Real Estate

As of September 30, 2016, the Company’s real estate portfolio consisted of 75 properties in 20 states consisting substantially of office, warehouse, and manufacturing facilities and 2 land parcels held for future development with a combined acquisition value of approximately $3.0 billion, including the allocation of the purchase price to above and below-market lease valuation.

2016 Acquisitions

On March 17, 2016, the Company acquired two land parcels to be held for future development from an unaffiliated party. The aggregate purchase price of the acquisitions was approximately $2.8 million.

On April 27, 2016, the Company, through the Operating Partnership, acquired the remaining 90% beneficial interest of a two-building, single-story office campus located in Nashville, Tennessee (the “HealthSpring property”) for $37.2 million (total purchase price value of $41.3 million). The purchase price and other acquisition items for the land parcels and properties acquired during the nine months ended September 30, 2016 are shown below (see Note 4, Investments, for additional detail):



Land Parcel/Property	Location	Tenant/Major Lessee	Acquisition Date	Purchase Price			Square Feet	Acquisition Fees Paid to the Advisor ⁽²⁾		Year of Lease Expiration
Lynnwood III	Lynnwood, WA	—	3/17/2016	$	1,538		43,000	$	46	—
Lynnwood IV	Lynnwood, WA	—	3/17/2016	$	1,244		34,800	$	37	—
HealthSpring	Nashville, TN	HealthSpring, Inc.	4/27/2016	$	41,300	⁽¹⁾	170,500	$	1.239	2022


(1)	The Company acquired a 10% beneficial interest in April 2013, which is included in the total purchase price at fair value.


(2)	The Advisor is entitled to receive acquisition fees equal to 2.5% and acquisition expense reimbursement of up to 0.5% of the contract purchase price for each property acquired.

The following summarizes the purchase price allocations of the Highway 94 and HealthSpring properties acquired during the year ended December 31, 2015 and the nine months ended September 30, 2016, respectively:



Property	Land		Building and improvements		Tenant origination and absorption costs		In-place lease valuation - above/(below) market			Debt discount		Total
Highway 94 ⁽¹⁾	$	5,637	$	18,592	$	6,688	$	(272	)	$	1,295	$	31,940
HealthSpring	$	8,126	$	26,441	$	5,006	$	1,192		$	535	$	41,300


(1)	The purchase price allocation of the Highway 94 property was finalized during the three months ended March 31, 2016.

Pro Forma Financial Information

The following condensed pro forma operating information is presented as if the Company’s property acquired during the three and nine months ended September 30, 2016, had been included in operations as of January 1, 2015. The pro forma operating information excludes certain nonrecurring adjustments, such as acquisition fees and expenses incurred, to reflect the pro forma impact the acquisition would have on earnings on a continuous basis:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Revenue	$	85,786		$	83,794		$	258,437		$	202,458
Net income	$	7,116		$	10,456		$	27,789		$	32,940
Net income attributable to noncontrolling interests	$	200		$	230		$	781		$	515
Distributions to redeemable noncontrolling interests attributable to common stockholders	$	(90	)	$	(91	)	$	(268	)	$	(268	)
Net income attributable to common stockholders ⁽¹⁾	$	6,826		$	7,806		$	26,740		$	14,808
Net income to common stockholders per share, basic and diluted	$	0.04		$	0.04		$	0.15		$	0.10


(1)	Amount is net of net income attributable to noncontrolling interests and distributions to redeemable noncontrolling interests attributable to common stockholders.

Future Minimum Contractual Rent Payments

The future minimum contractual rent payments pursuant to the current lease terms are shown in the table below. The Company's current leases have expirations ranging from 2016 to 2036.



Remaining 2016	$	64,869
2017	257,013
2018	246,790
2019	216,537
2020	191,780
Thereafter	1,005,568
Total	$	1,982,557

Assets Reclassified from Held for Sale to Held and Used

As of September 30, 2016, the Company decided to discontinue marketing the One Century Place property located in Nashville, Tennessee for sale. The One Century Place property, which was previously classified as held for sale and carried at the lower of its (i) carrying amount or (ii) fair value less costs to sell, was reclassified as held and used, and thus, included in continuing operations on the consolidated statement of operations as of September 30, 2016. In September 2016, the Company recorded a catch up adjustment for depreciation and amortization expense that would have been recognized had the property been continuously classified as held and used. No properties were classified as held for sale as of September 30, 2016.

Intangibles

The Company allocated a portion of the acquired and contributed real estate asset value to in-place lease valuation and tenant origination and absorption cost, as discussed above and as shown below, net of the write-off of intangibles as of September 30, 2016 and December 31, 2015. In-place leases were measured against comparable leasing information and the present value of the difference between the contractual, in-place rent, and the fair market rent was calculated using, as the discount rate, the capitalization rate utilized to compute the value of the real estate at acquisition or contribution.



	September 30, 2016			December 31, 2015
In-place lease valuation (above market)	$	47,419		$	46,227
In-place lease valuation (above market) - accumulated amortization	(17,885		)	(10,994		)
In-place lease valuation (above market), net	29,534			35,233
Ground leasehold interest (below market)	2,254			2,254
Ground leasehold interest (below market) - accumulated amortization	(75		)	(54		)
Ground leasehold interest (below market), net	2,179			2,200
Intangible assets, net	$	31,713		$	37,433
In-place lease valuation (below market)	$	(51,966	)	$	(55,774	)
In-place lease valuation (below market) - accumulated amortization	18,740			14,068
In-place lease valuation (below market), net	$	(33,226	)	$	(41,706	)
Tenant origination and absorption cost	$	541,646		$	536,882
Tenant origination and absorption cost - accumulated amortization	(177,874		)	(124,261		)
Tenant origination and absorption cost, net	$	363,772		$	412,621

The intangible assets are amortized over the remaining lease term of each property, which on a weighted-average basis, was approximately 7.1 years and 7.8 years as of September 30, 2016 and December 31, 2015, respectively. The amortization of the intangible assets and other leasing costs for the respective periods is as follows:



	Amortization (income) expense for the nine months ended September 30,
	2016		2015
In-place lease valuation, net	$	2,219	$	(2,147	)
Tenant origination and absorption cost	$	53,613	$	46,202
Ground leasehold amortization (below market)	$	21	$	21
Other leasing costs amortization	$	968	$	192

The following table sets forth the estimated annual amortization (income) expense for in-place lease valuation, net, tenant origination and absorption costs, ground leasehold improvements, and other leasing costs as of September 30, 2016 for the next five years:



Year	In-place lease valuation, net			Tenant origination and absorption costs		Ground leasehold improvements		Other leasing costs
Remaining 2016	$	488		$	16,150	$	7	$	233
2017	$	1,259		$	61,380	$	27	$	1,106
2018	$	249		$	53,849	$	27	$	1,579
2019	$	(1,663	)	$	44,762	$	27	$	1,579
2020	$	(839	)	$	36,169	$	27	$	1,556

Restricted Cash

In conjunction with the contribution of certain assets, as required by certain lease provisions or certain lenders in conjunction with an acquisition or debt financing, or credits received by the seller of certain assets, the Company assumed or funded reserves for specific property improvements and deferred maintenance, re-leasing costs, and taxes and insurance, which are included on the consolidated balance sheets as restricted cash. Additionally, an ongoing replacement reserve is funded by certain tenants pursuant to each tenant’s respective lease as follows:



Description	Balance as of December 31, 2015		Additions		Deductions			Balance as of September 30, 2016
Tenant improvement reserves⁽¹⁾	$	13,406	$	308	$	(2,553	)	$	11,161
Midland mortgage loan repairs reserves ⁽²⁾	453		—		(385		)	68
Real estate tax reserve (Emporia Partners, TW Telecom, DynCorp, and Mercedes-Benz) ⁽³⁾	1,891		1,725		(1,695		)	1,921
Property insurance reserve (Emporia Partners) ⁽³⁾	301		—		(172		)	129
Restricted deposits/Leasing commission reserve	68		25		(5		)	88
Midland mortgage loan restricted lockbox ⁽⁴⁾	2,044		1,569		(2,044		)	1,569
Restricted rent receipts ⁽⁵⁾	6,585		375		(6,585		)	375
Total	$	24,748	$	4,002	$	(13,439	)	$	15,311


(1)	Additions represent tenant improvement reserves funded by the tenant and held by the lender. Deductions represent tenant improvement reimbursements made to certain tenants during the current period.


(2)	Represents a deferred maintenance reserve funded by the Company as part of the refinancing that occurred on February 28, 2013, whereby certain properties became collateral for the Midland mortgage loan.


(3)	Additions represent monthly funding of real estate taxes and insurance by the tenants during the current period. Deductions represent reimbursements to the tenant for payment of real estate taxes and insurance premiums made during the current period.


(4)	As part of the terms of the Midland mortgage loan, rent collections from the eight properties which serve as collateral thereunder are received in a designated cash collateral account which is controlled by the lender until the designated payment date, as defined in the loan agreement, and the excess cash is transferred to the operating account.


(5)	Addition represents rent collections from the Mercedes-Benz property, which is to be held in a designated cash collateral account controlled by the lender until the designated payment date, as defined in the loan agreement. The excess cash is transferred to the operating account.

During January 2016, proceeds of $47.0 million from the sale of the Will Partners and LTI properties were released by the qualified intermediary. The funds were held by the qualified intermediary, as both properties were sold pursuant to a tax-deferred exchange.