Notes Payable

12 Months Ended

Dec. 31, 2019

The Operating Partnership is a party to four, cross-collateralized, term loan agreements with an insurance company. The term loans are secured by the Richardson Heights Property, the Cooper Street Property, the Bent Tree Green Property and the Mitchelldale Property. The loans require monthly payments of principal and interest due and payable on the first day of each month. Monthly payments are based on a 27-year loan amortization. Each of the loan agreements are subject to customary covenants, representations and warranties which must be maintained during the term of the loan agreements. Each of the loan agreements provides for a fixed interest rate of 4.61%. As of December 31, 2019, we were in compliance with all loan covenants. Each of the loan agreements are secured by a deed of trust, assignment of licenses, permits and contracts, assignment and subordination of the management agreements and assignment of rents.The terms of the security instruments provide for the cross collateralization/cross default of the each of the loans. The outstanding balance of the four loans was $43,393,000 and $44,584,000 as of December 31, 2019 and 2018, respectively.

On October 1, 2018, the Company through SPE LLC and Goldman Sachs Mortgage Company entered into a $259,000,000 term loan agreement. The Company together with its affiliates HIREIT, Hartman XIX and vREIT XXI, contributed a total of 39 commercial real estate properties ("Properties") to SPE, LLC, a recently formed Delaware limited liability company, subject to the mortgage indebtedness encumbering the Properties, in exchange for membership interests in SPE LLC. Proceeds of the Loan were immediately used to extinguish the existing mortgage indebtedness encumbering the Properties.

The term of the loan is five years, comprised of an initial two-year term with three one-year extension options. Each extension option shall be subject to certain conditions precedent including (i) no default then outstanding, (ii) 30 days prior written notice, (iii) the properties must have a specified in-place net operating income debt yield and (iv) purchase of an interest rate cap as described below for the exercised option term or terms.

The outstanding principal of the loan bears interest at the one-month LIBOR rate plus 1.8%. As a condition to the funding of the Loan, SPE LLC has entered into an interest rate cap arrangement with SMBC Capital Markets, Inc. that caps LIBOR at 3.75% during the initial term of the Loan.

The Loan Agreement contains various customary covenants, including but not limited to financial covenants, covenants requiring monthly deposits in respect of certain property costs, such as taxes, insurance, tenant improvements, and leasing commissions, covenants imposing restrictions on indebtedness and liens, and restrictions on investments and participation in other asset disposition, merger or business combination or dissolution transactions.

The Loan Agreement is secured by, among other things, mortgages on the Properties. The Company, HIREIT and Hartman XIX, entered into a guaranty agreement in favor of the lender, whereby each guarantor unconditionally guaranties the full and timely performance of the obligations set forth in the loan agreement and all other loan documents, including the payment of all indebtedness and obligations due under the loan agreement.

The following is a summary of the mortgage notes payable, in thousands:


					December 31,
Property/Facility	Payment (1)	Maturity Date	Rate		2019		2018
Richardson Heights (2)	P&I	July 1, 2041	4.61	%	$	17,260	$	17,760
Cooper Street (2)	P&I	July 1, 2041	4.61	%	$	7,435	$	7,632
Bent Tree Green (2)	P&I	July 1, 2041	4.61	%	$	7,435	$	7,632
Mitchelldale (2)	P&I	July 1, 2041	4.61	%	$	11,263	$	11,560
Promenade (3)	P&I				$	—	$	7,102
Hartman SPE LLC	IO	October 9, 2020	3.60	%	$	259,000	$	259,000
Hartman XXI	IO	March 31, 2021	10.00	%	$	4,400	$	—
					$	306,793	$	310,686
Less unamortized deferred loan costs					$	(3,754)	$	(4,779)
					$	303,039	$	305,907

(1) Principal and interest (P&I) or interest only (IO).

(2) Each promissory note contains a call option wherein the holder of the promissory note may declare the outstanding balance due and payable on either July 1, 2024, July 1, 2029, July 1, 2034, or July 1, 2039.

(3) Hartman SPE LLC loan proceeds for the repayment of the Promenade loan were in escrow as of October 1, 2018. The loan was paid in full with the refinancing proceeds on February 15, 2019.

Annual maturities of notes payable as of December 31, 2019 are as follows, in thousands:


December 31,	Amount Due
2020	$	260,253
2021	5,712
2022	1,374
2023	1,439
2024	1,506
Thereafter	36,509
Total	$	306,793

The Company’s loan costs are amortized using the straight-line method over the term of the loans, which approximates the interest method. Costs which have been deferred consist of the following, in thousands:


	December 31,
	2019		2018
Deferred loan costs	$	7,155	$	7,082
Less: deferred loan cost accumulated amortization	(3,401)		(2,303)
Total cost, net of accumulated amortization	$	3,754	$	4,779

Interest expense incurred for the year ending December 31, 2019 and 2018 was $13,834,000 and $11,306,000, respectively. Interest expense of $516,000 and $421,000 was payable as of December 31, 2019 and 2018, respectively, and is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.

Fair Value of Debt

The fair value of the Company’s fixed rate notes payable, variable rate notes payable and secured revolving credit facilities aggregates to $308,671,000 and $309,545,000 as compared to book value of $306,793,000 and $310,686,000 as of December 31, 2019 and 2018, respectively. The fair value of our debt instruments is estimated on a Level 2 basis, as provided by ASC 820, using a discounted cash flow analysis based on the borrowing rates currently available to the Company for loans with similar terms and maturities, discounting the future contractual interest and principal payments. Disclosure about the fair value of notes payable is based on relevant information available as of December 31, 2019 and 2018.