Notes Payable

3 Months Ended

Mar. 31, 2020

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 March 31, 2020, the Company was in compliance with all loan covenants, with respect to the loans above. Each of the loan agreements is 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 $42,982,000 and $43,393,000 as of March 31, 2020 and December 31, 2019, respectively.

On October 1, 2018, the Company through Hartman SPE, LLC and Goldman Sachs Mortgage Company entered into a $259,000,000 term loan agreement (the "SASB Loan"). The Company together with its affiliates HIREIT, Hartman XIX and vREIT XXI, contributed a total of 39 commercial real estate properties to Hartman SPE, LLC in exchange for membership interests in Hartman SPE, LLC.

The term of the SASB 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 SASB Loan bears interest at the one-month LIBOR rate plus 1.8%. The SASB Loan is subject to an interest rate cap arrangement which caps LIBOR at 3.75% during the initial term of the SASB Loan.

The SASB Loan 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 SASB Loan 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 Company’s notes payable, in thousands:


Property/Facility	Payment (1)	Maturity Date	Rate		March 31, 2020			December 31, 2019
Richardson Heights (2)	P&I	July 1, 2041	4.61	%	$	17,087		$	17,260
Cooper Street (2)	P&I	July 1, 2041	4.61	%	7,367			7,435
Bent Tree Green (2)	P&I	July 1, 2041	4.61	%	7,367			7,435
Mitchelldale (2)	P&I	July 1, 2041	4.61	%	11,161			11,263
Hartman SPE LLC	IO	October 9, 2020	2.79	%	259,000			259,000
Hartman XXI	IO	March 31, 2021	10.00	%	8,200			4,400
					310,182			306,793
Less: unamortized deferred loan costs							(3,500)			(3,754)
					$	306,682		$	303,039

(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.

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


	March 31, 2020		December 31, 2019
Deferred loan costs	$	7,155	$	7,155
Less: deferred loan cost accumulated amortization	(3,655)		(3,401)
Total cost, net of accumulated amortization	$	3,500	$	3,754

Interest expense incurred for the three months ended March 31, 2020 and 2019 was $3,018,000 and $3,669,000, respectively, which includes amortization expense of deferred loan costs. Interest expense of $320,000 and $516,000 was payable as of March 31, 2020 and December 31, 2019, respectively, and is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.

The Company is required to provide audited financial statements for Hartman SPE, LLC within 120 days after the end of its fiscal year, which is December 31. The servicer for the lender has extended the time for delivery of the Hartman SPE, LLC audited annual financial statements.

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 $315,637,000 and $308,671,000 as compared to book value of $310,182,000 and $306,793,000 as of March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019.