FAIR VALUE MEASUREMENTS

Fair Value of Financial Instruments

The following table presents the carrying value and estimated fair value of the Company’s financial instruments:



	June 30, 2018				December 31, 2017
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
Derivative asset	$	4,699	$	4,699	$	1,086	$	1,086
Financial liabilities:
Mortgages payable, net	$	274,267	$	279,680	$	287,068	$	298,635
Unsecured notes payable, net	$	696,055	$	670,042	$	695,748	$	693,823
Unsecured term loans, net	$	447,583	$	455,242	$	547,270	$	552,555
Unsecured revolving line of credit	$	126,000	$	126,000	$	216,000	$	216,222

The carrying value of the derivative asset is included in “Other assets, net” in the accompanying condensed consolidated balance sheets.

Recurring Fair Value Measurements

The following table presents the Company’s financial instruments, which are measured at fair value on a recurring basis, by the level in the fair value hierarchy within which those measurements fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.



	Fair Value
	Level 1		Level 2		Level 3		Total
June 30, 2018
Derivative asset	$	—	$	4,699	$	—	$	4,699

December 31, 2017
Derivative asset	$	—	$	1,086	$	—	$	1,086

Derivative asset: The fair value of the derivative asset is determined using a discounted cash flow analysis on the expected future cash flows of each derivative. This analysis uses observable market data including forward yield curves and implied volatilities to determine the market’s expectation of the future cash flows of the variable component. The fixed and variable components of the derivative are then discounted using calculated discount factors developed based on the LIBOR swap rate and are aggregated to arrive at a single valuation for the period. The Company also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives use Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2018 and December 31, 2017, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation. As a result, the Company has determined that its derivative valuations in their entirety are classified within Level 2 of the fair value hierarchy. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered any applicable credit enhancements. The Company’s derivative instruments are further described in Note 9 to the condensed consolidated financial statements.

Nonrecurring Fair Value Measurements

The Company did not remeasure any assets to fair value on a nonrecurring basis as of June 30, 2018. The following table presents the Company’s assets measured at fair value on a nonrecurring basis as of December 31, 2017, aggregated by the level within the fair value hierarchy in which those measurements fall. The table includes information related to properties remeasured to fair value as a result of impairment charges recorded during the year ended December 31, 2017, except for those properties sold prior to December 31, 2017. Methods and assumptions used to estimate the fair value of these assets are described after the table.



	Fair Value
	Level 1		Level 2			Level 3		Total		Provision for Impairment (a)
December 31, 2017
Investment properties	$	—	$	74,250	(b)	$	—	$	74,250	$	50,077


(a)	Excludes impairment charges recorded on investment properties sold prior to December 31, 2017.

(b)

Represents the fair value of the Company’s Schaumburg Towers and Home Depot Plaza investment properties. The estimated fair value of Schaumburg Towers was based on an expected sales price of $87,600 from a bona fide purchase offer, determined to be a Level 2 input, which contemplates historically deferred maintenance and capital requirements. The estimated fair value of $58,000 as of September 30, 2017, the date the asset was measured at fair value, reflects (i) capital expenditures expected to be incurred by the Company prior to sale and (ii) tenant-related costs expected to be credited to the buyer at close. The estimated fair value of Home Depot Plaza of $16,250 as of December 31, 2017, the date the asset was measured at fair value, was based upon the expected sales price for an executed sales contract and determined to be a Level 2 input.

Fair Value Disclosures

The following table presents the Company’s financial liabilities, which are measured at fair value for disclosure purposes, by the level in the fair value hierarchy within which those measurements fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.



	Fair Value
	Level 1		Level 2		Level 3		Total
June 30, 2018
Mortgages payable, net	$	—	$	—	$	279,680	$	279,680
Unsecured notes payable, net	$	234,853	$	—	$	435,189	$	670,042
Unsecured term loans, net	$	—	$	—	$	455,242	$	455,242
Unsecured revolving line of credit	$	—	$	—	$	126,000	$	126,000

December 31, 2017
Mortgages payable, net	$	—	$	—	$	298,635	$	298,635
Unsecured notes payable, net	$	243,183	$	—	$	450,640	$	693,823
Unsecured term loans, net	$	—	$	—	$	552,555	$	552,555
Unsecured revolving line of credit	$	—	$	—	$	216,222	$	216,222

Mortgages payable, net: The Company estimates the fair value of its mortgages payable by discounting the anticipated future cash flows of each instrument at rates currently offered to the Company by its lenders for similar debt instruments of comparable maturities. The rates used are not directly observable in the marketplace and judgment is used in determining the appropriate rate for each of the Company’s individual mortgages payable based upon the specific terms of the agreement, including the term to maturity, the quality and nature of the underlying property and its leverage ratio. The rates used range from 3.9% to 4.5% and 3.5% to 4.2% as of June 30, 2018 and December 31, 2017, respectively.

Unsecured notes payable, net: The quoted market price as of June 30, 2018 was used to value the Notes Due 2025. The Company estimates the fair value of its Notes Due 2021 and 2024 and Notes Due 2026 and 2028 by discounting the future cash flows at rates currently offered to the Company by its lenders for similar debt instruments of comparable maturities. The rates used are not directly observable in the marketplace and judgment is used in determining the appropriate rates. The weighted average rates used were 4.90% and 4.28% as of June 30, 2018 and December 31, 2017, respectively.

Unsecured term loans, net: The Company estimates the fair value of its unsecured term loans, net by discounting the anticipated future cash flows related to the credit spreads at rates currently offered to the Company by its lenders for similar instruments of comparable maturities. The rates used are not directly observable in the marketplace and judgment is used in determining the appropriate rates. The weighted average rates used to discount the credit spreads were 1.20% and 1.33% as of June 30, 2018 and December 31, 2017, respectively.

Unsecured revolving line of credit: The Company estimates the fair value of its unsecured revolving line of credit by discounting the anticipated future cash flows related to the credit spreads at rates currently offered to the Company by its lenders for similar facilities of comparable maturity. The rates used are not directly observable in the marketplace and judgment is used in determining the appropriate rates. The rates used to discount the credit spreads were 1.05% and 1.30% as of June 30, 2018 and December 31, 2017, respectively.

There were no transfers between the levels of the fair value hierarchy during the six months ended June 30, 2018.