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 Registrant’s 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
 
(GLADSTONE LAND LOGO)
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
 
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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 USDA’s 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


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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.


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  •  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.


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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.


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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.
 
(FLOW CHART)
 
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.


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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 Administrator’s 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.


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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 arm’s-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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements, notes thereto and other financial information included elsewhere in this prospectus. The summary 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  
Stockholder’s 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.


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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 tenant’s 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 year’s 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.


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  •  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.


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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 market’s 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 Adviser’s 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;


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  •  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


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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 arm’s-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 Adviser’s 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 Adviser’s 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 Adviser’s 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 Adviser’s 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.


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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 holder’s 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


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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


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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.


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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 REIT’s 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


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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 arm’s 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 arm’s-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;


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  •  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 management’s goals and objectives and other similar expressions concerning matters that are not historical facts. When we use the words “may,” “should,” “could,” “would,” “predicts,” “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 management’s good faith belief as of that time with respect to future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our common stock, along with the following factors that could cause actual results to vary from our forward-looking statements:
 
  •  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 %
 
 
(1) Estimated.


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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.


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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,” “Management’s 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  
                 


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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


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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 “Management’s 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  
                                                         

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those 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


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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 Adviser’s payroll and benefits expenses on an employee-by-employee basis, based on the percentage of each employee’s 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 Adviser’s (and until January 1, 2010, our Administrator’s) employees on our projects to the total hours worked by our Adviser’s (and until January 1, 2010, our Administrator’s) 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


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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 employee’s 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 Administrator’s employees on our projects to the total hours worked by our Administrator’s 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 Administrator’s 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.


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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 property’s 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) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. 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.


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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. Management’s 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 management’s evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. Characteristics to be considered by management in allocating these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s 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 entity’s 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


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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. Management’s 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 )%
                                 


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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 Adviser’s 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.


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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 Adviser’s 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


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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.


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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 Adviser’s 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.


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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.”


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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.


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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 Administrator’s 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.


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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.


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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.


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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
 
(BAR CHART)
 
United States Farmland
 
The USDA’s 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 USDA’s 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.


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The USDA’s 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
 
(BAR CHART )
 
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 nation’s agricultural land base is diminishing at a rapid pace. The NRI is a survey of the nation’s 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
 
(BAR CHART )
 
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


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Arable land continues to decrease in the United States at a significant rate as detailed in the USDA’s 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 USDA’s 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 California’s 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


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the increase in urban land over each measurement period, while the green bars illustrate the reduction in farmland over the same period:
 
Figure 6
 
(BAR CHART)
 
Data from the USDA’s 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


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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
 
(MAP)


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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
 
(MAP)
 
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,


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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.


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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


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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.
 
(BAR CHART)
 
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


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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 Adviser’s 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


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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 Adviser’s 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


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and conditions of the particular lease transaction, the quality of the tenant’s 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 Adviser’s 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.


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Credit Enhancement
 
Our Adviser may also seek to enhance the likelihood of a tenant’s lease obligations being satisfied through a cross-default with other tenant obligations, a letter of credit or a guaranty of lease obligations from the tenant’s 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.


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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;


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  •  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 lender’s 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


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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;


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  •  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 director’s 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


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  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.


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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


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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.


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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. Gladstone’s 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 Commercial’s real estate investing activities is described below under “Our Adviser’s 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.


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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 Adviser’s 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 Adviser’s incentive on creating FFO.


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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.
 
(FLOW CHART)
 
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,


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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 Adviser’s 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.


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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 tenant’s 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.


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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 Board’s 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


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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 Women’s 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 Commercial’s 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 Capital’s 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. John’s 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 Commercial’s 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


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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 Society’s 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 Women’s 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 University’s School of Management.


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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. Parker’s 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 bachelor’s 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.


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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 director’s 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 company’s 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 Board’s 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.


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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


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with management and the independent registered public accounting firm, including reviewing our disclosures under “Management’s 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 Committee’s 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.


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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


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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 stockholder’s ability to obtain injunctive relief or other equitable remedies for a violation of a director’s or an officer’s 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


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  •  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.”


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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 Administrator’s 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 Adviser’s compensation practices under the terms of the Advisory Agreement. The key elements of our Adviser’s 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 arm’s-length bargaining. For additional details regarding the non-arm’s-length nature of this and other agreements with our Adviser, see “Conflicts of Interest — Our agreements with our Adviser are not arm’s-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 Administrator’s 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


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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 Adviser’s 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 Committee’s oversight role also includes review of the above-described factors with regard to the compensation of our Administrator and our Administrator’s 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


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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)
 
(EQUATION)
 
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 Adviser’s and our Administrator’s 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.


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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. Gladstone’s 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 Administrator’s 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 Adviser’s and our Administrator’s 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


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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 Adviser’s 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 Adviser’s 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 Adviser’s 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 Adviser’s 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 Adviser’s investment committee to ensure that, in its view, the proposed transaction satisfies our investment criteria and is within our investment policies. Approval by our Adviser’s 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 Adviser’s 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


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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 stockholder’s 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


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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 Administrator’s 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 Administrator’s 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 Administrator’s 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.


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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 Adviser’s 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 arm’s-length agreements.