sv11za
As filed
with the Securities and Exchange Commission on October 7,
2010
Registration
No. 333-168625
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Pre-effective Amendment
No. 1
to
Form S-11
FOR REGISTRATION UNDER THE
SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
GLADSTONE LAND
CORPORATION
(Exact Name of Registrant as
Specified in its Governing Instruments)
1521 Westbranch Drive, Second Floor
McLean, Virginia 22102
(703) 287-5800
(Address, Including Zip
Code, and Telephone Number, including Area Code, of
Registrants Principal Executive Offices)
David Gladstone
Chairman and Chief Executive Officer
Gladstone Land Corporation
1521 Westbranch Drive, Second Floor
McLean, Virginia 22102
(703) 287-5800
(703) 287-5801
(facsimile)
(Name, Address, Including
Zip Code, and Telephone Number, Including Area Code, of Agent
for Service)
Copies to:
Thomas R. Salley, Esq.
Cooley LLP
777 6th
Street, NW
Washington, D.C. 20004
(202) 842-7800
(202) 842-7899
(facsimile)
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this Registration Statement.
If any of the Securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act, check the following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following
box. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
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.
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SUBJECT TO COMPLETION DATED
OCTOBER 7, 2010
12,100,000 Shares of
Common Stock
This is our initial public offering of shares of common stock.
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 or December 31, 2012.
We are 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. We 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 14 to read about
factors you should consider before buying shares of the common
stock. Some risks include:
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Our company will 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.
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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.
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We intend to set an initial annual distribution rate of $0.72
per share, or 4.8% of the midpoint of the estimated initial
public offering price range set forth above, which may have an
adverse impact on the market price for our common stock.
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We intend to use leverage through borrowings under mortgage
loans on our properties, and potentially other indebtedness,
which will result in risks, including restrictions on additional
borrowings and payment of distributions.
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We will be subject to corporate income tax liability for taxable
years prior to our REIT election.
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We may not qualify as a REIT for federal income tax purposes,
which would subject us to federal income tax on our taxable
income, thereby reducing funds available for distribution to
stockholders.
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We currently own only two farm properties. We have
identified
properties to potentially purchase with the net proceeds we will
receive from this offering, 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. 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.
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Highly leveraged tenants may be unable to make lease payments,
which could adversely affect our cash available for distribution
to our stockholders.
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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.
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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.
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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.
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Per Share
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Total
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Public Offering Price
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$
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$
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Underwriting Discount
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$
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$
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Proceeds, before expenses, to us
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$
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$
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Proceeds, before expenses, to the selling stockholder
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$
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$
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To the extent that the underwriters sell more than
12,100,000 shares of common stock, the underwriters have
the option to purchase up to an additional 1,815,000 shares
of common stock from us at the initial public offering price,
less the underwriting discount, within 30 days from the
date of this prospectus, solely to cover over-allotments.
The underwriters expect to deliver the shares of common stock
on ,
2010.
[Underwriters]
The date of this prospectus
is ,
2010.
GLADSTONE
LAND CORPORATION
TABLE OF
CONTENTS
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14
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F-1
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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
beginning on page 14. 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
effected in September 2010.
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 to lease to farmers. We may
elect to sell properties at such times as, for example, the land
may be developed by others for urban or suburban uses. To a
lesser extent, we may provide senior secured first lien
mortgages to farmers for the purchase of farmland and properties
related to farming. We expect that any mortgages we make would
be secured by farming properties that have been 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 centers. 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 potentially acquire, and we have provided
non-binding expressions of interest to purchase each of these
properties, but 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
subsidiary Gladstone Land Advisers, Inc.
We intend to elect to be taxed as a real estate investment
trust, or REIT, under federal tax laws beginning with the year
ending December 31, 2011 or December 31, 2012.
Gladstone Management Corporation serves as our adviser and
manages our real estate portfolio.
We were incorporated 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.
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. This
farmland includes land dedicated to any form of farming,
including crop production. Out of this total, there were
1.7 million farms dedicated to producing crops, or
cropland, on 406.4 million acres of land, resulting in an
average of approximately 241 acres per farm.
The USDAs 2007 Census of Agriculture estimates the total
annual market value of crops harvested in the United States at
$143.7 billion. According to the National Council of Real
Estate Investment Fiduciaries, or NCREIF, Farmland Index, which
tracks domestic farmland income and appreciation, U.S. farmland
has yielded
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average annualized returns of 13.9% between 2000 and 2009,
compared to average annual returns of the S&P 500 index of
1.2% during this period. Furthermore, the USDA estimates that
the value per acre of U.S. cropland has increased by 92.7%
between 2000 and 2009.
Crops can be divided into two
sub-categories,
annual crops and permanent crops. 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. We believe that
annual crops are less expensive to replace and are less
susceptible to disease and poor weather. 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. 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 intend to lease our acquired properties to independent
farmers with sufficient experience and capital to operate the
farms without our financial assistance. We do not currently have
resources to farm the land we intend to acquire but will seek
prospective tenants who desire to continue farming the land
after our acquisition of the property. We will seek to acquire
cropland in multiple locations in the United States, including
California, the Southeast and the Midwest, in order to provide
diversification with respect to climate conditions and water
sources.
Agricultural real estate 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, if market conditions
permit.
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 were 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 proceeds to repay existing indebtedness, for
growth of their farming operations, for retirement or in other
business endeavors. 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 to receive stable and
potentially increasing rents from leasing land for these farming
operations for many years, we believe that we may be able to
sell this land at appreciated valuations in the future if these
properties are sought to be developed for urban or suburban uses.
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. In general, the
farming sector has historically maintained low debt levels and,
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:
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Inflation drives up food costs and therefore the cost of
agricultural commodities. As a result, the value of land that
supports agricultural production should increase in correlation
with 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 fluctuations in the stock and
bond markets.
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Large acreage farmland has historically experienced minimal
vacancy loss and limited capital expense requirements, which
results in relatively stable and predictable operating income.
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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 use approximately 2% of the net proceeds of
this offering 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 purchasers of farmland in
amounts up to approximately 65% of the appraised value of the
land and 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
maximum
loan-to-value
percentage for mortgaged land, but at slightly higher interest
rates and with no principal amortization required. 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 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 a predetermined fair market value. This option will provide
borrowers with the assurance that they can sell their land to us
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 for a purchase price of approximately
$4.4 million. As of July 2009, this property was
independently appraised for $9.2 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 for a purchase price of approximately $9.9 million. As
of November 2009, this property was independently appraised
for $44.0 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 a mortgage
on this property with a current principal balance of
approximately $11.5 million that matures in February 2021.
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 flows
from operations and potential long-term appreciation in the
value of our real estate properties. Our primary strategy to
achieve our business objective is
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to invest in and own a diversified portfolio of leased
farmland, mortgages on farmland and properties related to
farming operations. This strategy includes the following
components:
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Owning Farms and Farm-Related Real Estate. We
intend to acquire farmland and lease it to independent farmers,
including sellers who desire to continue farming the land after
our acquisition of the property. We expect to hold acquired
properties for many years and to generate stable and increasing
rental income from leasing these properties.
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Acquiring Properties that Have the Potential to Appreciate in
Value. We intend to lease acquired properties
over the long term. However, from time to time we may elect to
sell one or more properties if we believe it to be in the best
interests of our stockholders. Potential purchasers may include
farmers, real estate developers desiring to develop the property
or financial purchasers seeking to acquire property for
investment purposes. Accordingly, we will seek to acquire
properties that we believe also have potential for long-term
appreciation in value.
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Owning Mortgages on Farms and Farm-Related Real
Estate. In circumstances where our purchase of
farms and farm-related properties is not feasible, we may
provide the owner of the property with a mortgage loan secured
by the property along with an option to sell the property to us
in the future at a predetermined price.
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Expanding Our Operations Beyond
California. While we will begin our farm
acquisition operations in California, we expect that we will
establish operations in other farming locations. We believe the
southern part of the United States, such as Georgia and Florida,
offers attractive locations for expansion. We also expect to
seek farmland acquisitions in the Midwest and Mid-Atlantic and
may do so in other areas in the United States and Canada.
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Using Leverage. To make more investments than
would otherwise be possible, we intend to borrow through loans
secured by mortgages on our properties, and we may also borrow
funds on a short-term basis or incur other indebtedness. While
our governing documents will not restrict our borrowing, our
board of directors currently intends to limit our debt-to-equity
ratio to a maximum of 2-to-1.
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Joint Ventures. 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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Risk
Factors
You should carefully consider the matters discussed in the
Risk Factors section of this prospectus beginning on
page 14 prior to deciding to invest in our common stock.
Some of the risks include:
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We may not be able to successfully lease our agricultural
properties for the production of annual crops.
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We have
identified
specific properties to potentially purchase with the net
proceeds from this offering, 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 or other properties being evaluated.
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Investors will be unable to evaluate the manner in which the net
proceeds of this offering are invested and the economic merits
of projects prior to investment.
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Because our properties will be devoted to agricultural uses, we
will be subject to risks associated with agriculture, such as
adverse weather conditions and crop disease.
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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.
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We cannot guarantee when or if our properties will ever be
converted to urban or suburban uses because our expectations
regarding local urban or suburban development may prove to be
incorrect or we may be unsuccessful in having our farmland
rezoned for such uses. If we are unable to sell our agricultural
real estate for urban or suburban development, it could limit
the potential long-term appreciation of our properties.
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Our expected distribution rate could have an adverse impact on
the market price for our common stock.
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Tenants may be unable to make lease payments, which would reduce
our revenues and could adversely affect our cash available for
distribution to our stockholders.
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Our real estate investments will include farms that may be
difficult to sell or re-lease upon tenant defaults or early
lease terminations.
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We have not yet 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.
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The inability of a borrower to make interest and principal
amortization payments would reduce our revenues and impact our
ability to make distributions to our stockholders.
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We intend to borrow funds secured by mortgages on our
properties, and may incur other indebtedness, which could result
in restrictions on additional borrowing and payment of
distributions, our inability to make or refinance balloon
payments and risk of loss of our equity upon foreclosure.
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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.
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We will be subject to corporate income tax liability for taxable
years prior to our proposed REIT election.
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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.
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We have identified material weaknesses in our internal controls
over financial reporting, which resulted in our need to revise
our previously issued financial statements.
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Our
Structure
We intend to conduct our business through an Umbrella
Partnership Real Estate Investment Trust, or UPREIT, structure
in which our properties and the mortgage loans we make will be
held directly or indirectly by our operating partnership,
Gladstone Land Limited Partnership, which we refer to in this
prospectus as our Operating Partnership. We are the sole general
partner of our Operating Partnership and currently hold 100% of
its outstanding limited partnership units. In the future, we may
issue operating partnership units to third parties from time to
time in connection with real property acquisitions. Holders of
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 under U.S. federal income tax laws.
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
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 to engage
in other activities when we deem it necessary or advisable. The
taxable income generated by any TRS would be subject to regular
corporate income tax.
The following diagram depicts our expected ownership structure
upon completion of this offering.
5
Our
Adviser
Gladstone Management Corporation, a Delaware corporation and a
registered investment adviser, serves as our external management
company, and we refer to it in this prospectus as our Adviser.
Our Adviser is responsible for managing our real estate and loan
portfolio on a
day-to-day
basis and for identifying properties and loans that it believes
meet our investment criteria. Our Adviser does not directly
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 31 professionals who are involved in
structuring, arranging and managing investments on behalf of
companies advised by our Adviser. We also rely on outside
professionals with agricultural experience that perform due
diligence on the properties that we intend to acquire and lease.
Our Adviser plans to hire additional investing professionals
following this offering.
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 we may issue and any uninvested
cash proceeds of this offering, and an additional incentive fee
based on funds from operations, or FFO. FFO is an operating
measure for equity REITs that is defined as net income,
excluding gains and losses from sales of property, plus
depreciation and amortization of real estate assets. However,
for purposes of calculating the incentive fee, FFO includes any
realized capital gains or losses on our investments, less any
dividends we may pay on any preferred stock we may issue, but
FFO does not include any unrealized capital gains or losses on
our investments. The incentive fee will reward our Adviser if
our FFO for a particular calendar quarter, before giving effect
to any incentive fee, exceeds a hurdle rate of 1.75% of our
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 for the quarter.
Our Adviser will also receive an incentive fee of 20% of the
amount of our pre-incentive fee FFO that exceeds 2.1875% each
the quarter.
There are no acquisition fees paid to our Adviser when we
acquire real estate, and we do not pay fees to our Adviser when
we lease properties to tenants or when we sell real estate.
Under this proposed compensation structure, we believe our
Adviser will be incentivized to generate stable and consistent
FFO to pay our monthly
6
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
a nominal fee.
Our
Administrator
We will enter into an amended Administration Agreement with
Gladstone Administration, LLC, which we refer to in this
prospectus as our Administrator, upon the completion of this
offering. Under this agreement, we will pay separately for our
allocable portion of our Administrators overhead expenses
in performing its obligations including, but not limited to,
rent and our allocable portion of the salaries and benefits
expenses of its employees. We expect that these employees of our
Administrator will include our chief financial officer, chief
compliance officer, treasurer, internal counsel, investor
relations officer and their respective staffs.
Compensation
of Our Adviser and Our Administrator
Set forth below is an estimate of all proposed compensation,
fees, profits and other benefits, including reimbursement of
out-of-pocket
expenses, that our Adviser and our Administrator may receive in
connection with this offering and our ongoing operations. We do
not expect to make any payments to any other affiliates of our
Adviser.
|
|
|
|
|
Type of Compensation
|
|
|
|
|
(Recipient)
|
|
Description and Determination of Amount
|
|
Estimated Amount
|
|
Offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursement of Offering Expenses
(Adviser)
|
|
Offering expenses include all estimated expenses, other than
underwriting discount, to be paid by us in connection with this
offering, including our legal, accounting, printing, mailing and
filing fees and other accountable offering expenses. To the
extent that our Adviser pays our offering expenses, we will
reimburse our Adviser for these amounts.
|
|
Up to $1.3 million
|
|
Ongoing Operations
|
|
|
|
|
|
Annual Base Management Fee (Adviser)
|
|
2.0% of our total stockholders equity less the recorded
value of any preferred stock outstanding and any uninvested cash
proceeds from this offering.
|
|
Actual amounts will be dependent upon the rate of property
acquisitions and mortgage loans following the completion of this
offering and therefore cannot be determined at this time.
However, we estimate that the base management fee will be
approximately $3.3 million per year once the proceeds of
this offering have been substantially fully invested in
properties and mortgage loans.
|
|
|
|
|
|
Quarterly Incentive Fee
(Adviser)
|
|
We will pay our Adviser an incentive fee with respect to our
pre-incentive fee FFO in each calendar quarter as follows:
|
|
Actual amounts will be dependent upon the amount of FFO we
generate from time to time.
|
7
|
|
|
|
|
Type of Compensation
|
|
|
|
|
(Recipient)
|
|
Description and Determination of Amount
|
|
Estimated Amount
|
|
|
|
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)
|
|
|
|
|
|
|
|
Reimbursement of Acquisition Expenses
(Adviser)
|
|
Acquisition expenses include customary third-party acquisition
expenses such as legal fees and expenses, costs of appraisals,
accounting fees and expenses, title insurance premiums and other
closing costs and miscellaneous expenses relating to the
acquisition of real estate and reserves for capital improvements
and maintenance and repairs of properties. To the extent that
our Adviser pays our acquisition expenses incurred in the
process of acquiring our properties or loans, we will reimburse
our Adviser for such acquisition expenses.
|
|
Actual amounts will be dependent upon the amount of net proceeds
we use for acquisitions (rather than for the other purposes
enumerated in this prospectus) and the expenses incurred, and
therefore cannot be estimated at the present time.
|
|
|
|
|
|
Allocation of Administrator Overhead Expenses (Administrator)
|
|
We will pay our Administrator for our allocable portion of the
Administrators overhead expenses in performing our
obligations, including, but not limited to, rent for employees
of the Administrator, and our allocable portion of the salaries
and benefits expenses of our chief financial officer, chief
compliance officer, treasurer, legal counsel and their
respective staffs. Our allocable portion is derived by
multiplying the Administrators total allocable expenses by
the percentage of our total assets at the beginning of each
quarter in comparison to the total assets of all companies for
whom our Administrator provides services.
|
|
Actual amounts will be dependent upon the expenses incurred by
our Administrator and our total assets relative to the assets of
the other entities for whom our Administrator provides services
and, therefore, cannot be determined at the present time.
However, we estimate that these expenses will be approximately
$340,000 per year after the first twelve months following this
offering.
|
Our Other
Affiliates and Potential Conflicts of Interest
Gladstone Commercial Corporation. All 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 and,
therefore, Gladstone Commercial will not compete with us for
investment opportunities.
Gladstone Capital Corporation. All of our
directors and each of our executive officers other than our
chief financial officer 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
8
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 and, therefore, Gladstone Capital will not compete
with us for investment opportunities. 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. All of our
directors and each of our executive officers other than our
chief financial officer 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 and, therefore, Gladstone
Investment will not compete with us for investment
opportunities. 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 in any business.
However, in the future it may be advisable for us to co-invest
with one of these companies. If we decide to change our policy
on co-investments with affiliates, we will seek approval of this
decision from our independent directors.
Many of our officers are also officers or directors of our
Adviser, Gladstone Capital, Gladstone Commercial and Gladstone
Investment. Our Adviser and its affiliates, including our
officers, may have conflicts of interest in the course of
performing their duties for us. These conflicts may include:
|
|
|
|
|
Our Adviser may realize substantial compensation on account of
its activities on our behalf;
|
|
|
|
Our agreements with our Adviser are not arms-length
agreements;
|
|
|
|
We may experience competition with our affiliates for financing
transactions; and
|
|
|
|
Our Adviser and other affiliates could compete for the time and
services of our officers and directors.
|
Our Tax
Status
We were taxed as a Subchapter C corporation for our taxable
years ended December 31, 1997 through December 31,
2009 and we intend to be taxed as a Subchapter C corporation for
the taxable year ending December 31, 2010 and possibly the
year ending December 31, 2011. We currently intend to elect
to be taxed as a REIT for federal income tax purposes commencing
with our taxable year ending December 31, 2011 or
December 31, 2012. To qualify as a REIT, we may not have,
at the end of any taxable year for which we first elect REIT
status and thereafter, 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. As of
June 30, 2010, we estimate that our non-REIT accumulated
earnings and profits were approximately $4.8 million. This
amount does not include an additional $4.6 million of
non-REIT earnings and profits associated with a deferred
intercompany gain that we will recognize immediately prior to
our REIT election. We intend to distribute our
non-REIT
earnings and profits to stockholders of record after the
completion of this offering but before December 31 of the
first year for which we elect REIT status. These distributions
will be in addition to distributions we will be required to make
after we elect REIT status in order to satisfy the REIT
distribution test discussed below and to avoid incurring tax on
our undistributed income.
We believe that, following the completion of this offering, our
making of an election to be taxed as a REIT, and any
distribution of non-REIT earnings and profits, we will operate
in conformity with the requirements for qualification and
taxation as a REIT. We expect to receive an opinion of counsel
to the effect that, subject to our distribution of all non-REIT
earnings and profits, 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 commencing with the first taxable year for which we elect
to so qualify. It is possible that the Internal Revenue Service,
or IRS, may challenge our proposed qualification
9
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 rental
income that we will receive from personal property.
To maintain our qualification as a REIT, we must meet a number
of organizational and operational requirements, including a
requirement that we annually distribute at least 90% of our net
income, excluding net capital gains, to our stockholders. As a
REIT, we generally will not be subject to U.S. federal
income tax on our net income that we distribute to our
stockholders. If we fail to qualify as a REIT in any taxable
year, we will be subject to U.S. federal income tax at
regular corporate rates. Even if we 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 any
of our subsidiaries that qualifies as a 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 prior to our qualification as a REIT. See
U.S. Federal Income Tax Considerations.
It is also possible that the regulations of the IRS relating to
REITs might change in the future in a manner that might make it
difficult or impossible for us to continue to qualify as a REIT.
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 maintain an office in Oxnard, California. 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.
10
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 a lesser extent, to make loans secured by mortgages on
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 to distribute annually 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 annual distribution rate is expected to be
$0.72 per share, which is 4.8% of the midpoint of the range
indicated on the cover of this prospectus. We also intend to
distribute non-REIT accumulated earnings and profits to
stockholders of record after the completion of this offering but
before December 31 of the first year for which we elect to
be treated as a REIT. |
|
|
|
Our Adviser |
|
Pursuant to the terms of an amended and restated advisory
agreement, our Adviser will identify and select our real estate
investments and manage our portfolio. |
|
|
|
(1) |
|
Excludes 1,815,000 shares of our common stock issuable
pursuant to the over-allotment option granted to the
underwriters. |
|
|
|
(2) |
|
Up to 30,000 shares of our common stock, or approximately 0.25%
of the shares being offered, excluding shares issuable pursuant
to the over-allotment option granted to the underwriters, will
be reserved for sale by the underwriters to our directors,
officers and employees and certain associated persons at the
public offering price less 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 comply with 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:
|
|
|
|
|
a 27,500-for-1 stock split effected on September 30, 2010;
|
|
|
|
|
|
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.
|
11
Summary
Consolidated Financial Data
You should read the summary financial information below in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations and the
financial statements, notes thereto and other financial
information included elsewhere in this prospectus. The summary
consolidated financial data as of December 31, 2009 and
2008 and for the years ended December 31, 2009, 2008 and
2007 are derived from audited financial statements included
elsewhere in this prospectus. The summary consolidated financial
data as of December 31, 2007 is derived from audited
financial statements not included in this prospectus. The
summary consolidated financial data as of and for the six months
ended June 30, 2010 and 2009 are derived from unaudited
financial statements included elsewhere in this prospectus. Our
results of operations are not necessarily indicative of results
of operations that should be expected in any future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Six Months Ended June 30,
|
|
As of and 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(2)
|
|
|
432,237
|
|
|
|
460,649
|
|
|
|
968,608
|
|
|
|
1,075,798
|
|
|
|
1,173,048
|
|
Assets
|
|
|
20,655,379
|
|
|
|
21,128,789
|
|
|
|
20,096,184
|
|
|
|
21,051,214
|
|
|
|
24,737,513
|
|
Liabilities
|
|
|
12,392,956
|
|
|
|
12,492,714
|
|
|
|
12,109,074
|
|
|
|
12,718,865
|
|
|
|
12,921,494
|
|
Stockholders Equity
|
|
|
8,262,423
|
|
|
|
8,636,075
|
|
|
|
7,987,110
|
|
|
|
8,332,349
|
|
|
|
11,816,019
|
|
|
|
|
(1) |
|
EBITDA is a key financial measure that our management uses to
evaluate our operating performance but should not be construed
as an alternative to operating income, cash flows from operating
activities or net income, in each case 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 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. |
12
|
|
|
|
|
A reconciliation of our net income to our 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 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. |
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Basic funds from operations per share, or Basic FFO per share,
and diluted funds from operations per share, or Diluted FFO per
share, are equal to FFO divided by our weighted average common
shares outstanding and FFO divided by our 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 operating results. 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. |
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The following table provides a reconciliation of our FFO to the
most directly comparable GAAP measure, net income, and a
computation of Basic FFO and Diluted FFO per weighted average
common share and basic and diluted net income per weighted
average common share: |
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For the Six Months Ended
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June 30,
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For the Years Ended December 31,
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2010
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2009
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2009
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|
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2008
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2007
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|
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(Unaudited)
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(Unaudited)
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Net income
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$
|
275,313
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$
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303,725
|
|
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$
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654,761
|
|
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$
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760,253
|
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$
|
857,384
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Add: Real estate depreciation and amortization
|
|
|
156,924
|
|
|
|
156,924
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|
|
|
313,847
|
|
|
|
315,545
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|
|
|
315,664
|
|
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FFO
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$
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432,237
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$
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460,649
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$
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968,608
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$
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1,075,798
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$
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1,173,048
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Weighted average shares outstanding
basic & diluted
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|
|
2,750,000
|
|
|
|
2,750,000
|
|
|
|
2,750,000
|
|
|
|
2,750,000
|
|
|
|
2,750,000
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Basic & Diluted net income per weighted average common
share
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$
|
0.10
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|
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$
|
0.11
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|
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$
|
0.24
|
|
|
$
|
0.28
|
|
|
$
|
0.31
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|
|
|
|
|
|
|
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|
|
|
|
|
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|
|
|
|
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Basic & Diluted FFO per weighted average common share
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$
|
0.16
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$
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0.17
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$
|
0.35
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$
|
0.39
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$
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0.43
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13
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 leasing agricultural land for the farming of annual
crops, primarily strawberries. We own two farm properties in
California that 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 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.
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 to 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 properties to potentially purchase with a
portion of the net proceeds from this offering, there can be no
assurance that we will be able to enter into definitive
agreements to purchase these properties or to complete these
acquisitions. 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 potentially 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 these or any other properties. Factors that could
cause us not to purchase one or more of these identified
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 your 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 annual distribution rate at $0.72
per share, which is 4.8% of the midpoint of the range indicated
the cover page of this prospectus. However, because we only own
two properties as of the date of this prospectus, we currently
do not expect to generate sufficient cash flows from operations
to make distributions at this level. Our failure to rapidly
invest the net proceeds of this offering or to make investments
at acceptable rates of
14
return could result in us using a significant portion of the
proceeds of this offering for the purpose of making these
distributions or could 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.
Some
of our tenants may be unable to pay rent, which could adversely
affect our cash available to make distributions to our
stockholders or otherwise impair the value of your
investment.
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. 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 in
their businesses or in general economic conditions. Tenants that
have experienced leveraged restructurings or acquisitions will
generally have substantially greater debt and substantially
lower net worth than they had prior to the leveraged
transaction. In addition, the payment of rent and debt service
may reduce the working capital available to leveraged entities
and prevent them from devoting the resources necessary to remain
competitive in their industries. In situations where management
of the tenant will change after a transaction, it may be
difficult for our Adviser to determine with certainty the
likelihood of the tenants business success and of it being
able to pay rent throughout the lease term. These companies are
more vulnerable to adverse conditions in their businesses or
industries, economic conditions generally and increases in
interest rates.
Any lease payment defaults by a tenant 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 also experience delays in enforcing our rights as
landlord and may incur substantial costs in protecting our
investment and re-leasing our property.
Some
of our tenants could be susceptible to bankruptcy.
In addition to the risk of tenants being unable to make regular
rent payments, certain of our tenants who may depend on debt and
leverage could be especially susceptible to bankruptcy in the
event that their cash flows are insufficient to satisfy their
debt. Any bankruptcy of one of our tenants would result in a
loss of lease payments to us, as well as an increase in our
costs to carry the property.
In addition, 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 lease,
would be treated as a general unsecured claim. Our claim would
likely be capped at the amount the tenant owed us for unpaid
rent prior to the bankruptcy unrelated to the termination, plus
the greater of one year of lease payments or 15% of the
remaining lease payments payable under the lease, but in no case
more than three years of lease payments. In addition, a
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.
Because
we expect to enter primarily into short-term leases, we will be
more susceptible to any decreases in prevailing market rental
rates than would be the case with long-term
leases.
We intend to primarily enter into leases with independent
farmers having terms of one to two years. As a result, we will
be required to frequently re-lease our properties upon the
expiration of our leases. This will subject our business to near
term fluctuations in market rental rates, and we will be more
susceptible to declines in market rental rates than we would be
if we were to enter into longer term leases. As a result, any
decreases in the prevailing market rental rates in the
geographic areas in which we own properties could have a
material adverse effect on our results of operations and cash
available for distribution to stockholders.
15
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 could limit our ability to quickly dispose of
properties in response to changes in economic or other
conditions. With these kinds of 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.
If our
properties do not have access to adequate water supplies, it
could harm our ability to lease the properties for
farming.
In order to lease the cropland that we intend to acquire with
the proceeds of this offering, these properties will require
access to sufficient water to make them suitable for farming.
Although we expect to acquire properties with sufficient water
access, should the need arise for additional wells from which to
obtain water, we would be required to obtain 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 in
areas where we expect to acquire properties, such as the farming
regions of California. Similarly, our properties may be subject
to governmental regulations relating to the quality and
disposition of rainwater runoff or other water to be used for
irrigation. In such case, we could incur costs necessary in
order to retain this water. If we are unable to obtain or
maintain sufficient water supply for our properties, our ability
to lease them for farming would be seriously impaired, which
would have a material adverse impact on the value of our assets
and our results of operations.
Our
agricultural properties will be subject to adverse weather
conditions and crop disease.
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. Because fresh produce is highly perishable and
generally must be brought to market and sold soon after harvest,
unfavorable growing conditions can reduce both crop size and
crop quality. In extreme cases, entire harvests may be lost in
some geographic areas.
In addition, fresh produce is 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. Although we do not expect that our rental payments will
be based on the quality of our tenants harvests, any of
these factors could have a material adverse effect on our
tenants ability to pay rent to us, which in turn could
have a material adverse effect on our ability to make
distributions to our stockholders.
Our
operating results and the value of our properties may be
adversely impacted by future climate change.
In addition to the general risks that adverse weather conditions
will pose for the tenants of our properties, the value of our
properties will potentially be subject to risks associated with
long-term effects of climate change. Many climatologists predict
increases in average temperatures, more extreme temperatures and
increases in volatile weather over time. The effects of climate
change may be more significant along coastlines, such as the
California coastal areas where we intend to focus our initial
acquisition efforts, due to rising sea levels resulting from
melting of polar ice caps, which could result in increased risk
of coastal erosion, flooding, degradation in the quality of
groundwater aquifers and expanding agricultural weed and pest
populations. As a result, the effects of climate change could
make our properties less suitable for farming or other
alternative uses, which could adversely impact the value of our
properties, our ability to generate rental revenue from leasing
our properties and our cash available for distribution to
stockholders.
16
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 choose to terminate its leases prior to or upon their
expiration.
Both of our current farm leases are with Dole Fresh under leases
expiring in 2010 and 2013. If Dole Fresh fails to make rental
payments or elects to terminate its leases prior to or upon
their expiration and the land cannot be
re-leased on
satisfactory terms, or if Dole Fresh experiences financial
problems or bankruptcy, it would have a material adverse effect
on our financial performance and our ability to make dividend
payments to our stockholders.
Because
we must distribute a substantial portion of our net income to
qualify as a REIT, we will be largely dependent on third-party
sources of capital to fund our future capital
needs.
To qualify as a REIT, we generally must distribute to our
stockholders at least 90% of our taxable income each year,
excluding capital gains. Because of this distribution
requirement, it is not likely that we will be able to fund a
significant portion of our future capital needs, including
property acquisitions, from retained earnings. Therefore, we
will likely rely on public and private debt and equity capital
to fund our business. This capital may not be available on
favorable terms or at all. Our access to additional capital
depends on a number of things, including the markets
perception of our growth potential and our current and potential
future earnings.
Our
business strategy relies heavily on borrowing, which may expose
us to risks associated with leverage such as restrictions on
additional borrowing and payment of distributions, the inability
to satisfy or refinance 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. Our
certificate of incorporation and bylaws to be in effect upon the
completion of this offering do not impose any limitation on our
borrowing. 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. Upon completion of
this offering, we expect our debt to equity ratio to be
approximately 0.1 to 1.
We currently have a line of credit from a bank that permits us
to borrow up to $3,250,000, which loan is 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 have
a $11.5 million mortgage loan from a life insurance company
that is secured by the Oxnard farm. The loan has an annual
interest rate of 6% and matures in February 2021.
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 distributions to stockholders.
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 our 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 could 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.
17
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 the property,
which in turn could cause the value of our common stock or the
distributions to our stockholders to be reduced.
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 REITs and 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 may have limited financial
and personnel resources.
Leasing real property to small and medium-sized farms and
related agricultural businesses will expose us to a number of
unique risks related to these entities. For example, small and
medium-sized agricultural businesses are more likely than larger
farming operations to have difficulty making lease payments when
they experience adverse events. They also tend to experience
significant fluctuations in their operating results and to be
more vulnerable to competitors actions and market
conditions, as well as general economic downturns. In addition,
our target tenants may face intense competition, including
competition from companies with greater financial resources,
which could lead to price pressure on crops that could lower our
tenants income.
Furthermore, the success of a small or medium-sized business may
also depend on the management talents and efforts of one or a
small group of persons. The death, disability or resignation of
one or more of these persons could have a material adverse
impact on our tenant and, in turn, on us.
We may
not ultimately be able to sell our agricultural real estate to
developers in connection with the conversion of such properties
to urban or suburban uses.
Our business plan in part contemplates purchasing agricultural
real property that we believe is located in the path of urban
and suburban growth and ultimately will increase in value over
the long term 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. These uncertainties are more acute since we do not
intend to acquire properties that are expected to be converted
to urban or suburban uses in the near term. As a result, there
can be no guarantee that increased development 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
your investment.
18
Our
real estate portfolio will be concentrated in a limited number
of properties, which subjects us to an increased risk of
significant loss if any property declines in value or if we are
unable to lease a property.
Based on the anticipated net proceeds to be received from this
offering, the expected investment size and our Advisers
experience in the marketplace, we estimate that we will purchase
approximately 10 to 15 properties with the net proceeds of this
offering. To the extent we are able to leverage such
investments, we will acquire additional properties with the net
proceeds of borrowings, subject to our debt policy. A
consequence of a limited number of investments is that the
aggregate returns we realize may be substantially adversely
affected by the unfavorable performance of a small number of
leases or a significant decline in the value of any single
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 underperforming investment could have a
material adverse effect on our cash flows 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 flows 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:
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|
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|
|
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;
|
|
|
|
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
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|
|
|
|
|
potential liability for 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 we will seek to
require 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.
The
presence of endangered or threatened species on or near our
acquired farmland could restrict the activities of our
agricultural tenants.
Federal, state and local laws and regulations intended to
protect threatened or endangered species could restrict certain
activities on our farmland. The size of any area subject to
restriction would vary depending on the protected species at
issue, the time of year and other factors, and there can be no
assurance that such federal, state and local laws will not
become more restrictive over time. If portions of our farmland
are deemed to be part of or bordering habitats for such
endangered or threatened species that could be disturbed by the
agricultural activities of our tenants, it could impair the
ability of the land to be used for farming, which in turn could
have a material adverse impact on the value of our assets and
our results of operations.
19
We may
be required to permit the owners of the mineral rights to our
properties to enter and occupy parts of the properties for the
purposes of drilling and operating oil or gas
wells.
Although we will own the surface rights to the properties that
we acquire, we expect that other persons will typically own the
rights to any minerals, such as oil and natural gas, that may be
located under the surfaces of these properties. Under agreements
with any such mineral rights owners, we expect that we would be
required to permit third parties to enter our properties for the
purpose of drilling and operating oil or gas wells on the
premises. We will also be required to set aside a reasonable
portion of the surface area of our properties to accommodate
these oil and gas operations. The devotion of a portion of our
properties to these oil and gas operations would reduce the
amount of the surface available for farming or farm-related
uses, which could adversely impact the rents that we receive
from leasing these properties.
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 acquired properties or other variable-rate
debt that we may owe, and mortgage loans we may make, 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 counterparties to derivative
contracts may be unable to perform their obligations, the risk
that interest rates move in a direction contrary to, or move
slower than the period contemplated by, the direction or time
period that the derivative instrument is designed to cover, and
the risk that the terms of such instrument will not be legally
enforceable. While we intend to design our hedging strategies to
protect against adverse movements in interest rates, derivative
instruments that we are likely to use may also involve immediate
costs, which could reduce our 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 operating results or reduce your overall
investment returns. Our Adviser and our Board of Directors will
review each of our derivative contracts and will periodically
evaluate their effectiveness against their stated purposes.
In addition, tax laws may substantially limit our ability to
hedge our interest rate exposure. If we qualify as a REIT for
federal income tax purposes, 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 taxable REIT
subsidiary, or 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 could 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 substantially dependent
upon the performance of our Adviser in evaluating potential
investments, selecting and negotiating property purchases and
dispositions on our behalf, selecting tenants and borrowers,
setting lease terms and determining financing arrangements. You
will have no 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 portfolio and will
locate, evaluate, recommend and negotiate the acquisition of our
real estate investments and mortgage loans. At the same time,
our advisory agreement permits our Adviser to conduct other
commercial activities and to provide management and advisory
services to other entities, including Gladstone Commercial
Corporation, Gladstone Capital Corporation and Gladstone
Investment
20
Corporation, each of which is affiliated with us. 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 that of 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:
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our Adviser may realize substantial compensation on account of
its activities on our behalf and may be motivated to approve
acquisitions solely on the basis of increasing its compensation
from us;
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our agreements with our Adviser are not arms-length
agreements;
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we may experience competition with our affiliates for potential
financing transactions; and
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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.
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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. See Conflicts of Interest in this
prospectus.
Our
financial condition and results of operations will depend on our
Advisers ability to effectively manage our future
growth.
Our ability to achieve our investment objectives will depend on
our ability to sustain continued growth, which will, in turn,
depend on our Advisers ability to find, select and
negotiate property purchases and net leases that meet our
investment criteria. Accomplishing this result on a
cost-effective basis is largely a function of our Advisers
marketing capabilities, management of the investment process,
ability to provide competent, attentive and efficient services
and our access to financing sources on acceptable terms. As we
grow, our Adviser may be required to hire, train, supervise and
manage new employees. Our Advisers failure to effectively
manage our future growth could have a material adverse effect on
our business, financial condition and results of operations.
We may
be obligated to pay our Adviser incentive compensation even if
we incur a loss.
The advisory agreement we will enter into in connection with
this offering will entitle our Adviser to incentive compensation
based on our funds from operations, or FFO, which will reward
our Adviser if our quarterly FFO, before giving effect to any
incentive fee, exceeds 1.75% of our total stockholders
equity, less the recorded value of any preferred stock that we
may issue and any uninvested cash proceeds from this offering.
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 as
determined in accordance with GAAP.
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, and Terry Lee Brubaker, our vice
chairman. Mr. Gladstone also serves as the chief executive
officer of our Adviser, and Messrs. Stelljes and Brubaker are
also executive officers of our Adviser. 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.
21
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 common stock
after this offering. This restriction may discourage a change of
control of our company and may deter individuals or entities
from making tender offers for our common stock, which offers
might otherwise be financially attractive to our stockholders or
which might cause a change in our management. See Certain
Provisions of Delaware Law and of our Certificate of
Incorporation and Bylaws Restrictions on Ownership
of Shares.
Certain
provisions of Delaware law could restrict a change in
control.
We are subject to provisions of the Delaware General Corporation
Law, or DGCL, that, in general, prohibit any business
combination with a beneficial owner of 15% or more of our common
stock for three years unless the holders acquisition of
our stock was either approved in advance by our Board of
Directors or ratified by the Board of Directors and stockholders
owning two-thirds of our outstanding stock not owned by the
acquiring holder. Although we believe these provisions
collectively provide for an opportunity to receive higher bids
by requiring potential acquirers to negotiate with our Board of
Directors, they would apply even if the offer may be considered
beneficial by some stockholders. As a result, this statute could
reduce the likelihood of a transaction that might otherwise be
in the best interests of our stockholders.
Our
staggered director terms could deter takeover attempts and
adversely impact the price of our common stock.
Our directors will be divided into three classes, with the term
of the directors in each class expiring every third year. At
each annual meeting of stockholders, the successors to the class
of directors whose term expires at such meeting will be elected
to hold office for a term expiring at the annual meeting of
stockholders held in the third year following the year of their
election. After election, a director may only be removed for
cause by a vote of at least two-thirds of our outstanding common
stock. 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 or
December 31, 2012. Before the first year for which we elect
REIT status, we will be subject to regular corporate income
taxation. Our qualification as a REIT will depend on our ability
to satisfy requirements set forth in the Internal Revenue Code,
or Code, concerning, among other things, the ownership of our
outstanding common stock, the nature of our assets, the sources
of our 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
proposed REIT election, which it may do without stockholder
approval.
22
If we fail to qualify, or lose or revoke our REIT status, we
would face serious tax consequences that would substantially
reduce the funds available for distribution to you because:
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we would not be allowed a deduction for distributions to
stockholders in computing our taxable income;
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we would be subject to federal income tax at regular corporate
rates and might need to borrow money or sell assets in order to
pay any such tax;
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we also could be subject to the federal alternative minimum tax
and possibly increased state and local taxes; and
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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.
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In addition, all distributions to stockholders made before the
beginning of the tax year for which we elect to qualify as a
REIT, 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. The U.S. federal income
tax rate 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
would not be required to make distributions to stockholders, and
any 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 could adversely affect the value of our common stock.
Complying
with REIT requirements may cause us to forego or liquidate
otherwise attractive investments.
To qualify as a REIT for federal income tax purposes, 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.
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, 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 in order to satisfy REIT
requirements. These actions could have the effect of reducing
our income and amounts available for distribution to our
stockholders.
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.
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 the first
taxable year for which we elect to do so, which we currently
expect will be the taxable year ending either December 31,
2011 or December 31, 2012. 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
23
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, 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 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:
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85% of our ordinary income for that year;
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95% of our capital gain net income for that year; and
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100% of our undistributed taxable income from prior years.
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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 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. As of June 30, 2010,
we estimate that our non-REIT accumulated earnings and profits
were approximately $4.8 million. This amount does not
include an additional $4.6 million of non-REIT earnings and
profits associated with a deferred intercompany gain resulting
from land transfers, described elsewhere in this prospectus,
that we will recognize immediately prior to our REIT election.
We also expect to recognize additional non-REIT earnings and
profits from future operations prior to our REIT election. We
intend to distribute sufficient earnings and profits to
stockholders of record after the completion of this offering,
but before the end of the taxable year that we first elect REIT
status, in order to eliminate any non-REIT earnings and profits.
If we are unable to fully distribute our non-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 transactions in which we
acquire a property and lease it back to the seller do not
qualify as 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 could lose our REIT status. Alternatively, the
amount of our REIT taxable income could be recalculated, which
could cause us to fail the distribution test for REIT
qualification. See 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:
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whether your investment is consistent with the applicable
provisions of the Employee Retirement Income Security Act, or
ERISA, or the Code;
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whether your investment will produce unrelated business taxable
income, or UBTI, to the benefit plan; and
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your need to value the assets of the benefit plan annually.
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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
24
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 with respect to your
purchase, you should not purchase shares in this offering.
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.
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 has been
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.
Our
ownership of and relationship with TRSs will be limited and a
failure to comply with the limits would jeopardize our REIT
status and may result in the application of a 100% excise
tax.
We currently own one TRS, Gladstone Land Advisers, Inc., and may
form other TRSs as part of our overall business strategy. A TRS
may earn income that would not be qualifying income if earned
directly by the parent REIT. Both the subsidiary and the REIT
must jointly elect to treat the subsidiary as a TRS. A
corporation of which a TRS directly or indirectly owns more than
35% of the voting power or value of the stock will automatically
be treated as a TRS. Overall, no more than 25% of the value of a
REITs assets may consist of stock or securities of one or
more TRSs. A TRS will pay federal, state and local income tax at
regular corporate rates on any income that it earns. In
addition, the TRS rules limit the deductibility of interest paid
or accrued by a TRS to its parent REIT to ensure that the TRS is
subject to an appropriate level of corporate taxation. The rules
also impose a 100% excise tax on certain transactions between a
TRS and its parent REIT that are not conducted on an
arms-length basis.
Our TRSs will pay federal, state and local income tax on their
taxable income, and their after-tax net income will be available
for distribution to us but is not required to be distributed to
us. We anticipate that the aggregate value of any TRS stock and
securities owned by us will be less than 25% of the value of our
total assets, including the TRS stock and securities. We will
evaluate all of our transactions with TRSs to ensure that they
are entered into on arms-length terms in order to avoid
incurring the 100% excise tax. There can be no assurance,
however, that we will be able to comply with the 25% limitation
or to avoid application of the 100% excise tax.
25
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 year ending December 31, 2010 and potentially the
taxable year ending December 31, 2011, depending upon
whether we elect to qualify as a REIT for that year. 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
Subchapter C corporation for U.S. 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.
The risk factors described in this prospectus, many of which are
beyond our control, could negatively affect our share price or
result in fluctuations in the price or trading volume of our
common stock. In addition, the value of our stock will be
subject to price and volume fluctuations in the stock market
from time to time, which are often unrelated to the operating
performance of particular companies, and significant volatility
in the market price and trading volume of shares of other REITs
and companies that is not necessarily related to the performance
of those companies.
Sales
of shares of our common stock, or the perception that such sales
will occur, 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
may seek securities paying higher dividends or interest. The
market price of our common stock likely will be based primarily
on the earnings that we derive from rental income with respect
to our 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
26
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 liabilities or income tax receivables, which resulted in
accounting errors in our previously issued financial statements.
The identification of this or similar material weaknesses may
cause investors to lose confidence in us and our stock may be
negatively affected.
Because we have no employees, we rely on the employees of our
Administrator and our Adviser to maintain effective internal
control over our financial reporting. The standards that must be
met for management to assess the internal control over financial
reporting are 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.
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, as well as statements of
managements goals and objectives and other similar
expressions concerning matters that are not historical facts.
When we use the words may, should,
could, would, predicts,
potential, continue,
expects, anticipates,
future, intends, plans,
believes, estimates or similar
expressions or their negatives, as well as statements in future
tense, we intend to identify forward-looking statements. You
should not place undue reliance on these forward-looking
statements. Statements regarding the following subjects are
forward-looking by their nature:
|
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|
|
|
our business strategy;
|
|
|
|
our projected operating results;
|
|
|
|
our ability to obtain future financing arrangements;
|
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|
|
estimates relating to our future distributions;
|
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|
our understanding of our competition;
|
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|
|
market trends;
|
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|
|
|
|
our compliance with tax laws; and
|
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|
|
|
|
use of the net proceeds of this offering.
|
27
Forward-looking statements should not be read as a guarantee of
future performance or results, and will not necessarily be
accurate indications of the times at, or by, which such
performance or results will be achieved. The forward-looking
statements are based on our beliefs, assumptions and
expectations of our future performance, taking into account all
information available to us at the time those statements are
made or managements good faith belief as of that time with
respect to future events. These beliefs, assumptions and
expectations can change as a result of many possible events or
factors, not all of which are known to us. If a change occurs,
our business, financial condition, liquidity and results of
operations may vary materially from those expressed in our
forward-looking statements. You should carefully consider these
risks before you make an investment decision with respect to our
common stock, along with the following factors that could cause
actual results to vary from our forward-looking statements:
|
|
|
|
|
the factors referenced in this prospectus, including those set
forth under the section captioned Risk Factors;
|
|
|
|
general volatility of the capital markets and the market price
of our common stock;
|
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|
|
changes in our business strategy;
|
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|
availability, terms and deployment of capital;
|
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|
availability of qualified personnel;
|
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|
changes in our industry, interest rates or the general
economy; and
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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 agricultural 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 evaluating potential real estate investments.
28
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:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Percentage
|
|
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 net proceeds to us to be used to acquire properties
and for general corporate and working capital purposes(2)
|
|
$
|
157,032,500
|
|
|
|
92.24
|
%
|
|
|
|
(2) |
|
Estimated allocation of estimated net proceeds: |
|
|
|
|
|
|
|
|
|
Acquisition of farms
|
|
$
|
141,329,250
|
|
|
|
90.0
|
%
|
Acquisition of farming-related properties
|
|
$
|
7,851,625
|
|
|
|
5.0
|
%
|
Mortgage loans
|
|
$
|
3,140,650
|
|
|
|
2.0
|
%
|
Payments to Adviser
|
|
$
|
3,500,000
|
|
|
|
2.2
|
%
|
General corporate and working capital
|
|
$
|
1,210,975
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
Total Estimated Net Proceeds
|
|
$
|
157,032,500
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
DISTRIBUTION
POLICY
We intend to cause our operating partnership to make regular
monthly distributions to holders of operating partnership units,
which will initially be only us, and we intend to use our share
of cash distributions received from our operating partnership to
make regular monthly distributions to the holders of our common
stock. We intend to pay an initial distribution with respect to
the period commencing on the completion of this offering and
ending on
[ ],
2010, based on a distribution of $0.06 per share for a full
month. On an annualized basis, this would be $0.72 per share, or
an annual distribution rate of approximately 4.8% based on an
assumed initial public offering price of $15.00 per share, the
midpoint of the range indicated on the cover of this prospectus.
We have not yet determined whether we will elect to be treated
as a REIT for tax purposes beginning with the taxable year
ending December 31, 2011 or the taxable year ending
December 31, 2012. Prior to the end of the taxable year for
which we first elect to be taxed as a REIT, we will be required
to distribute any remaining undistributed non-REIT earnings and
profits accumulated in prior years. In establishing our monthly
distribution rate, we have sought to set these distributions at
a level that will allow us to distribute these accumulated
non-REIT earnings and profits by December 31, 2011.
However, in addition to our current accumulated non-REIT
earnings and profits, we expect to recognize an additional
$4.6 million of non-REIT earnings and profits associated
with a deferred intercompany gain resulting from land transfers,
described elsewhere in this prospectus, immediately prior to our
REIT election. We also expect to have additional non-REIT
earnings and profits from our operations during the remainder of
2010 and, unless we elect to be treated as a REIT in 2011,
during 2011, which earnings and profits must also be distributed
prior to the completion of the first taxable year for which we
elect REIT status. As a result, it is possible that
distributions at our currently proposed rate may not be
sufficient to eliminate our non-REIT earnings and profits by
December 31, 2011, in which case we would likely not elect
to be taxed as a REIT until the taxable
29
year ending December 31, 2012. In the event that the
distributions we make at the currently proposed rate are
insufficient to result in the distribution of our accumulated
earnings and profits prior to the end of 2012, we would make a
special distribution of such undistributed non-REIT earnings and
profits prior to the end of that year.
We have estimated our cash available for distribution to our
common stockholders for the 12 months ending June 30,
2011 based on adjustments to our cash provided by operating
activities for the 12 months ended June 30, 2010, as
described below. We estimate that, without giving effect to cash
flows from our expected acquisition of new properties with the
proceeds of this offering, our existing operating activities
will not generate sufficient cash to fund distributions to
stockholders. Our estimates are based upon our historical
operating results, as adjusted to reflect the entry into the
Amended Advisory Agreement and do not take into account any
additional investments and their associated cash flows, or the
increase in the base management fee as a result of the use of
proceeds from this offering to acquire properties, unanticipated
expenditures that we may have to make or any additional debt we
may incur. In the event that our expected initial annual
distributions of $0.72 per share exceed our cash available for
distribution, we expect that our Adviser will reduce its
management fee to help us meet the dividend payout of $0.72 per
year. We may also be required to use existing cash, or possibly
borrowings under our revolving credit facility, to fund such
shortfall.
Distributions to our stockholders will generally be subject to
taxation 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. As described elsewhere
in this prospectus, as of June 30, 2010, we estimate that
our non-REIT accumulated earnings and profits were approximately
$4.8 million. This amount does not include an additional
$4.6 million of non-REIT earnings and profits associated
with a deferred intercompany gain resulting from land transfers
that we will recognize immediately prior to our REIT election.
As a result, we anticipate that, at least initially, our
distributions will not exceed our then current and accumulated
earnings and profits. However, it is possible that, in the
future, our distributions may exceed our then current and
accumulated earnings and profits, which would result in a
portion of our future distributions constituting a return of
capital for federal income tax purposes. 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. However, the percentage of our
stockholder distributions that exceeds our current and
accumulated earnings and profits, if any, may vary substantially
from year to year. We will furnish to 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. For a discussion of the tax
treatment of distributions to holders of our common stock, see
Federal Income Tax Consequences of Our Status as a
REIT.
We intend to maintain our initial distribution rate for the
12-month
period following completion of this offering unless actual
results of operations, economic conditions or other factors
differ materially from the assumptions used in our estimates.
Distributions made by us will be authorized by our Board of
Directors out of funds legally available and, therefore, will be
dependent upon a number of factors, including restrictions under
applicable law. There can be no assurance that we will be able
to achieve and maintain distributions at this level during 2011,
2012 or in future years, and the actual amount, timing and
frequency of our distributions will be at the discretion of, and
authorized by, our Board of Directors and will depend on our
actual results of operations and a number of other factors,
including:
|
|
|
|
|
the timing of our investment of the net proceeds of this
offering;
|
|
|
|
|
|
the rent received from our lessees;
|
|
|
|
|
|
our debt service requirements;
|
|
|
|
|
|
capital expenditure requirements for our properties;
|
|
|
|
|
|
unforeseen expenditures at our properties;
|
|
|
|
|
|
our ability to renew existing leases and new properties at
anticipated rates;
|
|
|
|
|
|
our taxable income and the taxable income, if any, of our TRS;
|
30
|
|
|
|
|
the annual distribution requirement under the REIT provisions of
the Code for taxable years for which we elect to be taxed as a
REIT;
|
|
|
|
|
|
our operating expenses;
|
|
|
|
|
|
the percentage of all operating partnership units outstanding
that we hold;
|
|
|
|
|
|
relevant provisions of Delaware law; and
|
|
|
|
|
|
other factors that our board of directors may deem relevant.
|
We may retain earnings, if any, of our TRS, and such amount of
cash would not be available to satisfy the 90% distribution
requirement. If our cash available for distribution to our
stockholders is less than 90% of our REIT taxable income, we
could be required to sell assets or borrow funds to make
distributions. Dividend distributions to our stockholders will
generally be taxable to our stockholders as ordinary income to
the extent of our current or accumulated earnings and profits.
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.
The following table describes our cash provided by operating
activities for the year ended December 31, 2009, and the
adjustments we have made thereto in order to estimate our cash
available for distribution for the twelve months ending
June 30, 2011:
|
|
|
|
|
Cash provided by operating activities for the year ended
December 31, 2009
|
|
$
|
781,996
|
|
Less: cash provided by operating activities for the six months
ended June 30, 2009
|
|
|
384,678
|
|
Add: cash provided by operating activities for the six months
ended June 30, 2010
|
|
|
620,834
|
|
|
|
|
|
|
Cash provided by operating activities for the twelve months
ended June 30, 2010
|
|
$
|
1,018,152
|
|
|
|
|
|
|
Less: estimated base management fee under amended and restated
advisory agreement for the period from completion of this
offering through June 30, 2011(1)
|
|
|
(110,166
|
)
|
Less: estimated management fee under existing advisory agreement
for the period from July 1, 2010 through completion of this
offering
|
|
|
(72,210
|
)
|
|
|
|
|
|
Add: management fee under existing advisory agreement for the
twelve months ended June 30, 2010
|
|
|
80,198
|
|
Estimated cash flow from operating activities for the
12 months ending June 30, 2011(2)
|
|
$
|
915,974
|
|
|
|
|
|
|
Estimated cash used in financing activities
scheduled mortgage loan principal payments(2)
|
|
|
(444,213
|
)
|
|
|
|
|
|
Estimated cash flow available for distribution for the
12 months ending June 30, 2011(2)
|
|
$
|
471,761
|
|
|
|
|
|
|
Cash and cash equivalents as of June 30, 2010
|
|
$
|
2,215,794
|
|
|
|
|
|
|
Estimated cash available for distribution for the
12 months ending June 30, 2011(2)
|
|
$
|
2,687,555
|
|
|
|
|
|
|
Estimated initial annual distribution to stockholders(3)
|
|
$
|
10,152,000
|
|
|
|
|
|
|
Estimated initial annual distribution per share(4)
|
|
$
|
0.72
|
|
Payout ratio based on estimated cash available for
distribution(5)
|
|
|
378
|
%
|
|
|
|
(1) |
|
Does not reflect increases in the base management fee resulting
from our application of any of the proceeds of this offering to
the purchase of properties, as we have not yet entered into
binding agreements to purchase these properties and, therefore,
the timing and amount of such purchases is uncertain. Under the
Amended Advisory Agreement, the annual base management fee will
equal 2.0% of our total stockholders equity, less the
recorded value of any preferred stock and any uninvested cash
proceeds of this offering. |
|
|
|
(2) |
|
Does not reflect any operating cash flows from new properties
that will be acquired with the proceeds of this offering as we
have not yet entered into binding agreements to purchase any
such properties. Also does not |
31
|
|
|
|
|
reflect cash to be used for repayment of any mortgage loans
that we may incur in connection with financing the acquisition
of such properties. |
|
|
|
(3) |
|
We expect that our initial estimated annual distributions will
exceed cash available for distributions. As a result, we intend
to fund the difference out of proceeds from this offering and,
potentially, borrowings under our credit facility. To the extent
that these distributions exceed our non-REIT earnings and
profits, these excess distributions would constitute return of
capital. |
|
|
|
(4) |
|
Based on an estimated 14,100,000 shares of common stock
outstanding after this offering. |
|
|
|
(5) |
|
Calculated as estimated initial annual distribution to
stockholders divided by estimated cash available for
distribution for the 12 months ending June 30, 2011.
As described in footnotes 1 and 2 above, our estimates of cash
available for distribution do not reflect our expected
application of the net proceeds of this offering, the increased
revenues resulting from such investments or the related
increased expense under the Amended Advisory Agreement. |
32
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 our amended and restated certificate of
incorporation; and
|
|
|
|
|
|
the sale by us of shares of common stock in this offering at an
assumed initial public offering price of $15.00 per share, the
midpoint of the range listed on the cover page of this
prospectus, and our receipt of the estimated net proceeds from
that sale after deducting the estimated underwriting discounts
and estimated offering expenses payable by us, assuming no
exercise of the underwriters over-allotment option).
|
This table should be read in conjunction with Use of
Proceeds, Selected Consolidated Financial
Data, Description of Capital Stock,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, our consolidated
financial statements and the notes thereto included elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
As of 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,
2,750,000 shares authorized, issued and outstanding,
actual; shares
authorized, 14,100,000 shares issued and outstanding, as
adjusted
|
|
|
27,500
|
|
|
|
141,500
|
|
Preferred stock, $0.01 par value per share, no shares
authorized, issued or outstanding,
actual; shares
authorized, no shares issued or outstanding, as adjusted
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
156,918,500
|
|
Retained earnings
|
|
|
8,234,923
|
|
|
|
8,234,923
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
8,262,423
|
|
|
|
165,294,923
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
19,736,799
|
|
|
$
|
176,769,299
|
|
|
|
|
|
|
|
|
|
|
33
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
$7.8 million, or $2.84 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, our net tangible book value as of June 30, 2010
would have been $164.8 million, or $11.69 per share. This
represents an immediate increase in net tangible book value of
$8.85 per share to existing stockholders and an immediate
dilution of $3.31 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
|
|
Net tangible book value per share at June 30, 2010
|
|
$
|
2.84
|
|
|
|
|
|
Pro forma increase per share attributable to new investors
|
|
|
8.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma 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 pro forma net tangible book value by
$10.6 million, the pro forma 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
|
|
|
|
19.5
|
%
|
|
$
|
100
|
|
|
|
0
|
%
|
|
$
|
0.00
|
|
New investors
|
|
|
11,350,000
|
|
|
|
80.5
|
|
|
|
170,250,000
|
|
|
|
100
|
|
|
$
|
15.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
14,100,000
|
|
|
|
100
|
%
|
|
$
|
170,250,100
|
|
|
|
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
34
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 sale of shares by the
existing stockholder 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
over-allotment option to purchase additional shares in full, the
shares held by the existing stockholder after this offering
would be reduced to 12.6% of the total number of shares of our
common stock outstanding after this offering, and the number of
shares held by new investors would increase to 13,915,000, or
87.4% of the total number of shares of our common stock
outstanding after this offering.
SELECTED
FINANCIAL DATA
You should read the following selected consolidated financial
data together with Managements Discussion and
Analysis of Financial Condition and Results of Operations,
our consolidated financial statements and the related notes
included in this prospectus.
The selected consolidated financial data as of December 31,
2009 and 2008 and for the years ended December 31, 2009,
2008 and 2007 are derived from our revised audited consolidated
financial statements included in this prospectus. The selected
consolidated financial data as of December 31, 2007, 2006
and 2005 and for the years ended December 31, 2006 and 2005
are derived from our revised audited consolidated financial
statements that are not included in this prospectus. The
selected consolidated financial data as of and for the six
months ended June 30, 2010 and 2009 are derived from our
unaudited consolidated financial statements included in this
prospectus. Our results of operations are not necessarily
indicative of results of operations that should be expected in
any future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per weighted average common share
basic & diluted
|
|
$
|
0.10
|
|
|
$
|
0.11
|
|
|
$
|
0.24
|
|
|
$
|
0.28
|
|
|
$
|
0.31
|
|
|
$
|
0.31
|
|
|
$
|
0.26
|
|
Weighted average shares outstanding
basic & diluted
|
|
|
2,750,000
|
|
|
|
2,750,000
|
|
|
|
2,750,000
|
|
|
|
2,750,000
|
|
|
|
2,750,000
|
|
|
|
2,750,000
|
|
|
|
2,750,000
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
Year Ended 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
|
|
|
2,750,000
|
|
|
|
2,750,000
|
|
|
|
2,750,000
|
|
|
|
2,750,000
|
|
|
|
2,750,000
|
|
|
|
2,750,000
|
|
|
|
2,750,000
|
|
|
|
|
(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 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 equal to FFO divided by our 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 operating results. 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 FFO 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
|
|
$
|
432,237
|
|
|
$
|
460,649
|
|
|
$
|
968,608
|
|
|
$
|
1,075,798
|
|
|
$
|
1,173,048
|
|
|
$
|
1,143,274
|
|
|
$
|
972,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
basic & diluted
|
|
|
2,750,000
|
|
|
|
2,750,000
|
|
|
|
2,750,000
|
|
|
|
2,750,000
|
|
|
|
2,750,000
|
|
|
|
2,750,000
|
|
|
|
2,750,000
|
|
Basic & Diluted net income per weighted average common
share
|
|
$
|
0.10
|
|
|
$
|
0.11
|
|
|
$
|
0.24
|
|
|
$
|
0.28
|
|
|
$
|
0.31
|
|
|
$
|
0.31
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & Diluted FFO per weighted average common share
|
|
$
|
0.16
|
|
|
$
|
0.17
|
|
|
$
|
0.35
|
|
|
$
|
0.39
|
|
|
$
|
0.43
|
|
|
$
|
0.42
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Managements Discussion and Analysis of
Financial Condition and Results of Operations contains
forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those
anticipated in these forward looking statements as a result of
certain factors, including those set forth under the heading
Risk Factors and elsewhere in this prospectus. The
following discussions should be read in conjunction with our
consolidated financial statements and related notes thereto
included elsewhere in this prospectus.
Overview
We were incorporated 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 reoriented our operations and began to implement a
strategy of leasing agricultural land for farming. We own two
large farms in California that we lease to Dole Fresh
Vegetables, Inc., or Dole Fresh, under leases expiring in 2010
and 2013, 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 a small portion of the net proceeds
of this offering to make mortgage loans on farms and
farm-related properties. We expect to earn rental and interest
income from our investments.
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 or
December 31, 2012, 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.
Any taxable REIT subsidiary through which we may operate will be
required to pay federal and state income taxes on its taxable
income. We will also be subject to regular corporate income tax
on our taxable income for the year ending December 31, 2010
and potentially for the year ending December 31, 2011.
Leases
We anticipate that most of our agricultural leases will have
initial terms of one to two years and will be payable annually
at a fixed rate, with one-half due at the beginning of the year
and the other half due later in the year. Leases will require
the tenant to pay taxes, insurance, water costs and other
operating costs. Some leases may have longer terms, such as for
five or ten years, but would contain provisions, often referred
to as escalation clauses, that provide for annual increases in
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 addition, some long-term leases may
require a regular survey of comparable land rents, with an
adjustment to reflect the current rents. We do not expect to
enter into leases that include variable rent based on the
success of the harvest each year.
37
Mortgages
We expect that we will use approximately 2% of the net proceeds
of this offering to make loans to farmers for the purchase of
farmland and properties related to farming. These loans would be
secured by mortgages on the property. We expect that the typical
mortgage we offer will be for a fixed interest rate, over a term
of five years, and will 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. When we
make mortgage loans, we intend to provide borrowers with a
conditional put option giving them the right to sell the
property to us at a predetermined fair market value.
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, or Amended Advisory Agreement,
with our Adviser and an amended and restated administration
agreement, or Amended 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. In the event 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, the total expenses that we incurred were
$275,187, $238,201 and $151,525, respectively. All of these
charges were 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, and we presently do not expect
that our Adviser will incur any such amounts on our behalf in
the future.
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 these 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. Accordingly, we did not make any reimbursements to
our Adviser for these amounts. The actual amount of these fees
that we incur in the future will depend largely upon the
aggregate costs of the properties we acquire, the aggregate
amount of mortgage loans we make, and the extent to which we are
able to shift the burden of such fees to our tenants and
borrowers. Accordingly, the amount of these fees that we will
pay in the future is not determinable at this time. We do not
presently expect that our Adviser will incur any of these fees
on our behalf.
Under our existing Advisory Agreement, we were required to
reimburse our Adviser for our pro rata share of our
Advisers payroll and benefits expenses on an
employee-by-employee
basis, based on the percentage of each employees time
devoted to our matters. Until January 1, 2010, this
obligation also extended to administrative services provided to
us by our Administrator, which until January 1, 2010 was a
wholly owned subsidiary of our Adviser. During the years ended
December 31, 2009, 2008, and 2007, these expenses were
$19,995, $13,228, and $22,529, respectively.
Under our existing Advisory Agreement, we are also required to
reimburse our Adviser for our pro rata portion of all other
expenses of our Adviser not reimbursed under the arrangements
described above, which we refer to as overhead expenses, equal
to the total overhead expenses of our Adviser multiplied by the
ratio of hours worked by our Advisers (and until
January 1, 2010, our Administrators) employees on our
projects to the total hours worked by our Advisers (and
until January 1, 2010, our Administrators) employees.
However, we are only required to
38
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 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 $5,293, $4,315, and
$7,699, respectively, of overhead expenses.
Since January 1, 2010, we have been required to reimburse
our Administrator for our pro rata portion of its payroll and
benefits expenses on an
employee-by-employee
basis, based on the percentage of each employees time
devoted to our matters. We are also required to reimburse our
Administrator for our pro rata portion of its overhead expenses,
equal to the total overhead expenses of our Administrator,
multiplied by the ratio of hours worked by our
Administrators employees on our projects to the total
hours worked by our Administrators employees.
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 and all fees charged by
third parties that are directly related to our business.
Although we expect to incur these expenses directly, 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 that we
may issue and any uninvested cash proceeds from this offering,
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 or losses, less any dividends paid on our
preferred stock, but FFO will not include any unrealized capital
gains or losses. The incentive fee will reward our Adviser if
our FFO for a particular calendar quarter, before giving effect
to any incentive fee, exceeds a hurdle rate of 1.75%, or 7%
annualized, of our 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 for the quarter. Our Adviser will also receive an incentive
fee of 20% of the amount of our pre-incentive fee FFO that
exceeds 2.1875% for the quarter.
Under the Amended Administration Agreement, we will pay
separately for our allocable portion of the Administrators
overhead expenses in performing its obligations, including rent
and our allocable portion of the salaries and benefits expenses
of our chief financial officer, chief compliance officer,
treasurer, internal counsel, investor relations officer and
their respective staffs.
Critical
Accounting Policies
The preparation of our financial statements in accordance with
generally accepted accounting principles in the United States of
America, or GAAP, requires management to make judgments that are
subjective in nature in order to make certain estimates and
assumptions. Management relies on its experience, collects
historical data and current market data, and analyzes this
information in order to arrive at what it believes to be
reasonable estimates. Under different conditions or assumptions,
materially different amounts could be reported related to the
accounting policies described below. In addition, application of
these accounting policies involves the exercise of judgment on
the use of assumptions as to future uncertainties and, as a
result, actual results could materially differ from these
estimates. A summary of all of our significant accounting
policies is provided in Note 1 to our consolidated
financial statements included elsewhere in this prospectus.
Below is a summary of accounting polices involving estimates and
assumptions that require complex, subjective or significant
judgments in their application and that materially affect our
results of operations.
39
Asset
Impairment Evaluation
We will periodically review the carrying value of each property
to determine if circumstances that indicate impairment in the
carrying value of an investment exist or that depreciation
periods should be modified. In determining if impairment exists,
management will consider such factors as our tenants
payment history, the financial condition of our tenants,
including calculating the current leverage ratios of tenants,
the likelihood of lease renewal, business conditions in the
industry in which our tenants operate and whether the carrying
value of our real estate has decreased. If any of the factors
above support the possibility of impairment, we will prepare a
projection of the undiscounted future cash flows, without
interest charges, of the specific property and determine if the
investment in such property is recoverable. In preparing the
projection of undiscounted future cash flows, we will estimate
the hold periods of the properties and cap rates using
information we obtain from market comparability studies and
other comparable sources. If impairment is indicated, the
carrying value of the property will be written down to its
estimated fair value based on our best estimate of the
propertys discounted future cash flows. Any material
changes to the estimates and assumptions used in this analysis
could have a significant impact on our results of operations, as
the changes would impact our determination of whether impairment
is deemed to have occurred and the amount of impairment loss we
would recognize.
Investments
in Real Estate
We will record investments in real estate at cost and we will
capitalize improvements and replacements when they extend the
useful life or improve the efficiency of the asset. In a triple
net lease, the tenant generally provides repairs and
maintenance. However, to the extent that we undertake repairs or
maintenance, we will expense these costs of repairs and
maintenance as incurred. We will compute depreciation using the
straight-line method over 39 years or the estimated useful
life, whichever is shorter, 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, which is not depreciated, we expect that the impact of
repair and maintenance expenses and depreciation expense 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 a minimal
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 the contractual
amounts to be paid pursuant to the in-place leases
and managements estimate of fair market lease rates
for the corresponding in-place leases, measured over a period
equal to the remaining non-cancelable term of the lease. We will
amortize the capitalized above-market lease values as a
reduction of rental income over the remaining non-cancelable
terms of the respective leases. We will amortize the capitalized
below-market lease values (presented in the accompanying balance
sheet as value of assumed lease obligations) as an increase to
rental income over the initial term and any fixed-rate renewal
periods in the respective leases. Since our mortgage strategy
will to a large degree involve sale-leaseback transactions with
newly originated leases at market rates, we do not expect that
the above-market and below-market in-place lease values will be
significant for many of the transactions we will ultimately
enter into.
40
We will measure the aggregate value of other intangible assets
acquired based on the difference between the property valued
with existing in-place leases adjusted to market rental rates
and the property valued as if vacant. Managements
estimates of value are expected to be made using methods similar
to those used by independent appraisers, such as discounted cash
flow analysis. Factors to be considered by management in its
analysis will include an estimate of carrying costs during
hypothetical expected
lease-up
periods considering current market conditions, and costs to
execute similar leases. We will also consider information
obtained about each property as a result of our pre-acquisition
due diligence, marketing and leasing activities in estimating
the fair value of the tangible and intangible assets acquired.
In estimating carrying costs, management will also include real
estate taxes, insurance and other operating expenses and
estimates of lost rentals at market rates during the expected
lease-up
periods, which we expect to primarily range from six to eighteen
months, depending on specific local market conditions.
Management will also estimate costs to execute similar leases
including leasing commissions, legal and other related expenses
to the extent that such costs are not already incurred in
connection with a new lease origination as part of the
transaction.
The total amount of other intangible assets acquired will be
further allocated to in-place lease values and customer
relationship intangible values based on managements
evaluation of the specific characteristics of each tenants
lease and our overall relationship with that respective tenant.
Characteristics to be considered by management in allocating
these values include the nature and extent of our existing
business relationships with the tenant, growth prospects for
developing new business with the tenant, the tenants
credit quality and expectations of lease renewals, including
those existing under the terms of the lease agreement, among
other factors.
We will amortize the value of in-place leases to expense over
the initial term of the respective leases, which we primarily
expect to range from one to two 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 beginning
with the year for which we first elect to qualify as a REIT,
which is currently contemplated to be the year ending
December 31, 2011 or December 31, 2012. 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
our REIT election. Many of the requirements for REIT
qualification, however, are highly technical and complex. If we
were to fail to meet these requirements, we would be subject to
federal income tax, which could have a material adverse impact
on our results of operations and amounts available for
distributions to our stockholders. Our taxable REIT subsidiary
will pay taxes on its income, if any.
In connection with intercompany transfers of the Watsonville and
Oxnard farms in 2002 and of the Watsonville farm again in 2004,
we created taxable gains for both federal and state purposes.
These taxable gains are generally based on the excess of the
fair market value of the property over the tax basis of the
property. These intercompany taxable gains are indefinitely
deferred until a triggering event occurs, generally when the
transferee or the transferor leave the consolidated group as
defined by the relevant tax law or the property is sold to a
third party. While there are taxable gains to the transferring
entity, the receiving entitys tax basis is the fair market
value at the date of transfer. Thus a deferred tax liability is
created related to the taxable gain to the transferring entity
but an offsetting deferred tax asset is created representing the
basis difference created by the new tax basis of the receiving
entity. As a result, the deferred tax assets and liabilities
offset one another and there is no net impact to us. In
accordance with ASC 740 and ASC 810, no tax impact is
recognized in the consolidated financial statements as a result
of intra-entity transfers of assets.
As a result of the transfers above, the related deferred tax
assets and liabilities total approximately $2.3 million as
of December 31, 2009. With respect to the federal amount of
$2.1 million, this amount will become payable when we make
a REIT election and as a REIT, we will no longer be able to
obtain the benefit of the related deferred tax
41
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. The REIT election does not have the same impact on the
state tax amount of approximately $200,000, and 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 to Gladstone Land. 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.
Income tax expense should have been reduced for the years ended
December 31, 2009, 2008 and 2007 by $20,383, $15,985 and
$29,072, respectively. The net impact to the provision for
income taxes, net income and opening equity is less than 5% for
each year presented as reflected in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Provision for income taxes (as originally reported)
|
|
$
|
444,503
|
|
|
$
|
492,293
|
|
|
$
|
580,018
|
|
Adjusted amount
|
|
|
20,383
|
|
|
|
15,985
|
|
|
|
29,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes (as revised)
|
|
|
424,120
|
|
|
|
476,308
|
|
|
|
550,946
|
|
Adjustment as percentage of provision for income taxes
|
|
|
5
|
%
|
|
|
3
|
%
|
|
|
5
|
%
|
Net income (as originally reported)
|
|
$
|
634,378
|
|
|
$
|
744,268
|
|
|
$
|
828,312
|
|
Adjusted amount
|
|
|
20,383
|
|
|
|
15,985
|
|
|
|
29,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (as revised)
|
|
|
654,761
|
|
|
|
760,253
|
|
|
|
857,384
|
|
Adjustment as percentage of net income
|
|
|
3
|
%
|
|
|
2
|
%
|
|
|
4
|
%
|
In addition, an adjustment for $36,800 was made to opening
balance of our stockholders equity as of December 31,
2006. The adjustment as a percentage of this opening balance was
less than 2% of the total value.
Although the adjustments relate to tax provisions when we
operated as a taxable entity, management put new controls in
place subsequent to the discovery of the control deficiency
discussed above. On a going forward basis, management will
perform a detailed review of all entity transactions to
determine the tax impact, if any.
The comparative discussion of our results of operations and cash
flows contained in this Managements Discussion and
Analysis reflects the impact of the revisions described above.
42
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 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 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
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
Rental income remained flat for six months ended June 30,
2010, as compared to the six months ended June 30, 2009.
There were no changes to the terms of the two operating leases
during the year, and thus our revenues did not change.
Operating
Expenses
Depreciation and amortization expenses remained flat for the six
months ended June 30, 2010, as compared to the six months
ended June 30, 2009. There were no additions or disposals
of fixed assets during the year, and thus depreciation expense
did not change.
The management advisory fee increased for the six months ended
June 30, 2010, as compared to the six months ended
June 30, 2009, primarily as a result of the increased
number of hours our Advisers employees spent on our
matters related to the preparation of the registration statement
related to this offering. The management advisory fee consists
of the reimbursement of expenses, including direct allocation of
employee salaries and benefits, as well as general overhead
expense, to our Adviser in accordance with the terms of the
advisory agreement.
Professional fees, consisting primarily of legal and accounting
fees, decreased during the six months ended June 30, 2010,
as compared to the six months ended June 30, 2009,
primarily as a result of the increased amount of legal fees
incurred during the quarter ended March 31, 2009 from
discussions with the State of California regarding water
regulations and clean up costs from environmental impact
studies. Insurance expense consists of the premiums paid for
directors and officers insurance coupled with liability
insurance premiums. Insurance expense increased for the six
months ended June 30, 2010, as compared to the six months
ended June 30, 2009, because of an increase in the premiums
paid for our commercial excess liability policy.
General and administrative expense increased for the six months
ended June 30, 2010, as compared to the six months ended
June 30, 2009, due to an increase in dues and subscriptions.
43
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.
Comparison
of Years Ended December 31, 2009 and 2008
A comparison of our operating results for the years ended
December 31, 2009 and 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 employee loans
|
|
|
|
|
|
|
140,423
|
|
|
|
(140,423
|
)
|
|
|
(100
|
)%
|
Other expense
|
|
|
|
|
|
|
(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.
44
Operating
Expenses
Depreciation and amortization expenses remained relatively flat
during the year ended December 31, 2009, as compared to the
year ended December 31, 2008. There were no additions or
disposals of fixed assets during 2009, and thus depreciation
expense did not significantly change.
The management advisory fee for the year ended December 31,
2009 increased, as compared to the year ended December 31,
2008, primarily as a result of the increased number of hours our
Advisers employees spent on our matters related to the
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 amount of legal fees incurred in the
first quarter of 2009 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
expenses incurred during 2008 that were 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.
45
Comparison
of Years Ended December 31, 2008 and 2007
A comparison of our operating results for the years ended
December 31, 2008 and 2007 is below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
2,418,111
|
|
|
$
|
2,418,111
|
|
|
$
|
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
2,418,111
|
|
|
|
2,418,111
|
|
|
|
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
315,545
|
|
|
|
315,664
|
|
|
|
(119
|
)
|
|
|
0
|
%
|
Management advisory fee
|
|
|
17,543
|
|
|
|
30,228
|
|
|
|
(12,685
|
)
|
|
|
(42
|
)%
|
Professional fees
|
|
|
189,341
|
|
|
|
132,698
|
|
|
|
56,643
|
|
|
|
43
|
%
|
Taxes and licenses
|
|
|
19,988
|
|
|
|
3,574
|
|
|
|
16,414
|
|
|
|
459
|
%
|
Insurance
|
|
|
14,723
|
|
|
|
11,897
|
|
|
|
2,826
|
|
|
|
24
|
%
|
General and administrative
|
|
|
14,149
|
|
|
|
3,356
|
|
|
|
10,793
|
|
|
|
322
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
571,289
|
|
|
|
497,417
|
|
|
|
73,872
|
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from temporary investments
|
|
|
43,663
|
|
|
|
99,881
|
|
|
|
(56,218
|
)
|
|
|
(56
|
)%
|
Interest income from note receivable
|
|
|
|
|
|
|
1,203
|
|
|
|
(1,203
|
)
|
|
|
(100
|
)%
|
Interest income from employee loans
|
|
|
140,423
|
|
|
|
188,478
|
|
|
|
(48,055
|
)
|
|
|
(25
|
)%
|
Other (expense) income
|
|
|
(870
|
)
|
|
|
10,097
|
|
|
|
(10,967
|
)
|
|
|
(109
|
)%
|
Interest expense
|
|
|
(793,477
|
)
|
|
|
(812,023
|
)
|
|
|
18,546
|
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(610,261
|
)
|
|
|
(512,364
|
)
|
|
|
(97,897
|
)
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
1,236,561
|
|
|
|
1,408,330
|
|
|
|
(171,769
|
)
|
|
|
(12
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
476,308
|
|
|
|
550,946
|
|
|
|
(74,638
|
)
|
|
|
(14
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
760,253
|
|
|
$
|
857,384
|
|
|
$
|
(97,131
|
)
|
|
|
(11
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
Rental income remained flat for the year ended December 31,
2008, as compared to the year ended December 31, 2007.
There were no changes to the terms of the two operating leases
during 2008, and thus our revenues did not change.
Operating
Expenses
Depreciation and amortization expenses remained flat during the
year ended December 31, 2008, as compared to the year ended
December 31, 2007. There were no additions or disposals of
fixed assets during 2008, and thus depreciation expense did not
significantly change.
The management advisory fee for the year ended December 31,
2008 decreased, as compared to the year ended December 31,
2007, primarily as a result of the decreased number of hours our
Advisers employees spent on our matters, coupled with a
decrease in overhead expenses incurred by our Adviser for our
benefit. There were more employee hours spent on the audit
during 2007. The management advisory fee consists of the
reimbursement of expenses, including direct allocation of
employee salaries and benefits, as well as general overhead
expense, to our Adviser in accordance with the terms of the
advisory agreement.
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.
46
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 expenses for a well located on the Watsonville
property 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.
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
47
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 tenant. 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, each
of 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 dividends paid in 2008 and 2009
were made from accumulated earnings and profits to the existing
stockholder in anticipation of conversion to a REIT. In order to
qualify as a REIT, we may not have, at the end of any taxable
year for which we initially qualify as a REIT and taxable years
thereafter, any undistributed earnings and profits accumulated
in any non-REIT taxable year. As of June 30, 2010, we
estimate that our non-REIT accumulated earnings and profits were
approximately $4.8 million. This amount does not include an
additional $4.6 million of non-REIT earnings and profits
associated with a deferred intercompany gain resulting from land
transfers, described elsewhere in this prospectus, that we will
recognize immediately prior to our REIT election. We also expect
to recognize additional non-REIT earnings and profits from
future operations prior to our REIT election.
The following table presents a summary of our significant
contractual obligations as of December 31, 2009:
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|
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|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
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|
|
|
|
|
Less than 1
|
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|
|
|
|
|
|
|
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
|
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|
|
|
|
|
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|
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|
|
|
|
|
|
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|
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|
Operating Lease Obligations
|
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|
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|
Total
|
|
$
|
17,550,870
|
|
|
$
|
1,120,418
|
|
|
$
|
2,240,837
|
|
|
$
|
2,240,836
|
|
|
$
|
11,948,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
(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 and the mortgage note matures in February 2021. |
|
|
|
(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. |
Oxnard
Note
In February 2006, we entered into a 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 the debt, requiring us to immediately
repay all outstanding principal. If we are unable to make any
required payments, our lender could foreclose on assets that we
have pledged as collateral. 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 Amended Advisory
Agreement that we will enter into upon completion of this
offering, we will be required to reimburse our Adviser for any
expenses incurred by our Adviser for our direct benefit, such as
offering, legal, accounting, tax preparation, consulting and
related fees. We expect 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 be required to reimburse our Adviser for
any fees charged by third parties that our Adviser incurs that
are directly related to our business, which could include real
estate brokerage fees, mortgage placement fees,
lease-up
fees and transaction structuring fees, which would be passed
through to us at the cost to our Adviser. The actual amount of
such fees that we incur 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. We
presently do not expect that our Adviser will incur any of these
fees on our behalf.
Under the Amended 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 any uninvested cash proceeds from this
offering, and an incentive fee based on funds from operations,
or FFO. Based on the
49
expected net proceeds of this offering, we estimate that this
base management fee will be approximately $3.3 million per
year once the proceeds of this offering have been substantially
fully invested in properties and mortgage loans. 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 Amended Advisory
Agreement.
Under the Amended Administration Agreement to be in effect upon
the completion of this offering, we will pay separately for our
allocable portion of the Administrators overhead expenses
in performing its obligations, including rent, and our allocable
portion of the salaries and benefits expenses of its employees,
including, but not limited to, our chief financial officer,
chief compliance officer, treasurer, internal counsel, investor
relations officer and their respective staffs. We estimate that
these expenses will be approximately $340,000 per year after the
first twelve months following the offering.
Distributions
to Stockholders
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 non-REIT earnings
and profits by the end of the taxable year for which we elect to
qualify as a REIT, 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.
Off-Balance
Sheet Arrangements
As of June 30, 2010, we did not have any off-balance sheet
arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation
S-K.
Quantitative
and Qualitative Disclosures about Market Risk
Market risk includes risks that arise from changes in interest
rates, foreign currency exchange rates, commodity prices, equity
prices and other market changes that affect market sensitive
instruments. In pursuing our business 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.
50
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 to lease to farmers. We may elect to sell
properties at such times as, for example, the land may be
developed by others for 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 provide senior secured first lien
mortgages to farmers for the purchase of farmland and properties
related to farming. We expect that any mortgages we make would
be secured by farming properties that have been in operation for
over five years with a history of crop production and profitable
farming operations. We may also acquire properties related to
farming, such as coolers, processing plants, packing buildings
and distribution centers. 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
specific properties to potentially 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 make loans secured by
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 or
December 31, 2012. 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,
which we refer to as a liquidity premium. The liquidity premium
reflects an investors ability to quickly acquire or
dispose 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, or 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, or NCREIF, and the Townsend Group.
However, we cannot guarantee that you will receive a liquidity
premium or any particular annual return if you buy stock in our
company.
Industry
Overview and Our Opportunity
Agricultural real estate 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 owning building
structures susceptible to fires or other natural disasters that
may damage the buildings. Second, we believe that farmland has
historically maintained relatively low vacancy rates when
compared to other types of rental real estate, and that it is
rare for good 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
51
entering into short-term leases, we believe that we will be in
a position to renegotiate increased rental rates when the leases
are renewed, to the extent market rates have increased.
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. 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.
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, which is land suitable for growing
crops, per capita, as illustrated in the chart from 2000 below
from the Food and Agricultural Organization of the United
Nations:
Figure
1
United
States Farmland
The USDAs 2007 Census of Agriculture estimated there were
approximately 2.2 million farms on 922.1 million acres
of land in the United States. Out of this total there were
1.7 million farms dedicated to producing crops. Crop farms
utilized 406.4 million acres of land, with approximately
241 acres per farm. The total estimated annual market value
of crops harvested in the United States according to the
USDAs 2007 Census of Agriculture was $143.7 billion.
Crops can be divided 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
52
produce annually without being replanted. Examples include
citrus, almonds and grapes. We seek to acquire and lease
farmland for the primary purpose of harvesting annual crops,
with less emphasis on permanent crop farms.
The USDAs agricultural projections anticipate continued
increases in domestic farm income, despite the current global
economic slowdown. Figure 2 below illustrates the continued
trend of increasing farm income projected by the USDA from 2008
onward. In very general terms it takes about one acre of land to
feed one person for one year.
Figure
2
According to the USDA, cropland values have increased 112% over
the 10-year period ended December 31, 2008. As an
investment, we believe that U.S. farmland has performed
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. Figure 3 below illustrates
the returns farmland has experienced compared to domestic REITs
and public equity:
Figure
3
Market Index Comparisons Annual Returns
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Annual
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|
Average
|
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|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Return
|
|
|
NCREIF Farmland
Index(a)
|
|
|
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(b)
|
|
|
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
|
%
|
|
|
|
(a)
|
|
The NCREIF Farmland Index is a
composite return measure of investment performance of a large
pool of approximately 450 individual agricultural properties
with an estimated aggregate value of over $2.1 billion. We
believe that the NCREIF Farmland Index is representative of the
overall agricultural market.
|
|
|
|
(b)
|
|
The NAREIT REIT Index is a
composite return measure of all U.S. REITs.
|
According to the 2007 National Resources Inventory, or NRI, a
survey of non-federal lands conducted by the USDAs Natural
Resources Conservation Service, 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. In addition, according to the NRI, the nation has
lost 23,163,500 acres of agricultural land and 13,773,400
acres of 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.
53
Since the inception of the NRI in 1982, every state has lost
prime farmland. States with the biggest loss of acres included
Texas (1,500,000), Ohio (796,000), North Carolina (766,000),
California (616,000) and Georgia (566,000). The following states
lost the greatest percentage of their prime land during the same
reporting period: Arizona (36 percent), Nevada
(34 percent), New Mexico (33 percent), New Jersey
(30 percent) and Massachusetts (24 percent).
Figure 4 below illustrates the increase in domestic cropland
value over the last 10 years:
Figure
4
Farmland in the United States has continued to improve from a
balance sheet perspective. In general, the farming sector is not
heavily leveraged, as illustrated in Figure 5 below, and has
maintained low debt levels during a period in which leverage has
increased 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.
54
Figure
5
Balance Sheet of the U.S. Farming Sector ($ in Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009P
|
|
|
2010F
|
|
|
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
Arable land continues to decrease in the United States at a
significant rate as detailed in the USDAs latest NRI
report dated December 2009. According to the report, cropland,
which is land specifically dedicated to crops as opposed to
livestock or other purposes, makes up 18% of all U.S. farmland,
but has 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, which is
the highest quality 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 and we
will initially focus on farmland investment opportunities in
California. Along the California coast, and in the valleys of
California, there are over 61,000 farms dedicated to growing
crops on over 9,000,000 acres of land according to the
USDAs Census of Agriculture. Total annual market value of
crops harvested in California is $22.9 billion, according
to the USDA, which accounts for 16% of the U.S. national output.
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, we believe some
of this land will eventually be converted into urban or suburban
uses such as homes or businesses. We believe there is an
opportunity for us to acquire agricultural real estate in
California and rent the land to farmers while we wait 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 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 as Californias
population and economy continue to grow.
Prime farmland has decreased and urban/suburban land has
increased over each of the two-year periods between 1984 and
2006 as measured by the California Department of Conservation,
or CDC. Southern California continues to lead the state in urban
development, comprising 47% of developed acres in California
during the last two-year period 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.
55
Figure
6
Data from the USDAs Census of Agriculture, which is taken
every five years, also illustrates the reduction in farms and
agricultural land taking place as more land is converted to
residential and commercial uses as seen in Figure 7:
Figure
7
State of
California
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10-Year
|
|
|
|
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
56
Farmland valuation. 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
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
57
Our current two farms are located in Region 6 on the preceding
map. The 2008 statistics for farms in Region 6 are as follows in
Figure 11:
Figure
11
Row Crop
Farmland Region 6
|
|
|
|
|
|
|
|
|
|
|
2008 Value per
|
|
2008 Rent per
|
County
|
|
Acre
|
|
Acre
|
|
Monterey
|
|
$
|
20,000 - $50,000
|
|
|
$
|
750 - $2,500
|
|
Santa Cruz
|
|
$
|
15,000 - $50,000
|
|
|
$
|
1,500 - $2,300
|
|
San Benito
|
|
$
|
11,000 - $32,000
|
|
|
$
|
500 - $ 900
|
|
San Luis Obispo
|
|
$
|
25,000 - $55,000
|
|
|
$
|
750 - $2,500
|
|
Santa Barbara
|
|
$
|
25,000 - $55,000
|
|
|
$
|
750 - $2,500
|
|
Ventura
|
|
$
|
45,000 - $75,000
|
|
|
$
|
1,800 - $3,200
|
|
Source: American Society of Farm Managers and Rural Appraisers
In addition to farmland on the coast of California, there are
millions of acres of farmland in other parts of California. We
intend to acquire properties and make mortgage loans secured by
that farmland also. Additionally, we intend to seek farmland in
other parts of the U.S. and Canada. The map in Figure 12
below is from the USDA National Agricultural Statistics Service,
or NASS. It shows that the most expensive farmland in the
U.S. is in California, with Iowa and Florida being similar.
Figure
12
Types of Farmland. Much of the farmland in the
areas where we intend to purchase properties is used for farming
annual crops. Annual crops are planted each year. By contrast,
vineyards or tree crops known as permanent crops, such as
lemons, oranges, cherries, peaches and nuts, 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 can be costly to
remove the vines or trees and start over
58
with a different crop. Unlike vineyard and tree crops, which
can generally only be used for a single crop, 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 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
relying on one crop for many years, as is necessary to produce
permanent crops. In addition, we initially intend to purchase
land in California. The cool summer breezes and mild winters in
the central coast of California provide what we believe to be
prime growing conditions for the annual crops that we expect
will be farmed on our properties. Figure 13 below illustrates
the returns on U.S. and California farmland and cropland:
Figure
13
Land
Value, Annualized
Returns(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of 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
|
%
|
(1) Includes appreciation (or depreciation), realized
capital gain (or loss) and income.
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
contains 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 engage soil experts to determine what is in the soil
proposed to be acquired 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, of which only a portion are used for 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, however.
We may also purchase some smaller amount of agricultural real
estate structures that are used by farmers for their crops, such
as processing plants, freezers, coolers, storage sheds, box
barns and other similar structures. We expect to lease our
farmland and other agricultural 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 over the long term. We
may, however, sell property to other farmers, developers seeking
to convert the farmland to urban and suburban uses, or other
real estate investors, at such times as we believe it to be
advantageous to us and our stockholders. The rent and interest
payments we receive from the farmers will be the primary source
of distributions to our stockholders.
In addition, in circumstances where our purchase of such
properties is not feasible, we will provide mortgage loans on
farmland and farm-related properties. 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
59
believe we will also be in a good position to purchase the
farmland should the owner wish to sell the land. We expect that
we will use less than 5% of the net proceeds of this offering to
make mortgage loans.
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 reasons described in this prospectus,
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.
We do not have resources to farm the land we acquire, but we
will rely on our Advisers relationships with prospective
tenants who have these resources and who desire to continue
farming the land over the long term. Finally, we seek to acquire
cropland in multiple locations throughout the State of
California, which we believe will provide diversification of
climate conditions and water sources. The left side of
Figure 14 below summarizes the risk profile we are seeking:
Figure 14
Agricultural real estate 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, if prevailing rental
rates have increased.
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 generated from using that real estate. The
real estate that we intend to purchase will mostly be used to
produce row crops, such as fruits and vegetables. As can be seen
in Figure 15 below, fruits and vegetables have historically
had the highest rate of inflation in price when compared to
other food items in the consumer price index. Fruits and
vegetables have increased in price by more than 300% since 1980
according to the
60
Bureau of Labor Statistics. However, there can be no assurance
that the rate of inflation as depicted in Figure 15 below
will continue.
Figure 15
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 USDA, approximately 86%
of farms in the United States were owned by families as of 2007.
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 proceeds to repay existing
indebtedness, for growth of their farming operations, for
retirement or in other business endeavors. 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.
As an alternative to selling their real estate to us for cash,
we believe that 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 equity of our
company and the potential appreciation in value of our
properties. 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 under U.S. tax laws. 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, to a lesser
extent, mortgages on agricultural real estate. We expect that
the vast majority of our leases 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 ratio of loan amount to value of the real estate to
be greater than for conventional mortgage loans on farms and the
interest rate to be higher than for such conventional loans.
Investments will not be restricted as to geographical areas, but
we expect that many of our properties will be located in
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
61
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 back 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 back to
the tenant or its successor in interest. For a discussion of the
risks associated with leasing property to leveraged tenants, see
Risk Factors Some of our tenants may be unable
to pay rent, which could adversely affect our cash available to
make distributions to our stockholders or otherwise impair the
value of your investment.
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
generally seek to enter into short-term leases with terms of one
or two years, which we believe 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 also 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 it may in fact result in decreasing rents.
We believe that most of the farmland that we are interested in
purchasing can be rented at annual rental rates ranging from 4%
to 6% of the properties market values. However, there can
be no assurance that we will be able to achieve this level of
rental rates. Since rental contracts in the farming business are
customarily short-term agreements, rental rates are renegotiated
regularly. We expect that we will be able to increase the rental
rates on our properties by 2% to 4% each year, although there
can be no guarantee that we will be able to increase rents on
any farmland to this extent or at all.
All of our leases will be approved by our Advisers
investment committee. Our Board of Directors has adopted a
policy that we will not make an investment in any individual
property with a cost in excess of 20% of our total assets at the
time of investment. However, our Board of Directors may amend or
waive this policy at any time or from time to time.
Underwriting
Criteria and Due Diligence Process
Selecting
the Property
We consider selecting the right properties to purchase or
finance as the most important aspect of our business. Buying
good farmland that can be used for many different crops and that
is located in desirable locations is essential to our success.
Our management team and their real estate contacts in California
are very familiar with the properties located in our general
farming areas. We believe that our management team is
experienced in selecting good farmland and will use this
expertise to identify promising properties. The following is a
list of factors 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
|
62
|
|
|
|
|
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, although 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. We will also
consider properties in locations that we believe have the
potential for conversion to more intensive uses, such as
commercial or residential developments, that could allow us to
sell the properties at appreciated values in the future. We
expect to expand our geographic focus 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 over the long term.
Generally, the closer that a property is located to urban
developments, the higher the value of the property. As a result,
properties that are currently located in close proximity to
urban developments 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 potential 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 estimate its value. Our
Advisers due diligence will be primarily focused on
valuing 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:
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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.
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The comparable real estate rental rates for similar properties
in the same area of the prospective property.
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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.
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The assessed value as determined by the local real estate taxing
authority. Under California law, many farms may be protected
from increases in real estate taxes.
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In addition, our Adviser will supplement its valuation estimate
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 and conditions of
the particular lease transaction, the quality of the
tenants credit and the conditions of the credit markets at
the time the lease transaction is negotiated. The actual sale
price of a property, if sold by us, may be greater or less than
its appraised value.
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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):
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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.
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Financial Strength. We will seek to rent to
farmers that have financial resources to invest in planting and
harvesting 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.
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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 high-quality produce.
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While our Adviser will select tenants it believes to be
creditworthy, tenants will not be required to meet any minimum
rating established by an independent credit rating agency. Our
Advisers standards for determining whether a particular
tenant is creditworthy will vary in accordance with a variety of
factors relating to specific prospective tenants. The
creditworthiness of a tenant will be determined on a
tenant-by-tenant and case-by-case basis. Therefore, general
standards for creditworthiness cannot be applied.
Diversification
Our Adviser will attempt to diversify our portfolio to avoid
dependence on any one particular tenant or geographic location.
By diversifying our portfolio, our Adviser intends to reduce the
adverse effect on our portfolio of a single underperforming
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 has distinct weather and
other characteristics. Over time, we expect to expand our
geographic focus 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 activities or that 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 transaction involving
the tenant.
Credit
Enhancement
Our Adviser may also seek to enhance the likelihood of a
tenants lease obligations being satisfied through a
cross-default with other tenant obligations, a letter of credit
or a guaranty of lease obligations from the tenants
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corporate affiliates, if any. We believe that any such credit
enhancement would 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:
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Positive cash flow. Our investment philosophy
places a premium on fundamental credit analysis. 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.
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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.
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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.
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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.
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Mortgage
Loan Terms
We expect that most of the mortgage loans we make will contain
some or all of the following terms and conditions:
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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
well-capitalized.
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Cash flow coverage. We expect most borrowers
to have a farming operation that has and is expected to continue
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.
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Term. In general we expect to make mortgage
loans of three to five years that will be interest-only, with
the entire principal amount due at the end of the term.
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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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Property
Review
We expect to perform a standard review of the property that will
be collateral for the mortgage, including most of the following:
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an independent appraisal;
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land record searches for possible restrictions;
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water samples and availability;
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soil samples;
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environmental analysis;
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zoning analysis;
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crop yields;
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possible future uses of the property; and
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government regulation impacting the property including taxes and
restrictions.
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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, as they each are operating a
farm business and will owe us money either rent or as 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:
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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
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that comply with the applicable terms and conditions set forth
in this prospectus.
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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, such as our existing TRS,
Gladstone Land Advisers, Inc. A TRS 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 Gladstone Land Advisers or any TRS that we
may establish in the future has after-tax income, its Board of
Directors could, but would not be required to, declare a
dividend to be paid to us as its sole stockholder. That dividend
would then become income to us and we would generally pay this
income out to our stockholders as a distribution.
Use of
Leverage
Non-recourse
financing
Our strategy is to use borrowings as a financing mechanism in
amounts that we believe will maximize the return to our
stockholders. We generally expect to enter into borrowing
arrangements directly or indirectly through our Operating
Partnership. We will seek to structure all borrowings as
non-recourse loans. The use of non-recourse financing allows us
to limit our exposure to the amount of equity invested in the
properties pledged as collateral for our borrowings.
Non-recourse financing generally restricts a lenders claim
on the assets of the borrower and, as a result, the lender
generally may look only to the property securing the debt for
satisfaction of the debt. We believe that this financing
strategy, to the extent available, will protect our other
assets. However, we can provide no assurance that non-recourse
financing will be available on terms acceptable to us, or at
all, and there may be circumstances where lenders have recourse
to our other assets. There is no limitation on the amount we may
borrow against any single investment property. Neither our
certificate of incorporation nor our bylaws impose any
limitation on our borrowing, but our Board of Directors has
adopted a policy limiting our aggregate borrowings to two times
our total equity. Our Board of Directors may change this policy
at any time.
We believe that, by operating on a leveraged basis, we will have
more funds available and, therefore, will be able to 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.
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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 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
approximately 1% of the net proceeds of this offering, 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:
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the acquisition of any property;
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the refinancing of the debt upon any property; or
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the leveraging of any previously unleveraged property.
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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, such as 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:
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invest 20% or more of our total assets in a particular property
or mortgage at the time of investment;
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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;
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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;
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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:
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the property was not acquired for the purpose of producing
rental or other operating income;
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no development or construction is in process on the
property; and
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no development or construction on the property is planned in
good faith to commence on the property within one year of
acquisition;
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issue equity securities on a deferred payment basis or other
similar arrangement;
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grant warrants or options to purchase shares of our stock to our
Adviser or its affiliates;
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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;
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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;
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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;
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acquire securities in any company holding investments or
engaging in activities prohibited in the foregoing
clauses; or
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make or invest in mortgage loans that are subordinate to any
mortgage or equity interest of any of our affiliates.
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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:
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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;
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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
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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%.
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Consistent with the provisions of the Sarbanes-Oxley Act of
2002, we will not extend credit, or arrange for the extension of
credit, to any of our directors and officers. Under Delaware
law, a contract or other transaction between us and one of our
directors or officers or any other entity in which one of our
directors or officers is also a director or officer or has a
material financial interest is not void or voidable solely on
the grounds of the common directorship or interest, the fact
that the director or officer was present at the meeting at which
the contract or transaction was approved or the fact that the
directors vote was counted in favor of the contract or
transaction if:
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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;
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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
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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.
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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 in fee simple through our
wholly owned subsidiary San Andreas Road Watsonville, LLC,
for a purchase price of approximately $4.4 million. On
July 24, 2009, Nicholson & Company, an independent
certified general real estate appraiser, concluded that the
as is value of the property was $9.2 million.
We currently lease 237 of these acres to Dole Fresh on a triple
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. Dole Fresh does not have a renewal
option under the lease, but we are currently in discussions with
Dole Fresh to renew its lease. 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,
and these obligations are full recourse obligations. 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 in fee simple through our wholly owned subsidiary
West Gonzales Road Oxnard, LLC, for a purchase price of
approximately $9.9 million. On November 1, 2009,
Moss & Associates, an independent certified general
real estate appraiser, concluded that the as is
value of the property was $44.0 million. We currently lease
500 acres, including a cooler operation, a box barn, and other
buildings, to Dole Fresh on a triple net lease basis under a
lease that expires on December 31, 2013. Dole Fresh does not
have a renewal option under the lease. 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 we will mutually agree
on the adjusted rent payments. 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 lease a small portion of the Oxnard farm to an oil
company that is not a material part of our current or
contemplated operations and from which we receive approximately
$25,000 in annual rental income.
In February 2006, we entered into a note payable with Rabo
AgriFinance under which we borrowed $13.0 million. Our
obligations under the note are secured by the Oxnard farm and
are full recourse obligations. 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.
Figure 16 below sets forth information, as of June 30,
2010, regarding our current portfolio of properties.
Figure
16
Current
Portfolio Information
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Fresh
|
|
|
|
Farm
|
|
|
|
306/237
|
|
|
$
|
405,000
|
|
|
$
|
405,000
|
|
|
|
6 years, None
|
|
|
|
Strawberries
|
|
|
|
None
|
|
Oxnard
|
|
$
|
9,200,000
|
|
|
McGrath Family
|
|
|
Dole Fresh
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Rent Per Acre
The following table summarizes the average annual effective rent
per acre, which is determined by dividing annual rental revenue
by total leased acreage, for our farm located in Watsonville,
California:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Watsonville Farm
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Annual rental revenue
|
|
$
|
405,000
|
|
|
$
|
405,000
|
|
|
$
|
405,000
|
|
|
$
|
405,000
|
|
|
$
|
405,000
|
|
Total leased acreage
|
|
|
237
|
|
|
|
237
|
|
|
|
237
|
|
|
|
237
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual rental per acre
|
|
$
|
1,708
|
|
|
$
|
1,708
|
|
|
$
|
1,708
|
|
|
$
|
1,708
|
|
|
$
|
1,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the average annual effective rent
per acre, which is determined by dividing annual rental revenue
by total leased acreage, for our farm located in Oxnard,
California:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oxnard Farm
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Annual rental revenue
|
|
$
|
1,988,268
|
|
|
$
|
1,988,268
|
|
|
$
|
1,988,268
|
|
|
$
|
1,925,301
|
|
|
$
|
1,743,774
|
|
Total leased acreage
|
|
|
500
|
|
|
|
500
|
|
|
|
500
|
|
|
|
500
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual rental per acre(1)
|
|
$
|
3,977
|
|
|
$
|
3,977
|
|
|
$
|
3,977
|
|
|
$
|
3,851
|
|
|
$
|
3,488
|
|
|
|
|
(1) |
|
As described above, the leased acreage includes a cooler and a
box barn that are leased separately from the farmland. The
stated rent for the farmable land is approximately $3,000 per
acre. |
71
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 our interest. The purchase of each of these
properties is subject to, among other factors, the satisfactory
completion of our due diligence investigations, the negotiation
of definitive acquisition terms and the structure and receipt of
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. If we purchase any of these properties, we expect the
purchase price to be paid from the 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. 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. We have not negotiated a purchase price on these
indentified properties and will not agree on a purchase price
until after the completion of this offering, if at all. The
total proposed purchase price for these properties, consisting
in the aggregate of
approximately acres,
of which
approximately
acres are farmable, is $ .
Clark
Avenue, Santa Maria, California
We have provided a non-binding expression of interest to
purchase a property located on Clark Avenue in Santa Maria,
California from 2617 Clark Avenue, LLC. This property consists
of 304 acres, of which 285 acres are currently farmed.
Espinosa
Road, Salinas, California
We have provided a non-binding expression of interest to
purchase a property located on Espinosa Road in Salinas,
California from Hoskins Road Building LP. This property consists
of 788 acres, of which 657 acres are currently farmed.
72
Channel
Islands Boulevard, Ventura, California
We have provided a non-binding
expression-of-interest
to purchase a property located on Channel Islands Boulevard in
Ventura, California from Channel Island Associates. This
property consists of 83 acres, all of which are currently
farmed.
Beach
Road, Santa Cruz, California
We have provided a non-binding expression of interest to
purchase a property located on Beach Road in Santa Cruz,
California from Trafton Affiliates. This property consists of
195 acres, all of which are currently farmed.
San Andreas
Road, Santa Cruz, California
We have provided a non-binding expression of interest to
purchase a property located on San Andreas Road in Santa
Cruz, California from the Jertberg Family Trust. This property
consists of 129 acres, of which 124 acres are
currently farmed.
Betteravia
Road, Santa Maria, California
We have provided a non-binding expression of interest to
purchase a property located on Betteravia Road in Santa Maria,
California from Santa Maria Valley Farms, LLC. This property
consists of 109 acres, of which 100 acres are
currently farmed, including a berry cooler comprising
approximately 43,000 square feet.
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 publicly
traded 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.
The prior programs described below were occasionally adversely
affected by the cyclical nature of the real estate market. For
example, during the years 2007-2008, the economic recession had
a significant adverse impact on the real estate market Annual
returns on the NAREIT REIT Index were (17.8)% and (37.3)% in
2007 and 2008, respectively. We expect that our business will be
affected by similar conditions. Accordingly, no assurance can be
made that Gladstone Land or any other program sponsored by
Mr. Gladstone, our Adviser or their affiliates will
ultimately be successful in meeting their investment objectives.
For additional information regarding the risks relating to
Gladstone Land, see the Risk Factors section of this
prospectus.
Mr. Gladstones
Real Estate Investing Experience
From 1997 to 2004 Mr. Gladstone, our chairman and chief
executive officer, owned Coastal Berry, one of the largest
strawberry producers in the United States. In 2004
Mr. Gladstone sold Coastal Berry to Dole Fresh but retained
the two farms that we currently rent to Dole Fresh.
Mr. Gladstone has a number of relationships in the farming
areas of California. Since selling Coastal Berry,
Mr. Gladstone has been a farm owner in California and has
been developing our company into a REIT for agricultural land.
He is the sole owner of our company.
Since 2003, Mr. Gladstone has been the chairman and chief
executive officer of Gladstone Commercial. A discussion of
Gladstone Commercials real estate investing activities is
described below under Our Advisers Real Estate
Investing Experience.
From 1992 until 1997, Mr. Gladstone served as chief
executive officer 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
73
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 10 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.
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%.
Allied Capital Advisers 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.
Due to the substantially different nature of an investment in
our common stock, there can be no assurance that Gladstone Land
will achieve the same or similar investment performance results
as were achieved by Mr. Gladstone during his time managing
these two REITs.
Our
Advisers Real Estate Investing Experience
Our Adviser serves as the adviser to Gladstone Commercial
Corporation (NASDAQ: GOOD), which is a publicly held REIT that
was formed to net lease commercial and industrial real property
and selectively make mortgage loans secured by industrial and
commercial real property. Gladstone Commercial completed its
initial public offering in August 2003, raising an aggregate of
approximately $105 million in net proceeds. 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.
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 with 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, which we
refer to as our Administrator, is an affiliate of our
74
Adviser and 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
Our management fee structure has been structured to incentivize
our Adviser to make long-term, income-oriented investments.
Unlike some other REITs, we do not pay fees to our Adviser when
we buy, sell or lease properties. In addition to a base
management fee based on our stockholders equity excluding
the uninvested cash proceeds of this offering, we pay incentive
fees based on our funds from operations, or FFO. Since we pay
distributions to stockholders from FFO, we believe it is
important to incentivize our Advise to generate FFO for us.
OUR
STRUCTURE
The following diagram depicts our ownership structure upon
completion of this offering. Our Operating Partnership will own
our real estate investments directly or indirectly, in some
cases through special purpose entities that we may create in
connection with the acquisition of real property.
Competition
Competition to our efforts to acquire farmland can come from
many different entities. Developers, municipalities, individual
farmers, agriculture corporations, institutional investors and
others compete 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.
75
Legal
Proceedings
We are not currently subject to any material legal proceedings
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 maintain an office
in Oxnard, California. 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, 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 approximately 10% of the full-time employees of our Adviser
or our Administrator will spend substantial time on our matters
during calendar year 2010. To the extent that we acquire more
investments, we anticipate that the number of employees of our
Adviser and our Administrator who devote time to our matters
will increase and the number of our Advisers employees
working out of local offices, if any, where we buy land will
also increase.
As of August 31, 2010, our Adviser and our Administrator
collectively had 51 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
|
|
10
|
|
|
Administration, Accounting, Compliance, Human Resources, Legal
and Treasury
|
Government
Regulation
Farming
Regulation
The farmland that we own and intend to acquire is subject to
regulation by state, county and federal governments, including
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
its 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 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 and pesticides that such water
may contain.
Each of our two farms located within California has its own
wells, which currently 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
76
access to river water. We believe that we maintain our two
California farms in compliance with all applicable state, county
and federal environmental regulations.
In addition to the regulation of water usage and water runoff,
state, county and federal governments also seek to regulate the
type, quantity and method of use of chemicals 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 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 can be 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.
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, such as the
Comprehensive Environmental Response and Compensation Liability
Act, or CERCLA, could increase the potential liability for
environmental conditions or circumstances existing or created by
tenants or others on properties, and laws affecting upkeep,
safety and taxation requirements may result in significant
unanticipated expenditures, loss of our properties or other
impairments to operations, any of which would adversely affect
our cash flows from operating activities.
Our property management activities, to the extent we are forced
to engage in them due to lease defaults by tenants or vacancies
on certain properties, will likely be subject to state real
estate brokerage laws and regulations as determined by the
particular real estate commission for each state.
Environmental
Matters
Our operations are subject to federal, state and local
environmental laws and regulations, including laws relating to
water, air, solid waste and hazardous substances and the
requirements of the federal Occupational Safety and Health Act
and comparable state statutes relating to the health and safety
of our employees. Although we believe that we are in material
compliance with these requirements, there can be no assurance
that we will not incur significant costs, civil and criminal
penalties, and liabilities, including those relating to claims
for damages to property, resulting from our operations or the
operations of our tenants. We intend to periodically conduct
regular and internal and independent third-party audits of our
properties to monitor compliance with these laws and regulations.
Insurance
Under the terms and conditions of the leases on our current
properties, tenants are generally required, at the tenants
expense, to obtain and keep in full force during the term of the
lease, liability and property damage insurance policies. These
policies include liability coverage for bodily injury and
property damage arising out of the ownership, use, occupancy or
maintenance of the properties and all of their appurtenant areas.
77
MANAGEMENT
Our business and affairs are managed under the direction of our
Board of Directors. Our Board has retained our Adviser to manage
our
day-to-day
real estate operations, and the acquisition and disposition of
investments, subject to our Boards oversight. We currently
have three directors and we intend to expand the Board prior to
the completion of this offering to seven members. 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(2)(5)(6)
|
Anthony W. Parker
|
|
|
64
|
|
|
Director(1)(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
78
the time of its initial public offering to $385 million in
assets at the time it merged into Allied Capital Corporation in
1997. From 1992 to 1997, Mr. Gladstone served as a
director, president and chief executive officer of Business
Mortgage Investors, a privately held mortgage REIT managed by
Allied Capital Advisers, which invested in loans to small and
medium-sized businesses. Mr. Gladstone is also a past
director of Capital Automotive REIT, a real estate investment
trust that purchases and net leases real estate to automobile
dealerships. Mr. Gladstone served as a director of The
Riggs National Corporation (the parent of Riggs Bank) from 1993
to May 1997 and of Riggs Bank from 1991 to 1993. He has served
as a trustee of The George Washington University and currently
is a trustee emeritus. He is a past member of the Listings and
Hearings Committee of the National Association of Securities
Dealers, Inc. He is a past member of the Advisory committee to
the Womens Growth Capital Fund, a venture capital firm
that finances women-owned small businesses. Mr. Gladstone
was the founder and managing member of The Capital Investors,
LLC, a group of angel investors, and is currently a member
emeritus. Mr. Gladstone holds a MBA from the Harvard
Business School, a MA from American University and a BA from the
University of Virginia. Mr. Gladstone has co-authored two
books on financing for small and medium-sized businesses,
Venture Capital Handbook and Venture Capital
Investing. Mr. Gladstone grew up on a farm in Virginia.
Mr. Gladstone was selected to serve as a director on our
Board, and to be nominated to serve another directorship term,
due to the fact that he is our founder and has greater than
thirty years of experience in the industry, including his past
service as our chairman and chief executive officer since our
inception.
George Stelljes III. Mr. Stelljes,
age 48, has served as our president, chief investment
officer and director since 2007. He also served as Gladstone
Commercials chief investment officer from its inception in
2003 and its executive vice president from its inception through
July 2007, when he assumed the duties of president and was
appointed as a director. He also served as the executive vice
president of Gladstone Capital (from 2002 to April
2004) and has been its chief investment officer since
September 2002 and its president since April 2004.
Mr. Stelljes also served on Gladstone Capitals board
of directors from August 2001 through September 2002 and then
rejoined its board in July 2003 and remains a director today. He
has served as the president, chief investment officer, and a
director of Gladstone Investment since its inception in June
2005 and assumed the duties of co-vice chairman in April 2008.
Mr. Stelljes has served as chief investment officer and as
a director of Gladstone Management since May 2003 and was its
executive vice president from May 2003 through February 2006,
when he assumed the duties of president. Prior to joining us,
Mr. Stelljes served as a managing member of St. Johns
Capital, a vehicle used to make private equity investments. From
1999 to 2001, Mr. Stelljes was a co-founder and managing
member of Camden Partners, a private equity firm which finances
high growth companies in communications, education, healthcare
and business services sectors. From 1997 to 1999,
Mr. Stelljes was a managing director and partner of
Columbia Capital, a venture capital firm focused on investments
in communications and information technology. From 1989 to 1997,
Mr. Stelljes held various positions, including executive
vice president and principal, with Allied Capital Corporation
(NYSE: ALD), Allied Capital Corporation II, Allied Capital
Lending Corporation and Allied Capital Advisors, Inc., a
registered investment adviser that managed the Allied companies,
which were the largest group of publicly-traded mezzanine debt
funds in the United States and were managers of two private
venture capital limited partnerships. From 1991 to 1997,
Mr. Stelljes served either as senior vice president or
executive vice president of Allied Capital Commercial
Corporation, a publicly traded REIT that invested in real estate
loans to small and medium-sized businesses, managed by Allied
Capital Advisors, Inc. From 1992 to 1997, Mr. Stelljes
served as a senior vice president or executive vice president of
Business Mortgage Investors, a privately held mortgage REIT
managed by Allied Capital Advisors, which invested in real
estate loans to small and medium-sized businesses.
Mr. Stelljes currently serves as a general partner and
investment committee member of Patriot Capital and Patriot
Capital II private equity funds and on the board of
Intrepid Capital Management, a money management firm. He is also
a former board member and regional president of the National
Association of Small Business Investment Companies.
Mr. Stelljes holds an MBA from the University of Virginia
and a BA in Economics from Vanderbilt University.
Mr. Stelljes was selected to serve as a director on our
Board due to his more than twenty years of experience in the
investment analysis, management, and advisory industries.
Terry Lee Brubaker. Mr. Brubaker,
age 66, has served as our chief operating officer and vice
chairman of the Board of Directors since 2007. He also served as
Gladstone Commercials chief operating officer, secretary
and a director since its inception in 2003 and as president from
its inception through July 2007, when he assumed the
79
duties of vice chairman. Mr. Brubaker has also served as
the chief operating officer, secretary and director of Gladstone
Management since its inception in 2003. He also served as
president of Gladstone Management from its inception until
assuming the duties of vice chairman in February 2006.
Mr. Brubaker has served as the chief operating officer,
secretary and a director of Gladstone Capital since May 2001. He
also served as president of Gladstone Capital from May 2001
through April 2004, when he assumed the duties of vice chairman.
Mr. Brubaker has also been the vice chairman, chief
operating officer, secretary and a director of Gladstone
Investment since its inception in June 2005. In March 1999,
Mr. Brubaker founded and, until May 1, 2003, served as
chairman of Heads Up Systems, a company providing processing
industries with leading edge technology. From 1996 to 1999,
Mr. Brubaker served as vice president of the paper group
for the American Forest & Paper Association. From 1992
to 1995, Mr. Brubaker served as president of Interstate
Resources, a pulp and paper company. From 1991 to 1992,
Mr. Brubaker served as president of IRI, a radiation
measurement equipment manufacturer. From 1981 to 1991,
Mr. Brubaker held several management positions at James
River Corporation, a forest and paper company, including vice
president of strategic planning from 1981 to 1982, group vice
president of the Groveton Group and Premium Printing Papers from
1982 to 1990 and vice president of human resources development
in 1991. From 1976 to 1981, Mr. Brubaker was strategic
planning manager and marketing manager of white papers at Boise
Cascade. Previously, Mr. Brubaker was a senior engagement
manager at McKinsey & Company from 1972 to 1976. Prior
to 1972, Mr. Brubaker was a U.S. Navy fighter pilot.
Mr. Brubaker holds an MBA from the Harvard Business School
and a BSE from Princeton University.
Mr. Brubaker was selected to serve as a director on our
Board due to his more than thirty years of experience in various
mid-level and senior management positions at several
corporations.
Danielle Jones. Ms. Jones, age 33,
was appointed to serve as our chief financial officer in
December 2008. Ms. Jones has also served as chief financial
officer for Gladstone Commercial since December 2008. Since July
2004, Ms. Jones has served us in various accounting
capacities (senior accountant, accounting manager, and, most
recently, Controller). From January 2002 to June 2004,
Ms. Jones was employed by Avalon Bay Communities, where she
worked in the corporate accounting division. Ms. Jones
received a B.B.A. in accounting from James Madison University
and is a licensed CPA with the Commonwealth of Virginia.
Gary Gerson. Mr. Gerson, age 45, has
served as our treasurer since April 2006. Mr. Gerson has
also served as treasurer for Gladstone Capital, Gladstone
Commercial and Gladstone Investment since April 2006, and of
Gladstone Management since May 2006. From 2004 to early 2006
Mr. Gerson was Assistant Vice President of Finance at the
Bozzuto Group, a real estate developer, manager and owner, where
he was responsible for the financing of multi-family and
for-sale residential projects. From 1995 to 2004 he held various
finance positions, including Director of Finance from 2000 to
2004, at PG&E National Energy Group where he led, and
assisted in, the financing of power generation assets.
Mr. Gerson holds an MBA from the Yale School of Management,
a B.S. in mechanical engineering from the U.S. Naval
Academy, and is a CFA charter holder.
Michela A. English. Ms. English,
age 60, has agreed to become a director prior to the
completion of this offering. Ms. English has served as
President and CEO of Fight for Children, a non-profit charitable
organization focused on providing high-quality education and
health care services to underserved youth in
Washington, D.C., since 2006. Ms. English has also
been a director of Gladstone Capital since June 2002, a director
of Gladstone Commercial since August 2003, and a director of
Gladstone Investment since June 2005. From March 1996 to March
2004, Ms. English held several positions with Discovery
Communications, Inc., including president of Discovery Consumer
Products, president of Discovery Enterprises Worldwide and
president of Discovery.com. From 1991 to 1996, Ms. English
served as senior vice president of the National Geographic
Society and was a member of the National Geographic
Societys Board of Trustees and Education Foundation Board.
Prior to 1991, Ms. English served as vice president,
corporate planning and business development for Marriott
Corporation and as a senior engagement manager for
McKinsey & Company. Ms. English currently serves
as director of the Educational Testing Service (ETS), as a
director of D.C. Preparatory Academy, a director of the District
of Columbia Public Education Fund, a director of the Society for
Science and the Public, a director of the National Womens
Health Resource Center, a member of the Advisory Board of the
Yale University School of Management, and as a member of the
Virginia Institute of Marine Science Council. Ms. English
is an emeritus member of the board of Sweet Briar College.
Ms. English holds a Bachelor of Arts in International
Affairs from Sweet Briar College and a Master of Public and
Private Management degree from Yale Universitys School of
Management.
80
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
U.S. 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 non-profit 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 experience in the field of
corporate taxation. Mr. Parkers knowledge of
corporate tax was instrumental in his appointment to the
chairmanship of our Audit Committee.
Paul W. Adelgren. Mr. Adelgren,
age 67, has agreed to become a director prior to the
completion of this offering. Since 1997, 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, Nominating and Corporate Governance Committee.
John Outland. Mr. Outland, age 64,
has agreed to become a director prior to the completion of this
offering. From March 2004 to June 2006, he served as vice
president of Genworth Financial, Inc. From 2002 to March 2004,
Mr. Outland served as a managing director for 1789 Capital
Advisors, where he provided market and transaction structure
analysis and advice on a consulting basis for multifamily
commercial mortgage purchase programs. From 1999 to 2001,
Mr. Outland served as vice president of mortgage-backed
securities at Financial Guaranty Insurance Company where he was
team leader for bond insurance transactions. In this capacity,
he was responsible for sourcing business, coordinating credit,
loan files, due diligence and legal review processes, and
negotiating both structure and business issues. From 1993 to
1999, Mr. Outland was senior vice president for Citicorp
Mortgage Securities, Inc., where he securitized non-conforming
mortgage products. From 1989 to 1993, Mr. Outland was vice
president of real estate and mortgage finance for Nomura
Securities International, Inc., where he performed due diligence
on and negotiated the financing of commercial mortgage packages
in preparation for securitization. Mr. Outland has also
been a director of Gladstone Capital since December 2003, a
director of Gladstone Commercial since December 2003, and a
director of Gladstone Investment since June 2005.
Mr. Outland holds an MBA from Harvard Business School and a
bachelors degree in Chemical Engineering from Georgia
Institute of Technology.
Mr. Outland was selected to serve as an independent
director on our Board due to his more than twenty years of
experience in the real estate and mortgage industry, which also
led to his appointment to the chairmanship of our Compensation
Committee.
81
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 will consist, 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 first annual meeting of our stockholders
following the completion of this offering, a second class will
hold office initially for a term expiring at the second annual
meeting of our stockholders following the completion of this
offering, and a third class will hold office initially for a
term expiring at the third annual meeting of our stockholders
following the completion of this offering. Each director holds
office for the term to which he or she is elected and until his
or her successor is duly elected and qualified. The terms of
Messrs. Stelljes and Parker and Ms. English will
expire at the first annual meeting following the completion of
this offering, the terms of Messrs. Brubaker and Outland
will expire at the second annual meeting following the
completion of this offering, and the terms of
Messrs. Gladstone and Adelgren will expire at the third
annual meeting following the completion of this offering. 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.