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. These loans are secured by farmland, properties related to farming, crops (growing or stored), and/or agricultural equipment, and are typically in principal amounts of $100,000 or more at fixed interest rates with maturities of up to three years. The Company expects the borrower to repay the loans in accordance with the applicable loan agreements based on farming operations and access to other forms of capital, as permitted. 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 December 31, 2019 and 2018, the Company held the following notes receivable:



($ in thousands)		Principal Outstanding as of
Loan	Payment Terms	December 31, 2019		December 31, 2018		Maturity
Mortgage Note (1)	Principal & interest due at maturity	$	1,804	$	1,840	1/15/2017
Mortgage Note (2)	Principal & interest due at maturity		234		234	12/7/2028
Mortgage Note (2)	Principal due at maturity & interest due monthly		2,145		2,145	3/16/2022
Mortgage Note (3)	Principal & interest due at maturity		-		1,647	12/31/2019
Mortgage Note	Principal & interest due at maturity		-		5,125	8/19/2020
Mortgage Note	Principal & interest due at maturity		62		62	3/1/2020
Line of Credit	Principal & interest due at maturity		369		106	3/1/2020
Total outstanding principal			4,614		11,159
Interest receivable (net prepaid interest)			565		947
Provision for loan receivable			(412)		(229)
Total notes and interest receivable		$	4,767	$	11,877

(1) In January 2016 the maturity date of the note was extended from January 15, 2016 to January 15, 2017 with the year 1 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 on the Promissory Note. In December 2019, the Company has begun the process of selling the underlying collateralized property to settle the principal and accrued interest.

(2)The original note was renegotiated and a second note was entered into simultaneously with the borrower during the three months ended March 31, 2017. The notes include mortgages on two additional properties in Colorado that include repurchase options for the properties at a fixed price that are exercisable between the third and fifth anniversary of the notes by the borrower.

(3)In April 2018 the interest rate on the note was increased from 6.50% to 7.50% and a loan fee of 1.0% was initiated for the period ended March 31, 2019. Note was paid down through the acquisition of collateralized property in December 2019

A reconciliation of the carrying amount of mortgage loans for the years ended December 31, 2019, 2018 and 2017 is set out below:


	Years ended December 31,
	2019		2018		2017
($ in thousands)
Balance at beginning of year	$	11,159	$	9,350	$	2,780
Additions during year:
New mortgage loans and additional advances on existing loans		1,781		6,662		7,372
Interest income added to principal		-		-		-
Amortization of discount		-		-		-
		12,940		16,012		10,152
Deductions during year:
Collection of principal		8,285		4,853		802
Foreclosure		41		-		-
Balance at end of year	$	4,614	$	11,159	$	9,350

The collateral for the mortgage notes receivable consists of real estate and improvements present on such real estate. For income tax purposes the aggregate cost of the investment of the mortgage notes is the carrying amount per the table above.

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.

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 and credit risk whenever the interest rates on the notes receivable are deemed not to be at market rates. As of December 31, 2019 and 2018, the fair value of the notes receivable was $4.6 million and $11.7 million, respectively.