Note 6—Notes Receivable

In August 2015, the Company introduced an agricultural lending product aimed at farmers as a complement to the Company’s business of acquiring and owning farmland and leasing it to farmers (the “FPI Loan Program”). Under the FPI Loan Program, the Company makes loans to third-party farmers (both tenant and non-tenant) to provide financing for working capital requirements and operational farming activities, farming infrastructure projects and for other farming and agricultural real estate related projects. The Company seeks to make loans that are collateralized by farm real estate and in principal amounts of $0.1 million or more at fixed interest rates with maturities of up to six years. The Company expects the borrower to repay the loans in accordance with the loan agreements based on farming operations and access to other forms of capital, as permitted.

In addition to loans made under the FPI Loan Program, the Company, on certain occasions, makes short-term loans to tenants secured by collateral other than real estate, such as growing crops, equipment or inventory, when the Company believes such loans will ensure the orderly completion of farming operations on a property owned by the Company for a given crop year and other credit is not available to the borrower.

Notes receivable are stated at their unpaid principal balance and include unamortized direct origination costs and accrued interest through the reporting date, less any allowance for losses and unearned borrower paid points.

As of September 30, 2019 and December 31, 2018, the Company had the following notes receivable:


($ in thousands)		Principal Outstanding as of				Maturity
Loan	Payment Terms	September 30, 2019		December 31, 2018		Date
Mortgage Note (1)	Principal & interest due at maturity	$	1,800	$	1,840	1/15/2017
Mortgage Note (2)	Principal & interest due at maturity		234		234	12/7/2028
Note Receivable (3)	Principal due at maturity & interest due monthly		2,145		2,145	3/16/2022
Mortgage Note (4)	Principal & interest due at maturity		1,647		1,647	3/1/2020
Mortgage Note (5)	Principal & interest due at maturity		-		5,125	8/19/2020
Mortgage Note (6)	Principal & interest due at maturity		62		62	12/31/2018
Line of Credit (7)	Principal & interest due at maturity		-		106	11/15/2018
Line of Credit (8)	Principal & interest due at maturity		988		-	11/15/2019
Total outstanding principal			6,876		11,159
Points paid, net of direct issuance costs			-		-
Interest receivable (net prepaid interest)			1,254		947
Provision for interest receivable			(365)		(229)
Total notes and interest receivable		$	7,765	$	11,877

(1)

In January 2016, the maturity date of the note was extended to January 15, 2017 with year one interest received at the time of the extension and principal and remaining interest due at maturity. On July 28, 2017, the Company notified the borrower of default under the Promissory Note. The Company currently believes that collectability is reasonably assured as the fair value of the mortgaged farm is greater than the amount owed under the loan. As of the date of this report, the Company and a court-appointed receiver are pursuing a sale of the property.

(2)

The original note was renegotiated during the three months ended March 31, 2017. Later the terms of the note were modified pursuant to the borrower’s reorganization plan, requiring annual payments of interest and principal.

(3)

Land acquired at a below-market-price, leased back to the seller who also has a repurchase right at below-market price. The transaction is accounted for as a financing transaction, with the rent paid by the seller being accounted for as interest payment. The seller’s repurchase right expires on 3/16/2022.

(4)

On April 17, 2018, the Company amended the loan to extend the term of the loan through March 1, 2020 and increased the interest rate to 7.5% per annum.

(5)

During the three months ended June 30, 2019 the outstanding amount on this loan was fully repaid.

(6)

On April 2, 2018, the Company entered into a loan secured against farm equipment. As the borrower is working through bankruptcy proceedings the Company will settle this balance through the bankruptcy process. The Company does not expect to incur any material losses.

(7)

During the three months ended June 30, 2019 the outstanding amount on this loan was fully repaid.

(8)

In 2019, the Company entered into a line of credit relationship with a tenant farmer with this line of credit secured against growing crops on the farms farmed by the tenant. The Company is awaiting bankruptcy court approval of the related documentation.

The collateral for the mortgage notes receivable consists of real estate, personal property and improvements present on such real estate.

Fair Value

FASB ASC 820-10 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

Level 1—Inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

Level 2—Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable or can be substantially corroborated for the asset or liability, either directly or indirectly.

Level 3—Inputs to the valuation methodology are unobservable, supported by little or no market activity and are significant to the fair value measurement.

The fair value of notes receivable is valued using Level 3 inputs under the hierarchy established by GAAP and is calculated based on a discounted cash flow analysis, using interest rates based on management’s estimates of market interest rates on mortgage notes receivable with comparable terms whenever the interest rates on the notes receivable are deemed not to be at market rates. As of September 30, 2019 and December 31, 2018, the fair value of the notes receivable was $7.0 million and $11.7 million, respectively.