Gladstone,
age 68, is our founder and has served as chief executive
officer and chairman of the Board of Directors since our
inception in 1997. Mr. Gladstone is also the founder of our
Adviser and has served as chief executive officer and chairman
of the board of directors of our Adviser since its inception.
Mr. Gladstone also founded and serves as the chief
executive officer and chairman of the board of directors of our
affiliates Gladstone Capital Corporation (NASDAQ: GLAD),
Gladstone Investment Corporation (NASDAQ: GAIN) and Gladstone
Commercial Corporation (NASDAQ: GOOD). Prior to founding
Gladstone Capital, Gladstone Investment and Gladstone
Commercial, Mr. Gladstone served as either chairman or vice
chairman of the board of directors of American Capital, Ltd.
(NASDAQ: ACAS), a publicly traded leveraged buyout fund and
mezzanine debt finance company, from 1997 to 2001. From 1974 to
1997, Mr. Gladstone held various positions, including
chairman and chief executive officer, with Allied Capital
Corporation (NYSE: ALD), Allied Capital Corporation II, Allied
Capital Lending Corporation and Allied Capital Advisers, a
registered investment adviser that managed the Allied companies.
The Allied companies were the largest group of publicly-traded
mezzanine debt funds in the United States and were managers of
two private venture capital limited partnerships. From 1991 to
1997, Mr. Gladstone served as either chairman of the board
of directors or president of Allied Capital Commercial
Corporation, a publicly traded REIT that invested in real estate
loans to small and medium-sized businesses, managed by Allied
Capital Advisers, Inc. He managed the growth of Allied Capital
Commercial from no assets at
74
the time of its initial public offering to $385 million in
assets at the time it merged into Allied Capital Corporation in
1997. From 1992 to 1997, Mr. Gladstone served as a
director, president and chief executive officer of Business
Mortgage Investors, a privately held mortgage REIT managed by
Allied Capital Advisers, which invested in loans to small and
medium-sized businesses. Mr. Gladstone is also a past
director of Capital Automotive REIT, a real estate investment
trust that purchases and net leases real estate to automobile
dealerships. Mr. Gladstone served as a director of The
Riggs National Corporation (the parent of Riggs Bank) from 1993
to May 1997 and of Riggs Bank from 1991 to 1993. He has served
as a trustee of The George Washington University and currently
is a trustee emeritus. He is a past member of the Listings and
Hearings Committee of the National Association of Securities
Dealers, Inc. He is a past member of the Advisory committee to
the Womens Growth Capital Fund, a venture capital firm
that finances women-owned small businesses. Mr. Gladstone
was the founder and managing member of The Capital Investors,
LLC, a group of angel investors, and is currently a member
emeritus. Mr. Gladstone holds a MBA from the Harvard
Business School, a MA from American University and a BA from the
University of Virginia. Mr. Gladstone has co-authored two
books on financing for small and medium-sized businesses,
Venture Capital Handbook and Venture Capital
Investing. Mr. Gladstone grew up on a farm in Virginia.
Mr. Gladstone was selected to serve as a director on our
Board, and to be nominated to serve another directorship term,
due to the fact that he is our founder and has greater than
thirty years of experience in the industry, including his past
service as our chairman and chief executive officer since our
inception.
George Stelljes III. Mr. Stelljes,
age 48, has served as our president, chief investment
officer and director since 2007. He also served as Gladstone
Commercials chief investment officer from its inception in
2003 and its executive vice president from its inception through
July 2007, when he assumed the duties of president and was
appointed as a director. He also served as the executive vice
president of Gladstone Capital (from 2002 to April
2004) and has been its chief investment officer since
September 2002 and its president since April 2004.
Mr. Stelljes also served on Gladstone Capitals board
of directors from August 2001 through September 2002 and then
rejoined its board in July 2003 and remains a director today. He
has served as the president, chief investment officer, and a
director of Gladstone Investment since its inception in June
2005 and assumed the duties of co-vice chairman in April 2008.
Mr. Stelljes has served as chief investment officer and as
a director of Gladstone Management since May 2003 and was its
executive vice president from May 2003 through February 2006,
when he assumed the duties of president. Prior to joining us,
Mr. Stelljes served as a managing member of St. Johns
Capital, a vehicle used to make private equity investments. From
1999 to 2001, Mr. Stelljes was a co-founder and managing
member of Camden Partners, a private equity firm which finances
high growth companies in communications, education, healthcare
and business services sectors. From 1997 to 1999,
Mr. Stelljes was a managing director and partner of
Columbia Capital, a venture capital firm focused on investments
in communications and information technology. From 1989 to 1997,
Mr. Stelljes held various positions, including executive
vice president and principal, with Allied Capital Corporation
(NYSE: ALD), Allied Capital Corporation II, Allied Capital
Lending Corporation and Allied Capital Advisors, Inc., a
registered investment adviser that managed the Allied companies,
which were the largest group of publicly-traded mezzanine debt
funds in the United States and were managers of two private
venture capital limited partnerships. From 1991 to 1997,
Mr. Stelljes served either as senior vice president or
executive vice president of Allied Capital Commercial
Corporation, a publicly traded REIT that invested in real estate
loans to small and medium-sized businesses, managed by Allied
Capital Advisors, Inc. From 1992 to 1997, Mr. Stelljes
served as a senior vice president or executive vice president of
Business Mortgage Investors, a privately held mortgage REIT
managed by Allied Capital Advisors, which invested in real
estate loans to small and medium-sized businesses.
Mr. Stelljes currently serves as a general partner and
investment committee member of Patriot Capital and Patriot
Capital II private equity funds and on the board of
Intrepid Capital Management, a money management firm. He is also
a former board member and regional president of the National
Association of Small Business Investment Companies.
Mr. Stelljes holds an MBA from the University of Virginia
and a BA in Economics from Vanderbilt University.
Mr. Stelljes was selected to serve as a director on our
Board due to his more than twenty years of experience in the
investment analysis, management, and advisory industries.
Terry Lee Brubaker. Mr. Brubaker,
age 66, has served as our chief operating officer and vice
chairman of the Board of Directors since 2007. He also served as
Gladstone Commercials chief operating officer, secretary
and a director since its inception in 2003 and as president from
its inception through July 2007, when he assumed the
75
duties of vice chairman. Mr. Brubaker has also served as
the chief operating officer, secretary and director of Gladstone
Management since its inception in 2003. He also served as
president of Gladstone Management from its inception until
assuming the duties of vice chairman in February 2006.
Mr. Brubaker has served as the chief operating officer,
secretary and a director of Gladstone Capital since May 2001. He
also served as president of Gladstone Capital from May 2001
through April 2004, when he assumed the duties of vice chairman.
Mr. Brubaker has also been the vice chairman, chief
operating officer, secretary and a director of Gladstone
Investment since its inception in June 2005. In March 1999,
Mr. Brubaker founded and, until May 1, 2003, served as
chairman of Heads Up Systems, a company providing processing
industries with leading edge technology. From 1996 to 1999,
Mr. Brubaker served as vice president of the paper group
for the American Forest & Paper Association. From 1992
to 1995, Mr. Brubaker served as president of Interstate
Resources, a pulp and paper company. From 1991 to 1992,
Mr. Brubaker served as president of IRI, a radiation
measurement equipment manufacturer. From 1981 to 1991,
Mr. Brubaker held several management positions at James
River Corporation, a forest and paper company, including vice
president of strategic planning from 1981 to 1982, group vice
president of the Groveton Group and Premium Printing Papers from
1982 to 1990 and vice president of human resources development
in 1991. From 1976 to 1981, Mr. Brubaker was strategic
planning manager and marketing manager of white papers at Boise
Cascade. Previously, Mr. Brubaker was a senior engagement
manager at McKinsey & Company from 1972 to 1976. Prior
to 1972, Mr. Brubaker was a U.S. Navy fighter pilot.
Mr. Brubaker holds an MBA from the Harvard Business School
and a BSE from Princeton University.
Mr. Brubaker was selected to serve as a director on our
Board due to his more than thirty years of experience in various
mid-level and senior management positions at several
corporations.
Danielle Jones. Ms. Jones, age 33,
was appointed to serve as our chief financial officer in
December 2008. Ms. Jones has also served as chief financial
officer for Gladstone Commercial since December 2008. Since July
2004, Ms. Jones has served us in various accounting
capacities (senior accountant, accounting manager, and, most
recently, Controller). From January 2002 to June 2004,
Ms. Jones was employed by Avalon Bay Communities, where she
worked in the corporate accounting division. Ms. Jones
received a B.B.A. in accounting from James Madison University
and is a licensed CPA with the Commonwealth of Virginia.
Gary Gerson. Mr. Gerson, age 45, has
served as our treasurer since April 2006. Mr. Gerson has
also served as treasurer for Gladstone Capital, Gladstone
Commercial and Gladstone Investment since April 2006, and of
Gladstone Management since May 2006. From 2004 to early 2006
Mr. Gerson was Assistant Vice President of Finance at the
Bozzuto Group, a real estate developer, manager and owner, where
he was responsible for the financing of multi-family and
for-sale residential projects. From 1995 to 2004 he held various
finance positions, including Director of Finance from 2000 to
2004, at PG&E National Energy Group where he led, and
assisted in, the financing of power generation assets.
Mr. Gerson holds an MBA from the Yale School of Management,
a B.S. in mechanical engineering from the U.S. Naval
Academy, and is a CFA charter holder.
Michela A. English. Ms. English,
age 60, has agreed to become a director prior to the
completion of this offering. Ms. English, has served as
President and CEO of Fight for Children, a non-profit charitable
organization focused on providing high quality education and
health care services to underserved youth in
Washington, D.C., since 2006. Ms. English has also
been a director of Gladstone Capital since June 2002, a director
of Gladstone Commercial since August 2003, and a director of
Gladstone Investment since June 2005. From March 1996 to March
2004, Ms. English held several positions with Discovery
Communications, Inc., including president of Discovery Consumer
Products, president of Discovery Enterprises Worldwide and
president of Discovery.com. From 1991 to 1996, Ms. English
served as senior vice president of the National Geographic
Society and was a member of the National Geographic
Societys Board of Trustees and Education Foundation Board.
Prior to 1991, Ms. English served as vice president,
corporate planning and business development for Marriott
Corporation and as a senior engagement manager for
McKinsey & Company. Ms. English currently serves
as director of the Educational Testing Service (ETS), as a
director of D.C. Preparatory Academy, a director of the District
of Columbia Public Education Fund, a director of the Society for
Science and the Public, a director of the National Womens
Health Resource Center, a member of the Advisory Board of the
Yale University School of Management, and as a member of the
Virginia Institute of Marine Science Council. Ms. English
is an emeritus member of the board of Sweet Briar College.
Ms. English holds a Bachelor of Arts in International
Affairs from Sweet Briar College and a Master of Public and
Private Management degree from Yale Universitys School of
Management.
76
Ms. English was selected to serve as an independent
director on our Board due to her greater than twenty years of
senior management experience at various corporations and
non-profit organizations.
Anthony W. Parker. Mr. Parker,
age 64, has agreed to become a director prior to the
completion of this offering. Mr. Parker has also been a
director of Gladstone Capital since August 2001, a director of
Gladstone Commercial since August 2003, and a director of
Gladstone Investment since June 2005. Mr. Parker founded
Parker Tide Corp., or Parker Tide, formerly known as Snell
Professional Corp., in 1997. Parker Tide is a government
contracting company providing mission critical solutions to the
Federal Government. From 1992 to 1996, Mr. Parker was
chairman of Capitol Resource Funding, Inc., a commercial finance
company with offices in Dana Point, California and Arlington,
Virginia. Mr. Parker practiced corporate and tax law for
over 15 years from 1980 to 1983 at Verner,
Liipfert, Bernhard & McPherson, and in private
practice from 1983 to 1992. Mr. Parker is currently the
sole stockholder of Parker & Associates, P.C., a
law firm. From 1973 to 1977 Mr. Parker served as executive
assistant to the administrator of the U.S. Small Business
Administration. Mr. Parker is a director of Naval Academy
Sailing Foundation, a 501(c)(3) organization located in
Annapolis, MD. Mr. Parker received his J.D. and Masters in
Tax Law from Georgetown Law Center and his undergraduate degree
from Harvard College.
Mr. Parker was selected to serve as an independent director
on our Board due to his expertise and wealth of experience in
the field of corporate taxation. Mr. Parkers
knowledge of corporate tax was instrumental in his appointment
to the chairmanship of our Audit Committee.
Paul W. Adelgren. Mr. Adelgren,
age 67, has agreed to become a director prior to the
completion of this offering. From 1997 to the present,
Mr. Adelgren has served as the pastor of Missionary
Alliance Church. From 1991 to 1997, Mr. Adelgren was pastor
of New Life Alliance Church. From 1988 to 1991,
Mr. Adelgren was the comptroller, treasurer, and vice
president for finance and materials of Williams &
Watts, Inc., a logistics management and procurement business
located in Fairfield, NJ. Prior to Joining Williams &
Watts, Mr. Adelgren served in the United States Navy, where
he served in a number of capacities, including as the director
of the Strategic Submarine Support Department, SPCC
Mechanicsburg, Pennsylvania, as an executive officer at the
Naval Supply Center, Charleston, South Carolina, and as the
director of the Joint Uniform Military Pay System, Navy Finance
Center. He is a retired Navy Captain. Mr. Adelgren has also
been a director of Gladstone Capital since January 2003, a
director of Gladstone Commercial since August 2003, and a
director of Gladstone Investment since June 2005.
Mr. Adelgren holds an MBA from Harvard University and a BA
from the University of Kansas.
Mr. Adelgren was selected to serve as an independent
director on our Board due to his strength and experience in
ethics, which also led to his appointment to the chairmanship of
our Ethics Committee.
John Outland. Mr. Outland, age 64,
has agreed to become a director prior to the completion of this
offering. From March 2004 to June 2006, he served as vice
president of Genworth Financial, Inc. From 2002 to March 2004,
Mr. Outland served as a managing director for 1789 Capital
Advisors, where he provided market and transaction structure
analysis and advice on a consulting basis for multifamily
commercial mortgage purchase programs. From 1999 to 2001,
Mr. Outland served as vice president of mortgage-backed
securities at Financial Guaranty Insurance Company where he was
team leader for bond insurance transactions. In this capacity,
he was responsible for sourcing business, coordinating credit,
loan files, due diligence and legal review processes, and
negotiating both structure and business issues. From 1993 to
1999, Mr. Outland was senior vice president for Citicorp
Mortgage Securities, Inc., where he securitized non-conforming
mortgage products. From 1989 to 1993, Mr. Outland was vice
president of real estate and mortgage finance for Nomura
Securities International, Inc., where he performed due diligence
on and negotiated the financing of commercial mortgage packages
in preparation for securitization. Mr. Outland has also
been a director of Gladstone Capital since December 2003, a
director of Gladstone Commercial since December 2003, and a
director of Gladstone Investment since June 2005.
Mr. Outland holds an MBA from Harvard Business School and a
bachelors degree in Chemical Engineering from Georgia
Institute of Technology.
Mr. Outland was selected to serve as an independent
director on our Board due to his more than twenty years of
experience in the real estate and mortgage industry, which also
led to his appointment to the chairmanship of our Compensation
Committee.
77
INFORMATION
REGARDING THE BOARD OF DIRECTORS AND CORPORATE
GOVERNANCE
Composition
of our Board of Directors
Effective upon the closing of this offering, our directors will
be divided into three classes. Each class consists, as nearly as
possible, of one-third of the total number of directors. One
class will hold office initially for a term expiring at the
annual meeting of our stockholders to be held in 2011, a second
class will hold office initially for a term expiring at the
annual meeting of our stockholders to be held in 2012, and a
third class will hold office initially for a term expiring at
the annual meeting of our stockholders to be held in 2013. Each
director holds office for the term to which he or she is elected
until his or her successor is duly elected and qualified. The
terms of Messrs. Stelljes and Parker and Ms. English
will expire in 2011, the terms of Messrs. Brubaker and
Outland will expire in 2012, and the terms of
Messrs. Gladstone and Adelgren will expire in 2013. At each
annual meeting of our stockholders, the class of directors whose
terms expire at such meeting will be elected to hold office for
a three year term. Although the number of directors may be
increased or decreased, a decrease shall not have the effect of
shortening the term of any incumbent director.
Vacancies
on our Board of Directors
Any director may resign at any time and may, in the case of a
corporation such as ours whose Board is classified, be removed
only with cause by the stockholders upon the affirmative vote of
a majority of the shares then entitled to vote at an election of
directors. The term cause as used in this context is
a term used in the DGCL. However, the DGCL does not include a
definition of cause, and Delaware case law suggests
that the term should be interpreted on a
case-by-case
basis. As a result of this uncertainty, stockholders may not
know what actions by a director may be grounds for removal.
A vacancy created by an increase in the number of directors or
the death, resignation or removal of a director shall be filled
by a vote of a majority of the remaining directors. A director
elected by the Board to fill a vacancy in a class, including any
vacancies created by an increase in the number of directors,
shall serve for the remainder of the full term of that class and
until the directors successor is elected and qualified.
Independence
of the Board of Directors
As required under the NASDAQ listing standards, a majority of
the members of a listed companys board of directors must
qualify as independent, as affirmatively determined
by the board of directors. The Board consults with our chief
compliance officer and legal counsel to ensure that the
Boards determinations are consistent with relevant
securities and other laws and regulations regarding the
definition of independent, including those set forth
in pertinent listing standards of NASDAQ, as in effect time to
time.
Consistent with these considerations, after review of all
relevant transactions or relationships between each director, or
any of his or her family members, and us, our senior management
and our independent registered public accounting firm, the Board
has affirmatively determined that the following four directors
are independent directors within the meaning of the applicable
NASDAQ listing standards: Messrs. Adelgren, Outland and
Parker and Ms. English. In making this determination, the
Board found that none of these directors had a material or other
disqualifying relationship with us. Mr. Gladstone, the
chairman of our Board of Directors and chief executive officer,
Mr. Brubaker, our vice chairman and chief operating
officer, and Mr. Stelljes, our president and chief
investment officer are not independent directors by virtue of
their positions as our officers
and/or their
employment by our affiliate Gladstone Management.
Meetings
of the Board of Directors
The Board of Directors shall meet at least four times during
each fiscal year. As required under applicable NASDAQ listing
standards, which require regularly scheduled meetings of
independent directors, our independent directors shall meet at
least four times in regularly scheduled executive sessions at
which only independent directors shall be present.
78
Corporate
Leadership Structure
Since our inception, Mr. Gladstone has served as chairman
of our Board of Directors and chief executive officer. The Board
believes that our chief executive officer is best situated to
serve as chairman because he is the director most familiar with
our business and industry, and most capable of effectively
identifying strategic priorities and leading the discussion and
execution of strategy. In addition, Mr. Adelgren, one of
our independent directors, shall serve as the lead director for
all meetings of our independent directors to be held in
executive session. The lead director has the responsibility of
presiding at all executive sessions of the Board, consulting
with the chairman and chief executive officer on Board and
committee meeting agendas, acting as a liaison between
management and the independent directors and facilitating
teamwork and communication between the independent directors and
management.
The Board believes the combined role of chairman and chief
executive officer, together with an independent lead director,
is in the best interest of stockholders because it provides the
appropriate balance between strategic development and
independent oversight of management.
Our Board of Directors has four committees: an Audit Committee,
a Compensation Committee, an Executive Committee and an Ethics,
Nominating and Corporate Governance Committee. The following
table shows the current composition of each of the committees of
the Board of Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethics, Nominating and
|
|
Name
|
|
Audit
|
|
|
Compensation
|
|
|
Executive
|
|
|
Corporate Governance
|
|
|
Paul W. Adelgren**
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
*X
|
|
Terry Lee Brubaker
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
Michela A. English
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Gladstone
|
|
|
|
|
|
|
|
|
|
|
*X
|
|
|
|
|
|
John H. Outland
|
|
|
X
|
|
|
|
*X
|
|
|
|
|
|
|
|
X
|
|
Anthony W. Parker
|
|
|
*X
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
George Stelljes III
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Committee Chairperson |
|
** |
|
Lead Independent Director |
Below is a description of each committee of the Board of
Directors. All committees have the authority to engage legal
counsel or other experts or consultants, as they deem
appropriate to carry out their responsibilities. The Board of
Directors has determined that each member of each committee
meets the applicable NASDAQ rules and regulations regarding
independence and that each member is free of any
relationship that would impair his or her individual exercise of
independent judgment with regard to us (other than with respect
to the executive committee, for which there are no applicable
independence requirements).
The
Audit Committee
The Audit Committee of the Board of Directors oversees our
corporate accounting and financial reporting process. For this
purpose, the Audit Committee performs several functions. The
Audit Committee evaluates the performance of and assesses the
qualifications of the independent registered public accounting
firm; determines and approves the engagement of the independent
registered public accounting firm; determines whether to retain
or terminate the existing independent registered public
accounting firm or to appoint and engage a new independent
registered public accounting firm; reviews and approves the
retention of the independent registered public accounting firm
to perform any proposed permissible non-audit services; monitors
the rotation of partners of the independent registered public
accounting firm on our audit engagement team as required by law;
confers with management and the independent registered public
accounting firm regarding the effectiveness of internal controls
over financial reporting; establishes procedures, as required
under applicable law, for the receipt, retention and treatment
of complaints received by us regarding accounting, internal
accounting controls or auditing matters and the confidential and
anonymous submission by employees of concerns regarding
questionable accounting or auditing matters; and meets to review
our annual audited financial statements and quarterly financial
statements
79
with management and the independent registered public accounting
firm, including reviewing our disclosures under
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
The Audit Committee is comprised of Mr. Parker (Chairman),
Ms. English and Mr. Outland, each of whom is an
independent director. Mr. Adelgren serves as an alternate
member of the Audit Committee. Alternate members of the Audit
Committee serve and participate in meetings of the Audit
Committee only in the event of an absence of a regular member of
the Audit Committee. The Audit Committee has adopted a written
charter that is available to stockholders on our website at
www.GladstoneLand.com.
The Board of Directors reviews the NASDAQ listing standards
definition of independence for audit committee members on an
annual basis and has determined that all members and alternate
members of our Audit Committee are independent (as independence
is currently defined in Rule 5605(a)(2) of the NASDAQ
listing standards and
Rule 10A-3(b)(1)
under the Exchange Act). No members of the Audit Committee
received any compensation from us during the last fiscal year.
The Board of Directors has also determined that each member
(including alternate members) of the Audit Committee qualifies
as an audit committee financial expert, as defined
in applicable SEC rules. The Board made a qualitative assessment
of the members level of knowledge and experience based on
a number of factors, including formal education and experience.
The Board has also unanimously determined that all Audit
Committee members and alternate members are financially literate
under current NASDAQ rules and listing standards that at least
one member has financial management expertise. In addition to
our Audit Committee, Messrs. Outland and Parker and
Ms. English also serve on the audit committees of Gladstone
Investment, Gladstone Commercial and Gladstone Capital. Our
Audit Committees alternate member, Mr. Adelgren, also
serves as an alternate members on the audit committees of
Gladstone Commercial, Gladstone Investment and Gladstone
Capital. The Board of Directors has determined that this
simultaneous service does not impair the respective
directors ability to effectively serve on our Audit
Committee.
The
Compensation Committee
The Compensation Committee operates pursuant to a written
charter, which can be found on our website at
www.GladstoneLand.com, and conducts periodic reviews of
the amended and restated investment advisory agreement, or the
Advisory Agreement, with our Adviser and the administration
agreement, or the Administration Agreement, with our
Administrator, to evaluate whether the fees paid to the parties
under the respective agreements are in the best interests of us
and our stockholders. The committee considers in such periodic
reviews, among other things, whether the salaries and bonuses
paid to our executive officers by our Adviser and our
Administrator are consistent with our compensation philosophies,
whether the compensation of our Adviser and our Administrator
are reasonable in relation to the nature and quality of services
performed, and whether the provisions of the Advisory and
Administration Agreements are being satisfactorily performed.
The Compensation Committee also reviews and considers all
incentive fees payable to our Adviser under the Advisory
Agreement. The Compensation Committee also reviews with
management our Compensation Discussion and Analysis to be
included in proxy statements and other filings.
The Compensation Committee is comprised of Messrs. Outland
(Chairman) and Adelgren, each of whom is an independent
director. Mr. Parker and Ms. English serve as
alternate members of the Compensation Committee. Alternate
members of the Compensation Committee serve and participate in
meetings of the Compensation Committee only in the event of an
absence of a regular member of the Compensation Committee. All
members and alternate members of our Compensation Committee are
independent (as independence is currently defined in
Rule 5605(a)(2) of the NASDAQ listing standards).
Compensation
Committee Interlocks and Insider Participation
The Compensation Committee is comprised of Messrs. Outland,
(Chairman), and Adelgren. Messrs. Outland or Adelgren have
not been one of our officers or employees. Further, none of our
executive officers has ever served as a member of the
compensation committee or as a director of another entity any of
whose executive officers served on our Compensation Committee,
and none of our executive officers has ever served as a member
of the compensation committee of another entity any of whose
executive officers served on our Board of Directors.
80
The Compensation Committee is responsible for, among other
things, determining compensation for our executive officers and
negotiating the terms of our advisory agreement.
The
Executive Committee
The Executive Committee, which is comprised of
Messrs. Gladstone (Chairman), Brubaker and Parker, has the
authority to exercise all powers of our Board of Directors
except for actions that must be taken by a majority of
independent directors or the full Board of Directors under
applicable rules and regulations and Delaware law. The Executive
Committee met once during the prior fiscal year.
The
Ethics, Nominating and Corporate Governance
Committee
The Ethics, Nominating and Corporate Governance Committee of the
Board of Directors is responsible for identifying, reviewing and
evaluating candidates to serve as our directors (consistent with
criteria approved by the Board), reviewing and evaluating
incumbent directors, recommending to the Board for selection
candidates for election to the Board of Directors, making
recommendations to the Board regarding the membership of the
committees of the Board, assessing the performance of the Board,
and developing our corporate governance principles. Our Ethics,
Nominating and Corporate Governance Committee charter can be
found on our website at www.GladstoneLand.com. The Ethics,
Nominating and Corporate Governance Committee is comprised of
Mr. Adelgren (Chairman) and Mr. Outland, each of whom
is an independent director. Mr. Parker and Ms. English
serve as alternate members of the Ethics, Nominating and
Corporate Governance Committee. Alternate members of the
committee serve and participate in meetings of the committee
only in the event of an absence of a regular member of the
committee. Each member and alternate member of the Ethics,
Nominating and Corporate Governance Committee is independent (as
independence is currently defined in Rule 5605(a)(2) of the
NASDAQ listing standards).
Qualifications
for Director Candidates
The Ethics, Nominating and Corporate Governance Committee
believes that candidates for director should have certain
minimum qualifications, including being able to read and
understand basic financial statements, being over 21 years
of age and having the highest personal integrity and ethics. The
Ethics, Nominating and Corporate Governance Committee also
intends to consider such factors as possessing relevant
expertise upon which to be able to offer advice and guidance to
management, having sufficient time to devote to our affairs,
demonstrated excellence in his or her field, having the ability
to exercise sound business judgment and having the commitment to
rigorously represent the long-term interests of our
stockholders. However, the Ethics, Nominating and Corporate
Governance Committee retains the right to modify these
qualifications from time to time. Candidates for director
nominees are reviewed in the context of the current composition
of the Board, our operating requirements and the long-term
interests of our stockholders. Though we have no formal policy
addressing diversity, the Ethics, Nominating and Corporate
Governance Committee and Board of Directors believe that
diversity is an important attribute of directors and that our
Board of Directors should be the culmination of an array of
backgrounds and experiences, capable of articulating a variety
of viewpoints. Accordingly, the Ethics, Nominating and Corporate
Governance Committee considers in its review of director
nominees factors such as values, disciplines, ethics, age,
gender, race, culture, expertise, background and skills, all in
the context of an assessment of the perceived needs of us and
our Board of Directors at that point in time in order to
maintain a balance of knowledge, experience and capability.
In the case of incumbent directors whose terms of office are set
to expire, the Ethics, Nominating and Corporate Governance
Committee reviews such directors overall service to us
during their term, including the number of meetings attended,
level of participation, quality of performance, and any other
relationships and transactions that might impair such
directors independence. In the case of new director
candidates, the Ethics, Nominating and Corporate Governance
Committee also determines whether such new nominee must be
independent for NASDAQ purposes, which determination is based
upon applicable NASDAQ listing standards, applicable SEC rules
and regulations and the advice of counsel, if necessary. The
Ethics, Nominating and Corporate Governance Committee then uses
its network of contacts to compile a list of potential
candidates, but may also engage, if it deems appropriate, a
professional search firm. The Ethics, Nominating and Corporate
81
Governance Committee conducts any appropriate and necessary
inquiries into the backgrounds and qualifications of possible
candidates after considering the function and needs of the
Board. The Ethics, Nominating and Corporate Governance Committee
meets to discuss and consider such candidates
qualifications and then selects a nominee for recommendation to
the Board by majority vote. To date, the Ethics, Nominating and
Corporate Governance Committee has not paid a fee to any third
party to assist in the process of identifying or evaluating
director candidates.
Code of
Ethics
We have adopted the Gladstone Land Corporation Code of Business
Conduct and Ethics that applies to all of our officers and
directors and to the employees of our Adviser and our
Administrator. The Ethics, Nominating and Corporate Governance
Committee reviews, approves and recommends to our Board of
Directors any changes to the Code of Business Conduct and
Ethics. They also review any violations of the Code of Business
Conduct and Ethics and make recommendations to the Board of
Directors on those violations, if any. The Code of Business
Conduct and Ethics is available on our website at
www.GladstoneLand.com. If we make any substantive amendments to
the Code of Business Conduct and Ethics or grant any waiver from
a provision of the code to any executive officer or director, we
will promptly disclose the nature of the amendment or waiver on
our website.
Limited
Liability and Indemnification
We maintain a directors and officers liability insurance policy.
Our certificate of incorporation limits the personal liability
of our directors and officers for monetary damages to the
fullest extent permitted under current Delaware law, and our
bylaws provide that a director or officer may be indemnified to
the fullest extent required or permitted by Delaware law.
Delaware law provides that directors of a corporation will not
be personally liable for monetary damages for breach of their
fiduciary duties as directors, except liability for any of the
following acts:
|
|
|
|
|
any breach of their duty of loyalty to the corporation or its
stockholders;
|
|
|
|
acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
|
|
|
|
unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
|
|
|
|
any transaction from which the director derived an improper
personal benefit.
|
Any indemnification or any agreement to hold harmless is
recoverable only out of our assets and not from our
stockholders. Indemnification could reduce the legal remedies
available to us and our stockholders against the indemnified
individuals. This provision for indemnification of our directors
and officers does not reduce the exposure of our directors and
officers to liability under federal or state securities laws,
nor does it limit a stockholders ability to obtain
injunctive relief or other equitable remedies for a violation of
a directors or an officers duties to us or to our
stockholders, although these equitable remedies may not be
effective in some circumstances.
In addition to any indemnification to which our directors and
officers are entitled pursuant to our certificate of
incorporation and bylaws and the DGCL, our certificate of
incorporation and bylaws provide that we may indemnify other
employees and agents to the fullest extent permitted under
Delaware law, whether they are serving us or, at our request,
any other entity, including our Adviser.
The general effect to investors of any arrangement under which
any person who controls us or any of our directors, officers or
agents is insured or indemnified against liability is a
potential reduction in distributions to our stockholders
resulting from our payment of premiums associated with liability
insurance. In addition, indemnification could reduce the legal
remedies available to us and to our stockholders against our
officers, directors and agents. The SEC takes the position that
indemnification against liabilities arising under the Securities
Act of 1933 is against public policy and unenforceable. As a
result, indemnification of our directors and officers and of our
Adviser or its affiliates may not be allowed for liabilities
arising from or out of a violation of state or federal
securities laws. Indemnification will be allowed for settlements
and related expenses of lawsuits alleging securities laws
violations and for expenses incurred in successfully defending
any lawsuit, provided that a court either:
|
|
|
|
|
approves the settlement and finds that indemnification of the
settlement and related costs should be made; or
|
82
|
|
|
|
|
dismisses with prejudice or makes a successful adjudication on
the merits of each count involving alleged securities law
violations as to the particular indemnity and a court approves
the indemnification.
|
Oversight
of Risk Management
Since 2006, Jack Dellafiora has served as our chief compliance
officer, and in that position, he directly oversees our
enterprise risk management function and reports to our chief
executive officer, the Audit Committee and the Board of
Directors in this capacity. In fulfilling his risk management
responsibilities, he works closely with other members of senior
management including, among others, our chief executive officer,
chief financial officer, chief investment officer and chief
operating officer.
The Board of Directors, in its entirety, plays an active role in
overseeing management of our risks. The Board regularly reviews
information regarding our credit, liquidity and operations, as
well as the risks associated with each. Each committee of the
Board plays a distinct role with respect to overseeing
management of our risks:
|
|
|
|
|
Audit Committee: Our Audit Committee oversees
our enterprise risk management function. To this end, our Audit
Committee will meet at least annually (i) to discuss our
risk management guidelines, policies and exposures and
(ii) with our independent registered public accounting firm
to review our internal control environment and other risk
exposures;
|
|
|
|
Compensation Committee: Our Compensation
Committee oversees the management of risks relating to the fees
paid to our Adviser and Administrator under the Advisory
Agreement and the Administration Agreement, respectively. In
fulfillment of this duty, the Compensation Committee meets at
least annually to review these agreements. In addition, the
Compensation Committee reviews the performance of our Adviser to
determine whether the compensation paid to our Adviser and
Administrator was reasonable in relation to the nature and
quality of services performed and whether the provisions of the
Advisory Agreement were being satisfactorily performed.
|
|
|
|
Ethics, Nominating and Corporate Governance
Committee: Our Ethics, Nominating and Corporate
Governance Committee manages risks associated with the
independence of our Board of Directors and potential conflicts
of interest.
|
While each committee is responsible for evaluating certain risks
and overseeing the management of such risks, the committees each
report to our Board of Directors on a regular basis to apprise
the Board of the status of remediation efforts of known risks
and of any new risks that may have arisen since the previous
report.
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Our chief executive officer, chief operating officer, chief
investment officer, chief financial officer and treasurer are
salaried employees of either our Adviser or Administrator, which
are affiliates of ours. Our Adviser and our Administrator pay
the salaries and other employee benefits of the persons in their
respective organizations that render services for us. These
services are provided under the terms of the Advisory and
Administration Agreements, as applicable.
Compensation
of Our Adviser and Administrator Under the Advisory and
Administrative Agreements
The
Advisory and Administration Agreements
We are externally managed by our Adviser and Administrator under
the Advisory and Administration Agreements. Under the terms of
an amended Advisory Agreement with our Adviser that we will
enter into upon completion of this offering, we will pay an
annual base management fee equal to 2.0% of our total
stockholders equity, less the recorded value of any
preferred stock. The Advisory Agreement also includes incentive
fees that we pay to our Adviser if our performance reaches
certain benchmarks. These incentive fees are intended to provide
an additional incentive for our Adviser to achieve targeted
levels of FFO and to increase distributions to our stockholders.
For a more detailed discussion of these incentive fees, see
Long-Term Incentives.
83
Under the amended Administration Agreement that we will enter
into upon completion of this offering, we will pay separately
for our allocable portion of the Administrators overhead
expenses in performing its obligations, including rent, and our
allocable portion of the salaries and benefits expenses of its
employees, including, but not limited to, our chief financial
officer, chief compliance officer, treasurer, internal counsel,
investor relations officer and their respective staffs.
Compensation
Philosophy
For our long-term success and enhancement of long-term
stockholder value, we depend on our Adviser and our executive
officers, who are employees of, and are compensated by, our
Adviser and our Administrator. Our Adviser has implemented a
plan of attracting, retaining and rewarding executive officers
and others who contribute to our long-term success and
motivating them to enhance stockholder value through our
Advisers compensation practices under the terms of the
Advisory Agreement. The key elements of our Advisers
philosophy include:
|
|
|
|
|
ensuring that the base salary paid to our executive officers is
competitive with other leading companies with which we compete
for talented investment professionals;
|
|
|
|
ensuring that bonuses paid to our executive officers are
sufficient to provide motivation to achieve our principal
business and investment goals and to bring total compensation to
competitive levels; and
|
|
|
|
providing incentives to ensure that our executive officers are
motivated over the long term to achieve our business and
investment objectives.
|
Compensation
of our Adviser and Administrator
The following sets forth the type and, to the extent possible,
estimates of the amounts payable to our Adviser in connection
with its operation of our business. These payments have not been
determined through arms-length bargaining. For additional
details regarding the non-arms-length nature of this and
other agreements with our Adviser, see Conflicts of
Interest Our agreements with our Adviser are not
arms-length agreements.
Under the Advisory Agreement, we will also pay to our Adviser an
annual base management fee equal to 2.0% of our total
stockholders equity, less the recorded value of any
preferred stock. Based on the expected net proceeds of this
offering, we estimate that this base management fee will be
approximately $3.5 million for the first twelve months
following the offering.
We will also reimburse our Adviser for all expenses incurred by
our Adviser for our direct benefit. Examples of these expenses
include expenses incurred in connection with our organization
and offering, legal, accounting, tax preparation, consulting and
related fees. The actual amounts to be paid will depend upon the
actual amount of organization and offering expenses paid and
incurred by our Adviser and its affiliates in connection with
this offering, which amount is not determinable at this time. We
believe all of these charges will be incurred directly by us
rather than by our Adviser for our benefit. Accordingly, we do
not anticipate making any reimbursements to our Adviser for
these amounts.
In addition, we will reimburse our Adviser for all fees charged
by third parties that are directly related to our business,
which may include real estate brokerage fees, mortgage placement
fees,
lease-up
fees and transaction structuring fees that will be passed
through to us at their cost to our Adviser. The actual amount
that we will pay to our Adviser will depend largely upon the
aggregate costs of the properties we acquire and mortgage loans
that we make, which in turn will depend upon the net proceeds of
this offering and the amount of leverage we use in connection
with our activities. Accordingly, the amount of these fees is
not determinable at this time.
Under the Amended Administration Agreement, we will pay
separately for our allocable portion of the Administrators
overhead expenses in performing its obligations, including rent,
and our allocable portion of the salaries and benefits expenses
of its employees, including, but not limited to, our chief
financial officer, chief compliance officer, treasurer, internal
counsel, investor relations officer and their respective staffs.
We estimate that these expenses will be approximately
$3.5 million per year after the first twelve months
following the offering.
In fulfillment of its oversight role, the Compensation Committee
has reviewed the Advisory Agreement and the Administration
Agreement to determine whether the fees paid to our Adviser and
our Administrator were in the
84
best interests of the stockholders. The Compensation Committee
has also reviewed the performance of our Adviser and
Administrator to determine whether the compensation paid to our
Adviser and Administrator was reasonable in relation to the
nature and quality of services performed and whether the
provisions of the Advisory Agreement and Administration
Agreement were being satisfactorily performed. Specifically, the
committee considered factors such as:
|
|
|
|
|
the amount of the fees paid to our Adviser in relation to our
size and the composition and performance of our investments;
|
|
|
|
the success of our Adviser in generating appropriate investment
opportunities;
|
|
|
|
rates charged to other investment entities by advisers
performing similar services;
|
|
|
|
additional revenues realized by our Adviser and its affiliates
through their relationship with us, whether paid by us or by
others with whom we do business;
|
|
|
|
the value of our assets each quarter;
|
|
|
|
the quality and extent of service and advice furnished by our
Adviser and the performance of our investment portfolio;
|
|
|
|
the quality of our portfolio relative to the investments
generated by our Adviser for its other clients; and
|
|
|
|
the extent to which our Advisers performance helped us to
achieve our principal business and investment objectives of
generating income for our stockholders in the form of quarterly
cash distributions that grow over time and increasing the value
of our common stock.
|
The Compensation Committees oversight role also includes
review of the above-described factors with regard to the
compensation of our Administrator and our Administrators
performance under the Administration Agreement. The Board may,
pursuant to the terms of each of the Advisory and Administration
Agreements, terminate either of the agreements at any time and
without penalty, upon sixty days prior written notice to
our Adviser or our Administrator, as applicable. In the event of
an unfavorable periodic review of the performance of our Adviser
or our Administrator in accordance with the criteria set forth
above, the Compensation Committee would provide a report to the
Board of its findings and provide suggestions of remedial
measures, if any, to be sought from our Adviser or our
Administrator, as applicable. If such recommendations are, in
the future, made by the Compensation Committee and are not
implemented to the satisfaction of the Compensation Committee,
it may recommend exercise of our termination rights under the
Advisory Agreement or Administration Agreement.
Long-Term
Incentives
The Compensation Committee believes that the incentive structure
provided for under the Advisory Agreement is an effective means
of creating long-term stockholder value because it encourages
the Adviser to increase our FFO, which in turn may increase our
distributions to our stockholders.
In addition to a base management fee, the Advisory Agreement
includes incentive fees that we pay to our Adviser if our
performance reaches certain benchmarks. These incentive fees are
intended to provide an additional incentive for our Adviser to
achieve targeted levels of FFO and to increase distributions to
our stockholders. FFO is a non-GAAP supplemental measure of
operating performance of an equity REIT developed by the NAREIT,
in order to recognize that income-producing real estate
historically has not depreciated on the basis determined under
GAAP. FFO, as defined by NAREIT, is net income or net loss
(computed in accordance with GAAP), excluding gains or losses
from sales of property, plus depreciation and amortization of
real estate assets, and after adjustments for unconsolidated
partnerships and joint ventures. FFO does not represent cash
flows from operating activities in accordance with GAAP, and
should not be considered an alternative to either net income or
net loss as an indication of our performance or to cash flow
from operations as a measure of liquidity or ability to make
distributions.
The incentive fee is calculated and payable quarterly in arrears
based on our pre-incentive fee FFO for the
immediately preceding calendar quarter. For this purpose,
pre-incentive fee FFO means FFO accrued by us during the
calendar quarter. FFO is calculated after taking into account
all operating expenses for the quarter, including the base
management fee, expenses payable under the Administration
Agreement and any interest expense (but
85
excluding the incentive fee) and any other operating expenses.
Pre-incentive fee FFO includes accrued income and rents that we
have not yet received in cash. Pre-incentive fee FFO also
includes any realized capital gains and realized capital losses,
less any dividend paid on any issued and outstanding preferred
stock, but does not include any unrealized capital gains or
losses.
Pre-incentive fee FFO, expressed as a rate of return on our
total stockholders equity as reflected on our balance
sheet (less the recorded value of any preferred stock, and
adjusted to exclude the effect of any unrealized gains, losses
or other items that do not affect realized net income), will be
compared to a hurdle rate of 1.75% per quarter (7%
annualized). Because the hurdle rate is fixed and has been based
in relation to current interest rates, if interest rates rise,
it would become easier for our pre-incentive fee FFO to exceed
the hurdle rate and, as a result, more likely that our Adviser
will receive an income incentive fee than if interest rates on
our investments remained constant or decreased. We will pay our
Adviser an incentive fee with respect to our pre-incentive fee
FFO in each calendar quarter as follows:
|
|
|
|
|
no incentive fee in any calendar quarter in which our
pre-incentive fee FFO does not exceed the hurdle rate of 1.75%
(7% annualized);
|
|
|
|
100% of the amount of the pre-incentive fee FFO that exceeds the
hurdle rate, but is less than 2.1875% in any calendar quarter
(8.75% annualized); and
|
|
|
|
20% of the amount of our pre-incentive fee FFO that exceeds
2.1875% in any calendar quarter (8.75% annualized).
|
Quarterly Incentive Fee Based on FFO
Pre-incentive fee FFO
(expressed as a percentage of total common stockholders
equity)
Percentage of pre-incentive fee FFO allocated to incentive fee
We refer to the portion of the incentive fee payable on 100% of
our pre-incentive fee FFO, if any, that exceeds the hurdle rate
but is less than 2.1875% as the catch up. The
catch up provision is intended to provide our
Adviser with an incentive fee of 100% on all of our
pre-incentive fee FFO that does not exceed 2.1875% once the
hurdle rate has been surpassed. The base management fee and
total stockholders equity will be calculated using GAAP
and FFO will be calculated using the definition adopted by
NAREIT.
Income realized by our Adviser from any such incentive fees will
be paid by our Adviser to its eligible employees in bonus
amounts based on their respective contributions to our success
in meeting our goals. This incentive compensation structure is
designed to create a direct relationship between the
compensation of our executive officers and other employees of
our Adviser and the income and capital gains realized by us as a
result of their efforts on our behalf. We believe that this
structure rewards our executive officers and other employees of
our Adviser for the accomplishment of long-term goals consistent
with the interests of our stockholders.
Personal
Benefits Policies
Our executive officers are not entitled to operate under
different standards than other employees of our Adviser and our
Administrator who work on our behalf. Our Adviser and our
Administrator do not have programs for providing personal
benefit perquisites to executive officers, such as permanent
lodging, personal use of company vehicles, or defraying the cost
of personal entertainment or family travel. Our Advisers
and our Administrators health care and other insurance
programs are the same for all of their respective eligible
employees, including our executive officers. We expect our
executive officers to be exemplars under our Code of Business
Conduct and Ethics, which is applicable to all employees of our
Adviser and our Administrator who work on our behalf.
86
Executive
Compensation
None of our executive officers receive direct compensation from
us. We do not currently have any employees and do not expect to
have any employees in the foreseeable future. The services
necessary for the operation of our business are provided to us
by our officers and the other employees of our Adviser and
Administrator, pursuant to the terms of the Advisory and
Administration Agreements, respectively. Mr. Gladstone, our
chairman and chief executive officer, Mr. Brubaker, our
vice chairman, chief operating officer and secretary and
Mr. Stelljes, our president and chief investment officer,
are all employees of and are compensated directly by our
Adviser. Under the terms of the current Advisory Agreement, we
reimburse our Adviser for our allocable portion of the salaries
and benefits expenses of these officers. During fiscal 2009, we
reimbursed $5,500 of Mr. Gladstones salary and $385
of the cost of his benefits that were paid by our Adviser.
Ms. Jones, our chief financial officer, and
Mr. Gerson, our treasurer, are employees of and are
compensated directly by our Administrator. Under the
Administration Agreement, we reimburse our Administrator for our
allocable portion of the salaries and benefits expenses of
Ms. Jones and Mr. Gerson. During fiscal 2009, we
reimbursed $4,599 of Ms. Jones salary, $508 of her
bonus, and $758 of the cost of her benefits that were paid by
our Administrator.
Employment
Agreements
Because our executive officers are employees of our Adviser and
our Administrator, we do not pay cash compensation to them
directly in return for their services to us and we do not have
employment agreements with any of our executive officers.
Pursuant to the terms of the Administration Agreement, we make
payments equal to our allocable portion of our
Administrators overhead expenses in performing its
obligations under the Administration Agreement including, but
not limited to, our allocable portion of the salaries and
benefits expenses of our chief financial officer and treasurer.
For additional information regarding this arrangement, see
Transactions with Related Persons.
Equity,
Post-Employment, Non-Qualified Deferred and
Change-In-Control
Compensation
We do not offer stock options, any other form of equity
compensation, pension benefits, non-qualified deferred
compensation benefits, or termination or
change-in-control
payments to any of our executive officers.
Conclusion
We believe that the elements of our Advisers and our
Administrators compensation programs individually and in
the aggregate strongly support and reflect the strategic
priorities on which we have based our compensation philosophy.
Through the incentive structure of the Advisory Agreement
described above, a significant portion of their
compensation programs have been, and continue to be contingent
on our performance, and realization of benefits is closely
linked to increases in long-term stockholder value. We remain
committed to this philosophy of paying for performance that
increases stockholder value. The Compensation Committee will
continue its work to ensure that this commitment is reflected in
a total executive compensation program that enables our Adviser
and our Administrator to remain competitive in the market for
talented executives.
Director
Compensation
After our public offering, as compensation for serving on our
Board of Directors, each of our independent directors will
receive an annual fee of $20,000, an additional $1,000 for each
Board of Directors meeting attended, and an additional $1,000
for each committee meeting attended. In addition, the
chairperson of the Audit Committee will receive an annual fee of
$3,000, and the chairpersons of each of the Compensation and
Ethics, Nominating and Corporate Governance committees will
receive annual fees of $1,000 for their additional services in
these capacities. In addition, we will reimburse our directors
for their reasonable
out-of-pocket
expenses incurred in connection with their Board service,
including those incurred for attendance at Board of Directors
and committee meetings.
We do not pay any compensation to directors who also serve as
our officers, or as officers or directors of our Adviser or our
Administrator, in consideration for their service on our Board
of Directors. Our Board of Directors may change the compensation
of our independent directors in its discretion. None of our
independent directors
87
received any compensation from us during the fiscal year ended
December 31, 2009, as our independent directors intend to
join the Board prior to completion of the offering.
OUR
ADVISER
Gladstone
Management Corporation
Our business is managed by our Adviser, Gladstone Management,
which was incorporated in 2002. The officers, directors and
employees of our Adviser have significant experience in making
investments in and lending to small and medium-sized businesses,
including investing in real estate and making mortgage loans. We
have entered into an Advisory Agreement with our Adviser under
which our Adviser will be responsible for managing our assets
and liabilities, for operating our business on a
day-to-day
basis and for identifying, evaluating, negotiating and
consummating investment transactions consistent with our
investment policies as determined by our Board of Directors from
time to time.
David Gladstone, our chairman and chief executive officer, is
also the chairman, chief executive officer and the controlling
stockholder of our Adviser. Terry Lee Brubaker, our vice
chairman and a member of our Board of Directors, serves as
secretary and chief operating officer of our Adviser. George
Stelljes III, our president and chief investment officer and
member of our Board of Directors, serves in the same capacity
for our Adviser and is also a member of our Advisers Board
of Directors.
Our Adviser will maintain an investment committee that will
screen our investments. This investment committee will initially
be comprised of Messrs. Gladstone, Brubaker and
Stelljes. We believe that our Advisers investment
committee review process will give us a unique competitive
advantage over other investors in agricultural real estate
because of the substantial experience and perspective that the
members of our Advisers investment committee possess in
evaluating the blend of corporate credit, real estate and lease
terms that combine to provide an acceptable risk for investment.
Our Advisers board of directors has empowered its
investment committee to authorize and approve our investments,
subject to the terms of the Advisory Agreement. Before we
acquire any property, the transaction will be reviewed by our
Advisers investment committee to ensure that, in its view,
the proposed transaction satisfies our investment criteria and
is within our investment policies. Approval by our
Advisers investment committee will generally be the final
step in the property acquisition approval process, although the
separate approval of our Board of Directors will be required in
certain circumstances described below.
Our Advisers executive offices are located at
1521 Westbranch Drive, McLean, Virginia 22102.
Advisory
Agreement
Under the terms of the Advisory Agreement that we will enter
into upon completion of this offering, we will reimburse our
Adviser for all expenses incurred by our Adviser for our direct
benefit, such as offering, legal, accounting, tax preparation,
consulting and related fees. We believe all of these charges
will be incurred directly by us rather than by our Adviser for
our benefit. Accordingly we do not anticipate making any
reimbursements to our Adviser for these amounts.
In addition, we will reimburse our Adviser for all fees charged
by third parties that are directly related to our business,
which may include real estate brokerage fees, mortgage placement
fees,
lease-up
fees and transaction structuring fees that will be passed
through to us at the cost to our Adviser. The actual amount that
we will pay to our Adviser will depend largely upon the
aggregate costs of the properties we acquire, which in turn will
depend upon the net proceeds of this offering and the amount of
leverage we use in connection with our activities. Accordingly,
the amount of these fees is not determinable at this time.
Under the advisory agreement, we will also pay to our Adviser an
annual base management fee equal to 2.0% of our total
stockholders equity, less the recorded value of any
preferred stock, and an incentive fee based on funds from
operations, or FFO. Based on the expected net proceeds of this
offering, we estimate that this base management fee will be
approximately $3.5 million for the first twelve months
following the offering. Because
88
the payment of the incentive fee will be based on performance,
we are currently unable to estimate whether or when we will
incur an incentive fee under the terms of the agreement.
The estimated amounts set forth above are based on our current
expectations regarding the expenses and the net proceeds of this
offering. To the extent that the expenses of this offering are
greater than we anticipate, the amounts reimbursable to our
Adviser could be materially greater than currently projected. To
the extent that the net proceeds of this offering are greater
than currently expected, our stockholders equity will
likely be greater than we expect, which would result in actual
advisory fees payable to our Adviser that may be materially
greater than currently projected.
Each of our officers is an officer of our Adviser and
Messrs. Gladstone, Brubaker and Stelljes are also directors
of our Adviser.
Many of the services to be performed by our Adviser and its
affiliates in managing our
day-to-day
activities are summarized below. This summary is provided to
illustrate the material functions which our Adviser and its
affiliates will perform for us pursuant to the terms of the
advisory agreement, but it is not intended to include all of the
services which may be provided to us by third parties.
Adviser
Duties and Authority Under the Advisory Agreement
Under the terms of the Advisory Agreement, our Adviser will use
its best efforts to present to us investment opportunities
consistent with our investment policies and objectives as
adopted by our Board of Directors. In performing its duties, our
Adviser, either directly or indirectly by engaging an affiliate,
will:
|
|
|
|
|
find, evaluate, present and recommend to us a continuing series
of real estate investment opportunities consistent with our
investment policies and objectives;
|
|
|
|
provide advice to us and act on our behalf with respect to the
negotiation, acquisition, financing, refinancing, holding,
leasing and disposition of real estate investments;
|
|
|
|
enter contracts to purchase real estate on our behalf in
compliance with our investment procedures, objectives and
policies, subject to approval of our Board of Directors, where
required;
|
|
|
|
take the actions and obtain the services necessary to effect the
negotiation, acquisition, financing, refinancing holding,
leasing and disposition of real estate investments; and
|
|
|
|
provide
day-to-day
management of our real estate activities and other
administrative services.
|
It is expected that each investment that we make will be
approved or ratified by our Board of Directors. Our Board of
Directors has authorized our Adviser to make investments in any
property on our behalf without the prior approval of our Board
if the following conditions are satisfied:
|
|
|
|
|
Our Adviser has determined that the total cost of the property
does not exceed its determined value; and
|
|
|
|
Our Adviser has provided us with a representation that the
property, in conjunction with our other investments and proposed
investments, is reasonably expected to fulfill our investment
objectives and policies as established by our Board of Directors
then in effect.
|
The actual terms and conditions of transactions involving
investments in properties shall be determined in the sole
discretion of our Adviser, subject at all times to compliance
with the foregoing requirements. Some types of transactions,
however, will require the prior approval of our Board of
Directors, including a majority of our independent directors,
including the following:
|
|
|
|
|
any acquisition which at the time of investment would have a
cost exceeding 20% of our total assets; and
|
|
|
|
transactions that involve conflicts of interest with our Adviser
(other than reimbursement of expenses in accordance with the
advisory agreement).
|
In addition to its duties under the Advisory Agreement, our
Adviser and its affiliates expect to engage in other business
ventures and, as a result, their resources will not be dedicated
exclusively to our business. For example, our Adviser also
serves as external adviser to our affiliate Gladstone
Commercial. However, under the Advisory
89
Agreement, our Adviser must devote sufficient resources to the
administration of our affairs to discharge its obligations under
the agreement. The Advisory Agreement is not assignable or
transferable by either us or our Adviser without the consent of
the other party, except that our Adviser may assign the Advisory
Agreement to an affiliate for whom our Adviser agrees to
guarantee its obligations to us. Either we or our Adviser may
assign or transfer the Advisory Agreement to a successor entity.
Other
Transactions with our Adviser and its Affiliates
From time to time we may enter into transactions with our
Adviser or one or more of its affiliates. A majority of our
independent directors and a majority of our directors not
otherwise interested in a transaction with our Adviser must
approve all such transactions with our Adviser or its
affiliates. See Conflicts of Interest. We will not
purchase any property from or co-invest with our Adviser, any of
its affiliates or any business in which our Adviser or any of
its affiliates have invested. If we decide to change this policy
on co-investments with our Adviser or its affiliates, we will
seek approval of this decision from our independent directors.
Administrator
The holding company of our Adviser also has a wholly-owned
subsidiary, Gladstone Administration, LLC, or the Administrator,
which employs our chief financial officer, chief compliance
officer, treasurer, internal counsel, investor relations officer
and their respective staffs. Our Administrator provides
administrative services to Gladstone Land and our affiliates,
Gladstone Capital, Gladstone Investment and Gladstone
Commercial. The services performed by our Administrator include
the managing of financial reporting, accounting for our
properties, stockholder reporting, treasury functions,
compliance function, legal services and similar services. Under
the Administration Agreement, we will pay separately for our
allocable portion of our Administrators overhead expenses
in performing its obligations, including rent, and our allocable
portion of the salaries and benefits expenses of its employees,
including, but not limited to, our chief financial officer,
chief compliance officer, treasurer, internal counsel, investor
relations officer and their respective staffs. Our allocable
portion of expenses is derived by multiplying our
Administrators total allocable expenses by the percentage
of our total assets at the beginning of each quarter in
comparison to the total assets of all companies managed by our
Adviser under similar agreements. We estimate that these
expenses will be approximately $340,000 per year after the first
twelve months following the offering. To the extent that the
operating expenses of our Administrator or the proportion of our
Administrators time we believe will be spent on matters
relating to our business are greater than we currently expect,
our actual reimbursements of our Administrator may be materially
greater than currently projected.
CONFLICTS
OF INTEREST
There will be various conflicts of interest in the operation of
our business. Our directors will have an obligation to function
on our behalf in all situations in which a conflict of interest
may arise and will have a fiduciary obligation to act on behalf
of our stockholders.
Our
Affiliates
Gladstone Commercial Corporation. Many of our
directors and executive officers are also affiliated with
Gladstone Commercial Corporation, a publicly held REIT whose
common stock is traded on the NASDAQ Global Select Market under
the trading symbol GOOD. Gladstone Commercial net
leases, and selectively makes mortgage loans secured by,
commercial and industrial real property to small and
medium-sized businesses. It does not buy or invest in
agricultural real estate. Gladstone Commercial will not make
loans to or investments in any company with which we have or
intend to enter into a real estate lease.
Gladstone Capital Corporation. Many of our
directors and executive officers are also affiliated with
Gladstone Capital Corporation, a publicly held closed-end
management investment company whose common stock is traded on
the NASDAQ Global Market under the trading symbol
GLAD. Gladstone Capital makes loans to and
investments in small and medium-sized businesses. It does not
buy or lease real estate and does not lend to agricultural
enterprises. Gladstone Capital will not make loans to or
investments in any company with which we have or intend to enter
into a lease.
90
Gladstone Investment Corporation. Many of our
directors and executive officers are also affiliated with
Gladstone Investment Corporation, a publicly held, closed-end
management investment company whose common stock is traded on
the NASDAQ Global Market under the trading symbol
GAIN. Gladstone Investment makes loans to and
investments in small and medium-sized businesses in connection
with buyouts and other recapitalizations. It does not buy or
lease real estate and does not lend to agricultural enterprises.
Gladstone Investment will not make loans to or investments in
any portfolio company with which we have or intend to enter into
a real estate lease.
We do not presently intend to co-invest with Gladstone Capital,
Gladstone Investment, Gladstone Commercial or any other
affiliated entity in any business. However, in the future it may
be advisable for us to co-invest with one of our affiliates. We
will obtain approval of our Board of Directors before we change
our policy on co-investments with affiliates. Any such
co-investment must be approved by a majority of our independent
directors and must not jeopardize our status as a REIT.
Additionally, Gladstone Capital or Gladstone Investment may also
need to receive an order from the Securities and Exchange
Commission under the Investment Company Act of 1940 permitting
these arrangements.
Gladstone Management Corporation. Our Adviser
is an external management company that does not buy or lease
real estate, other than for its own use, in the ordinary course
of its business. We will not co-invest with our Adviser nor will
our Adviser make loans to or investments in any company with
which we have entered into a real estate lease or mortgage loan
arrangement. The following chart illustrates generally the
relationship among us, our Adviser and our affiliates.
Every transaction we enter into with our Adviser or its
affiliates is subject to an inherent conflict of interest. Our
Board of Directors may encounter conflicts of interest in
enforcing our rights against any of our affiliates in the event
of a default by or disagreement with an affiliate or in invoking
powers, rights or options pursuant to any agreement between us
and any of our affiliates. Each transaction between us and our
Adviser or any of its affiliates must be approved by a majority
of our independent directors who are otherwise disinterested in
the transaction as being fair and reasonable to us and on terms
and conditions no less favorable to us than those available from
unaffiliated third parties.
Experience
of Our Advisers Professionals in Managing Conflicts of
Interest
The officers and directors of our Adviser have operated under a
similar structure with Gladstone Capital, Gladstone Investment
and Gladstone Commercial. We believe that their experience will
allow them to successfully manage potential conflicts of
interest inherent in our business. They have also managed these
potential conflicts of interest through their services to and
through our Adviser.
Potential
Conflicts of Interest Inherent in Our Business
Our
Adviser may realize substantial compensation.
Our Adviser will receive an advisory fee based on a percentage
of our stockholders equity, regardless of our performance
or its performance in managing our business. As a result, even
if our Adviser does not identify suitable opportunities in which
to invest the net proceeds of this offering, our Adviser will
still receive material compensation from us. In addition, our
Adviser will also receive reimbursement of expenses and fees
incurred directly on our behalf regardless of its or our
performance. See Our Adviser Advisory
Agreement Payments to our Adviser Under the Advisory
Agreement.
Our
agreements with our Adviser are not arms-length
agreements.