Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Fair Value Measurements [Abstract]

Fair Value Measurements

3. Fair Value Measurements

The Company has categorized its financial instruments in accordance with U.S. GAAP based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Financial assets and liabilities recorded on the consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:

Level 1. Quoted prices for identical assets or liabilities in an active market.

Level 2. Financial assets and liabilities whose values are based on the following:

a) Quoted prices for similar assets or liabilities in active markets.

b) Quoted prices for identical or similar assets or liabilities in non-active markets.

c) Pricing models whose inputs are observable for substantially the full term of the asset or liability.

d) Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability.

Level 3. Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.

Determination of Fair Value

The following is a description of the valuation techniques used to measure fair value and the general classification of these instruments pursuant to the fair value hierarchy.

Real Estate Securities

Real estate securities are generally valued using a third-party pricing service or broker quotations. These quotations are based on observable inputs that can be validated, and as such, are classified as Level 2 of the fair value hierarchy. Certain real estate securities that may be valued based on a single broker quote or an internal pricing model, and have less observable pricing will be classified as Level 3 of the fair value hierarchy. For real estate securities using an internal pricing model, inputs include assumptions related to the timing and amount of expected future cash flows, the discount rate, prepayments and losses.

Fair Value Hierarchy

Financial assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth the Company’s financial assets that were accounted for at fair value on a recurring basis as of September 30, 2011 and December 31, 2010 by level within the fair value hierarchy:

	September 30, 2011								December 31, 2010
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Real estate securities CMBS	$	—	$	34,255,310	$	—	$	34,255,310	$	—	$	31,264,331	$	—	$	31,264,331

At September 30, 2011, the Company had no financial assets or liabilities that were accounted for at fair value on a non-recurring basis.

Fair Value Option

The Company generally will not elect the fair value option of accounting for its financial assets and liabilities. However, the Company may elect to apply the fair value option of accounting to certain of its real estate security investments at the time of initial recognition of the investments. As of September 30, 2011, the fair value option of accounting was elected for two of the Company’s real estate securities.

Changes in fair value for assets and liabilities for which the election is made will be recognized in income as they occur. The fair value option may be elected on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The following table sets forth fair value of the Company’s financial instruments for which the fair value option was elected and the aggregate contractual amounts of those real estate securities as of September 30, 2011 and December 31, 2010:

	September 30,		December 31,
	2011		2010
Real estate securities(1)
CMBS, at fair value	$	31,470,157	$	31,264,331
CMBS, contractual amount due upon maturity		28,856,000		28,856,000
Difference	$	2,614,157	$	2,408,331

(1) As of September 30, 2011, excludes one security with a principal amount of $4.0 million for which the fair value option was not elected.

For the three months ended September 30, 2011 and 2010, the Company recognized a net unrealized gain (loss) of ($278,519) and $1,109,603, respectively, from the change in fair value of financial assets for which the fair value option was elected. For the nine months ended September 30, 2011 and 2010, the Company recognized a net unrealized gain of $302,793 and $2,213,850, respectively. These amounts are recorded as unrealized gains (losses) on investments and other in the Company’s consolidated statements of operations.

Fair Value of Financial Instruments

In addition to the above disclosures regarding assets or liabilities which are recorded at fair value, U.S. GAAP requires disclosure of fair value about all financial instruments. The following disclosures of estimated fair value of financial instruments were determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The following table shows the principal amount, carrying value and fair value of our financial assets and liabilities at September 30, 2011:

	September 30, 2011
	Principal		Carrying		Fair
	Amount		Value		Value
Financial assets:
Cash(1)	$	40,588,178	$	40,588,178	$	40,588,178
Restricted cash(1)		4,945,802		4,945,802		4,945,802
Real estate securities, available for sale(2)		32,856,000		34,255,310		34,255,310
Real estate debt investments		29,357,400		29,225,791		29,357,400
Receivables(1)		273,784		273,784		273,784
Financial liabilities:
Borrowings		24,061,212		24,061,212		25,571,699
Accounts payable and accrued expenses(1)		1,000,300		1,000,300		1,000,300
Escrow deposits payable(1)		4,945,802		4,945,802		4,945,802
Distribution payable(1)		559,507		559,507		559,507

(1)	As of September 30, 2011, carrying value approximates fair value due to the short-term maturities of these items.
(2)	Refer to the “Determination of Fair Value” above for a discussion of methodologies used to determine fair value.

Disclosure about fair value of financial instruments is based on pertinent information available to management at the time. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.

Real Estate Debt Investments

For real estate debt investments, fair value was approximated by comparing yields at which the investments are held to estimated yields at which loans originated with similar credit risks or market yields at which a third party might require to purchase the investment by discounting future cash flows at such market yields. Prices were calculated assuming fully-extended maturities regardless of structural or economic tests required to achieve such extended maturities.

Borrowings

The estimated fair value is based on interest rates available for issuance of debt with similar terms and remaining maturities. The estimated fair value of the Company’s secured term loans is not necessarily indicative of the amounts that the Company could realize in a current market exchange.