NOTE 4. LAND AND SUBSURFACE INTERESTS

As of September 30, 2017, the Company owned approximately 8,100 acres of undeveloped land in Daytona Beach, Florida, along six miles of the west and east sides of Interstate 95. Currently, the majority of this land is used for agricultural purposes. Approximately 1,100 acres of our land holdings are located on the east side of Interstate 95 and are generally well suited for commercial development. Approximately 7,000 acres of our land holdings are located on the west side of Interstate 95 and the majority of this land is generally well suited for residential development. Included in the western land is approximately 1,100 acres, primarily an 850-acre parcel and three smaller parcels, which are located further west of Interstate 95 and a few miles north of Interstate 4 that is generally well suited for industrial purposes.

Real estate operations revenue consisted of the following for the three and nine months ended September 30, 2017 and 2016, respectively:


	Three Months Ended September 30, 2017		Three Months Ended September 30, 2016		Nine Months Ended September 30, 2017		Nine Months Ended September 30, 2016
Revenue Description	($000's)		($000's)		($000's)		($000's)
Land Sales Revenue	$	—	$	318	$	39,564	$	508
Tomoka Town Center - Percentage of Completion Revenue		—		3,654		—		16,456
Revenue from Reimbursement of Infrastructure Costs		—		—		1,276		—
Impact Fee and Mitigation Credit Sales		548		209		1,987		481
Subsurface Revenue		2,374		463		2,827		1,535
Fill Dirt and Other Revenue		4		—		4		—
Total Real Estate Operations Revenue	$	2,926	$	4,644	$	45,658	$	18,980

The Tomoka Town Center consists of approximately 235 acres of which approximately 180 acres are developable. During 2015 and 2016, land sales with a gross sales price totaling approximately $21.4 million within the Tomoka Town Center consisted of sales of approximately 99 acres to Tanger Outlets, Sam’s Club, and North American Development Group (“NADG”) (the “Tomoka Town Center Sales Agreements”). The Company performed certain infrastructure work, beginning in the fourth quarter of 2015 through completion in the fourth quarter of 2016, which required the sales price on the Tomoka Town Center Sales Agreements to be recognized on the percentage-of-completion basis. As the infrastructure work was completed in the fourth quarter of 2016, all revenue related to the Tomoka Town Center Sales Agreements had been recognized as of December 31, 2016. The timing of the remaining reimbursements for the cost of the infrastructure work which totals approximately $2.4 million is more fully described in Note 9, “Other Assets.”

Tanger Outlets completed its approximately 350,000 square foot outlet mall in November 2016. As of October 30, 2017, NADG has begun pre-construction on its approximately 500,000 square foot retail power center.

During the nine months ended September 30, 2017, the Company completed the sale of approximately 19 acres to NADG (the “Third NADG Land Sale”). The remaining developable acreage of approximately 62 acres is currently under contract with NADG as described in the land pipeline in Note 18, “Commitment and Contingencies.”

Land Sales. No land sales were completed during the three months ended September 30, 2017. During the nine months ended September 30, 2017, a total of approximately 1,669 acres were sold for approximately $39.6 million, as described below:


					Gross Sales		Price per Acre		Gain
			Date of	No. of	Price		($ Rounded		on Sale
	Buyer (or Description)	Location	Sale	Acres	($000's)		000's)		($000's)
1	Minto Communities, LLC	West of I-95	02/10/17	1,581.00	$	27,151	$	17,000	$	20,041
2	Commercial	East of I-95	03/22/17	6.35		1,556		245,000		11
		Subtotal - Q1 2017		1,587.35		28,707		18,000		20,052

3	Commercial	East of I-95	04/05/17	27.50		3,218		117,000		2,955
4	Commercial	East of I-95	04/13/17	4.50		1,235		274,000		13
5	Commercial	West of I-95	04/25/17	30.00		2,938		98,000		627
6	NADG - Parcel B-I (FPII)	East of I-95	06/27/17	19.43		3,467		178,000		3,263	(1)
		Subtotal - Q2 2017		81.43		10,858		133,000		6,858

		YTD Q3 2017		1,668.78	$	39,565	$	24,000	$	26,910

(1)The gain of approximately $3.3 million on the Third NADG Land Sale includes an infrastructure reimbursement payment of approximately $955,000 received in conjunction with the closing on June 27, 2017.

A total of 4.5 acres were sold during the three months ended September 30, 2016 for approximately $205,000. A total of approximately 12.0 acres were sold during the nine months ended September 30, 2016 for approximately $2.4 million as described below:


					Gross Sales				Gain
			Date of	No. of	Price (1)		Price		on Sale
	Buyer (or Description)	Location	Sale	Acres	($000's)		per Acre		($000's)
1	Commercial / Retail	East of I-95	02/12/16	3.1	$	190	$	61,000	$	145
2	NADG - OutParcel	East of I-95	03/30/16	4.4		2,000		455,000		1,304
		Subtotal - Q1 2016		7.50		2,190		292,000		1,449

3	Minto Sales Center	West of I-95	09/27/16	4.50		205		46,000		126
		Subtotal - Q3 2016		4.50		205		46,000		126

		YTD Q3 2016		12.0	$	2,395	$	200,000	$	1,575

(1)Land Sales Revenue for the nine months ended September 30, 2016 is equal to the Gross Sales Price of land sales of $2.40 million, less the $2.0 million sales price for the NADG – OutParcel, as the NADG – OutParcel revenue is included in Tomoka Town Center – Percentage of Completion Revenue, plus approximately $113,000 of incentives received and earned during the three months ended September 30, 2016 related to the Distribution Center sale which closed during 2014.

Pipeline. For a description of our land which is currently under contract, see the land pipeline in Note 18, “Commitment and Contingencies.”

Land Impairments. There were no impairment charges related to the Company’s undeveloped land during the nine months ended September 30, 2017. For a description of impairment charges totaling approximately $1.0 million on the Company’s undeveloped land during the nine months ended September 30, 2016, see Note 8, “Impairment of Long-Lived Assets.”

Beachfront Development. During the year ended December 31, 2015, the Company acquired, through a real estate venture with an unaffiliated third party institutional investor, an interest in approximately six acres of vacant beachfront property located in Daytona Beach, Florida. The property was acquired for approximately $11.3 million of which the Company contributed approximately $5.7 million. As of December 31, 2015, the real estate venture was fully consolidated as the Company determined that it was the primary beneficiary of the variable interest entity. On November 17, 2016, the Company acquired the unaffiliated third party’s 50% interest for approximately $4.8 million, a discount of approximately $879,000. The discount was recorded through equity on the consolidated balance sheet during the year ended December 31, 2016. The Company evaluated its interest in the six-acre vacant beachfront property for impairment and determined that no impairment was necessary as of December 31, 2016. As the Company owns the entire real estate venture as of September 30, 2017, there is no longer a consolidated VIE.

The cost basis of the six-acre vacant beachfront property asset totaled approximately $11.7 million as of September 30, 2017 which includes costs for entitlement. The beachfront property received approval of the rezoning and entitlement of the site to allow for the development of two restaurants and also for the future potential development of up to approximately 1.2 million square feet of vertical density. In the first quarter of 2017, the Company executed a 15-year lease agreement with the operator of LandShark Bar & Grill, for an approximately 6,264 square foot restaurant property the Company will develop on the parcel. The annual rent under the lease is based on a percentage of the tenant’s net operating income (“NOI”) until the Company has received its investment basis in the property and thereafter, the Company will receive a lower percentage of the tenant’s NOI during the remaining lease term. In the second quarter of 2017, the Company executed a 15-year lease agreement with the tenant, Cocina 214 Restaurant & Bar, for the second restaurant property to be developed on the parcel. The annual rent is equal to the greater of $360,000 per year or a certain percentage of gross sales. The lease also provides for additional percentage rent upon the achievement of certain gross sales thresholds. The Company completed the design phase and commenced construction on the two restaurants during the three months ended September 30, 2017. As of September 30, 2017, the Company has incurred approximately $2.2 million of design and construction costs. See Note 18, “Commitment and Contingencies” for the total expected cost to be incurred for the development of the site and both restaurants. The Company expects the development of the two restaurant properties to be completed in time for the tenants to commence operations during January of 2018. Upon completion of the construction of the two income properties and commencement of the tenant leases, the total investment in the beach parcel will be classified as Income Properties, Land, Building, and Improvements, within the Property, Plant, and Equipment classification on the Company’s consolidated balance sheets.

Other Real Estate Assets. The Company owns impact fees with a cost basis of approximately $416,000 and mitigation credits with a cost basis of approximately $849,000 for a combined total of approximately $1.3 million as of September 30, 2017. During the nine months ended September 30, 2017, the Company sold mitigation credits for approximately $1.5 million, for a gain of approximately $1.2 million, or $0.14 per share, after tax. Additionally, the Company recorded the transfer of mitigation credits with a cost basis of approximately $298,000 as a charge to direct cost of revenues of real estate operations during the nine months ended September 30, 2017, as more fully described in Note 18, “Commitments and Contingencies.” During the nine months ended September 30, 2017 and 2016, the Company received cash payments of approximately $506,000 and $481,000, respectively, for impact fees with a cost basis that was generally of equal value.

As of December 31, 2016, the Company owned impact fees with a cost basis of approximately $925,000 and mitigation credits with a cost basis of approximately $1.4 million for a combined total of approximately $2.3 million.

Subsurface Interests. As of September 30, 2017, the Company owns full or fractional subsurface oil, gas, and mineral interests underlying approximately 462,000 “surface” acres of land owned by others in 20 counties in Florida (the “Subsurface Interests”). The Company leases certain of the Subsurface Interests to mineral exploration firms for exploration. Our subsurface operations consist of revenue from the leasing of exploration rights and in some instances, additional revenues from royalties applicable to production from the leased acreage.

During the three months ended September 30, 2017, the Company sold approximately 38,750 acres of subsurface interests in Osceola County, Florida for approximately $2.1 million (the “Osceola Subsurface Sale”). The gain from the Osceola Subsurface Sale totaled approximately $2.08 million, or $0.23 per share, after tax. The Company expects to utilize the proceeds from this sale to acquire an income property through the 1031 like-kind exchange structure.

During 2011, an eight-year oil exploration lease was executed. On September 20, 2017, the Company amended the oil exploration lease to, among other things, extend the expiration of the original term for five additional years to the new expiration date of September 22, 2024. The lease calls for annual lease payments which are recognized as revenue ratably over the respective twelve-month lease periods. In addition, non-refundable drilling penalty payments are made as required by the drilling requirements in the lease which are recognized as revenue when received.

Lease payments on the respective acreages and drilling penalties received through lease year seven are as follows:


	Acreage
Lease Year	(Approximate)	Florida County	Lease Payment (1)		Drilling Penalty (1)
Lease Year 1 - 9/23/2011 - 9/22/2012	136,000	Lee and Hendry	$	913,657	$	—
Lease Year 2 - 9/23/2012 - 9/22/2013	136,000	Lee and Hendry		922,114		—
Lease Year 3 - 9/23/2013 - 9/22/2014	82,000	Hendry		3,293,000		1,000,000
Lease Year 4 - 9/23/2014 - 9/22/2015	42,000	Hendry		1,866,146		600,000
Lease Year 5 - 9/23/2015 - 9/22/2016	25,000	Hendry		1,218,838		175,000
Lease Year 6 - 9/23/2016 - 9/22/2017	15,000	Hendry		806,683		150,000
Lease Year 7 - 9/23/2017 - 9/22/2018	15,000	Hendry		806,683		50,000
Total Payments Received to Date			$	9,827,121	$	1,975,000

(1)Generally, cash payment for the Lease Payment and Drilling Penalty is received on or before the first day of the lease year. The Drilling Penalty, which is due within thirty days from the end of the prior lease year, is recorded as revenue when received, while the Lease Payment is recognized on a straight-line basis over the respective lease term. Pursuant to the amendment for the Year 7 renewal, the Lease Payment and Drilling Penalty were both received on October 11, 2017. See separate disclosure of revenue recognized per period below.

The terms of the lease state the Company will receive royalty payments if production occurs, and may receive additional annual rental payments if the lease is continued in years eight through thirteen. The lease is effectively thirteen one-year terms as the lessee has the option to terminate the lease at the end of each lease year.

Lease income generated by the annual lease payments is recognized on a straight-line basis over the guaranteed lease term. For the three months ended September 30, 2017 and 2016, lease income of approximately $203,000 and $297,000, respectively, was recognized. For the nine months ended September 30, 2017 and 2016, lease income of approximately $603,000 and $904,000, respectively, was recognized. There can be no assurance that the oil exploration lease will be extended beyond the expiration of the current term of September 22, 2018 or, if extended, the terms or conditions of such extension.

During the nine months ended September 30, 2017 and 2016, the Company also received oil royalties from operating oil wells on 800 acres under a separate lease with a separate operator. Revenues received from oil royalties totaled approximately $19,000 and $16,000, during the three months ended September 30, 2017 and 2016, respectively. Revenues received from oil royalties totaled approximately $69,000 and $32,000, during the nine months ended September 30, 2017 and 2016, respectively.

The Company is not prohibited from the disposition of any or all of its Subsurface Interests. Should the Company complete a transaction to sell all or a portion of its Subsurface Interests, the Company may utilize the like-kind exchange structure in acquiring one or more replacement investments including income-producing properties. The Company may release surface entry rights or other rights upon request of a surface owner for a negotiated release fee typically based on a percentage of the surface value. There were no releases of surface entry rights during the nine months ended September 30, 2017. Cash payments for the release of surface entry rights totaled approximately $450,000 during the nine months ended September 30, 2016, which is included in revenue from real estate operations.