5. Loans

Our investments in loans held-for-investment are accounted for at amortized cost and the loans held-for-sale are accounted for at the lower of cost or fair value, unless we have elected the fair value option. The following table summarizes our investments in mortgages and loans by subordination class as of September 30, 2013 and December 31, 2012 (amounts in thousands):

September 30, 2013	Carrying Value			Face Amount		Weighted Average Coupon		WAL (years)(2)
First mortgages	$	1,928,052		$	1,975,959	6.1	%	4.3
Subordinated mortgages(1)	523,393			560,147		7.9	%	3.5
Mezzanine loans	1,342,793			1,354,863		10.8	%	3.5
Total loans held-for-investment	3,794,238			3,890,969
First mortgages held-for-sale, lower of cost or fair value	66,018			67,000		3.5	%	4.9
First mortgages held-for-sale, fair value option elected	279,121			273,110		5.3	%	9.3
Loans transferred as secured borrowings	85,590			85,740		4.7	%	2.4
Total gross loans	4,224,967			4,316,819
Loan loss allowance	(3,976		)	—
Total net loans	$	4,220,991		$	4,316,819

December 31, 2012	Carrying Value			Face Amount		Weighted Average Coupon		WAL (years)(2)
First mortgages	$	1,461,666		$	1,502,382	6.2	%	3.8
Subordinated mortgages(1)	397,159			430,444		9.8	%	4.0
Mezzanine loans	1,057,670			1,079,897		10.3	%	3.6
Total loans held-for-investment	2,916,495			3,012,723
Loans transferred as secured borrowings	85,901			86,337		4.7	%	3.2
Total gross loans	3,002,396			3,099,060
Loan loss allowance	(2,061		)	—
Total net loans	$	3,000,335		$	3,099,060

(1) Subordinated mortgages include (i) subordinated mortgages that we retain after having sold first mortgage positions related to the same collateral, (ii) B-Notes, and (iii) subordinated loan participations.

(2) Represents the WAL of each respective group of loans. The WAL of each individual loan is calculated as a fraction, the numerator of which is the sum of the timing (in years) of each expected future principal payment multiplied by the balance of the respective payment, and with a denominator equal to the sum of the expected principal payments using the contractually extended maturity dates of the assets. This calculation was made as of September 30, 2013 and December 31, 2012. Assumptions for the calculation of the WAL are adjusted as necessary for changes in projected principal repayments and/or maturity dates of the loan.

As of September 30, 2013, approximately $2.7 billion, or 64.1%, of the loans are variable rate and pay interest at LIBOR or EURIBOR plus a weighted-average spread of 6.17%. The following table summarizes our investments in floating rate loans (amounts in thousands):

	September 30, 2013			December 31, 2012
Index	Rate	Carrying Value		Rate	Carrying Value
1 Month LIBOR	0.1789%	$	453,690	0.2087%	$	674,327
1 Month Citibank LIBOR(1)	N/A	—		0.1900%	93,195
3 Month Citibank LIBOR(1)	N/A	—		0.3000%	7,217
3 Month EURIBOR	0.225%	54,091		N/A	—
LIBOR Floor	0.19% - 3.0%(2)	2,201,216		0.5% - 2.0%	1,143,443
Total		$	2,708,997		$	1,918,182

(1) The Citibank LIBOR rate is equal to the rate per annum at which deposits in United States dollars are offered by the principal office of Citibank, N.A. in London, England to prime banks in the London interbank market.

(2) The weighted-average LIBOR Floor is 0.52% as of September 30, 2013.

As of September 30, 2013, the risk ratings for loans subject to our rating system, which is described in our Form 10-K, and excludes loans on cost recovery method and loans for which the fair value option has been elected, by class of loan were as follows (amounts in thousands):

	Balance Sheet Classification
Risk	Loans Held-For-Investment								Loans Transferred
Rating Category	First Mortgages		Subordinated Mortgages		Mezzanine Loans		Loans Held- For-Sale		As Secured Borrowings		Total
1	$	—	$	—	$	—	$	—	$	—	$	—
2	25,473		2,422		343,818		—		13,046		384,759
3	1,740,951		489,430		919,293		66,018		72,544		3,288,236
4	153,845		31,541		79,682		—		—		265,068
5	—		—		—		—		—		—
Not Rated	7,783		—		—		279,121		—		286,904
	$	1,928,052	$	523,393	$	1,342,793	$	345,139	$	85,590	$	4,224,967

As of December 31, 2012, the risk ratings by class of loan, excluding loans where we have elected the fair value option, were as follows (amounts in thousands):

	Balance Sheet Classification
Risk	Loans Held-For-Investment								Loans Transferred
Rating Category	First Mortgages		Subordinated Mortgages		Mezzanine Loans		Loans Held- For-Sale		As Secured Borrowings		Total
1	$	—	$	—	$	—	$	—	$	—	$	—
2	39,734		2,434		370,671		—		13,113		425,952
3	1,350,455		363,275		679,371		—		72,788		2,465,889
4	59,970		31,450		7,628		—		—		99,048
5	11,507		—		—		—		—		11,507
	$	1,461,666	$	397,159	$	1,057,670	$	—	$	85,901	$	3,002,396

After completing the impairment evaluation process described in our Form 10-K, we concluded that no impairment charges were required on any individual loans held for investment as of September 30, 2013 or December 31, 2012. As of September 30, 2013, none of our loans held for investment were in default. Additionally, none of our held-for-sale loans where we have elected the fair value option were 90 days or more past due or on nonaccrual status.

We recorded an allowance for loan losses equal to (i) 1.5% of the aggregate carrying amount of loans rated as a “4,” plus (ii) 5% of the aggregate carrying amount of loans rated as a “5.” These groups accounted for 6.3% and 3.7% of our loan portfolio as of September 30, 2013 and December 31, 2012, respectively (amounts in thousands):

	For the Nine Months Ended September 30, 2013		For the Nine Months Ended September 30, 2012
Reserve for loan losses at beginning of year	$	2,061	$	—
Provision for loan losses	1,915		—
Charge-offs	—		—
Recoveries	—		—
Reserve for loan losses at end of period	$	3,976	$	—
Recorded investment in loans related to the allowance for loan loss	$	265,068	$	—

For the nine months ended September 30, 2013, the activity in our loan portfolio was as follows (amounts in thousands):

Balance December 31, 2012	$	3,000,335
Acquisition of LNR loans	264,517
Acquisitions/originations	2,506,378
Capitalized interest (1)	12,481
Basis of loans sold (2)	(1,221,396		)
Loan maturities	(329,636		)
Principal repayments	(65,272		)
Discount accretion/premium amortization	26,917
Changes in fair value	26,315
Unrealized foreign currency remeasurement gain	3,784
Capitalized cost written off	(1,517		)
Loan loss allowance	(1,915		)
Balance September 30, 2013	$	4,220,991

(1) Represents accrued interest income on loans whose terms do not require current payment of interest.

(2) See Note 12 of the condensed consolidated financial statements for additional disclosure on these transactions.

We acquired or originated $2.5 billion (face value) in loans during the nine months ended September 30, 2013, which included: (1) 74 first mortgage loans originated for future securitization by LNR’s conduit platform (2) an $86.0 million first mortgage construction financing for the development of 30 luxury condominium residences and a ground floor retail space in Manhattan, New York. Of this total loan amount, $50.6 million was funded at closing; (3) an origination of a $350.0 million first mortgage and mezzanine loan for the construction of the Hudson Yards South Tower located on Manhattan’s West side with $98.9 million funded at close; (4) an origination of a $158.5 million first mortgage and mezzanine loan, with $122.9 million funded at closing, secured by the fee interest in an 11 story office building in New York; (5) an origination of a $275.0 million first mortgage loan of which $225.0 million was funded at close; (6) recapitalization of an existing loan with a $140.0 million first mortgage of which $115.0 million was funded at close. The A-Note was subsequently sold to another lender for proceeds that approximated our carrying amount; (7) refinancing of an existing loan collateralized by a portfolio of hotel properties located throughout the United States. We co-originated a $142.5 million first mortgage loan with a strategic partner. The $100.0 million A-note was sold in securitization shortly after, resulting in gross proceeds of approximately $99.4 million; (8) an origination of a $145.6 million first mortgage and mezzanine loan, of which $115.0 million was funded at close, secured by a media campus located in Burbank, CA; (9) an origination of an $136.8 million first mortgage loan and mezzanine loan, of which $112.0 million was funded at close, collateralized by eight, two-story office/research & development buildings located on a campus in San Jose, CA; (10) co-originated a Euro-denominated first mortgage loan with an affiliate of the Manager (loan is secured by a portfolio of 225 retail properties in Finland with $53.8 million funded at close and $12.9 million in future funding); and (11) an origination of a $112.0 first mortgage loan secured by 844,820 square feet of land, which currently consists of 15 parking lots totaling 2,509 spaces, located in Boston’s Seaport District. Additionally, eight loans, totaling $147.5 million, were prepaid or matured during the nine months ended September 30, 2013.