Note 13 — Share-Based Compensation

Stock Option Plan

The Company has a stock option plan (the "Plan") which authorizes the grant of nonqualified stock options to the Company's independent directors, officers, advisors, consultants and other personnel, subject to the absolute discretion of the board of directors and the applicable limitations of the Plan. The exercise price for all stock options granted under the Plan will be equal to the fair market value of a share on the date of grant. Upon a change in control, unvested options will become fully vested and any performance conditions imposed with respect to the options will be deemed to be fully achieved. A total of 0.5 million shares have been authorized and reserved for issuance under the Plan. As of March 31, 2016 and December 31, 2015, no stock options were issued under the Plan.

Restricted Share Plan

The Company's employee and director incentive restricted share plan ("RSP") provides the Company with the ability to grant awards of restricted shares to the Company's directors, officers and employees (if the Company ever has employees), employees of the Advisor and its affiliates, employees of entities that provide services to the Company, directors of the Advisor or of entities that provide services to the Company, certain consultants to the Company and the Advisor and its affiliates or to entities that provide services to the Company.

Under the RSP, the annual amount granted to the independent directors is determined by the board of directors. The maximum number of shares of stock granted under the RSP cannot exceed 10% of the Company’s outstanding shares of common stock, par value $0.01 per share on a fully diluted basis at any time. Restricted shares issued to independent directors generally vest over a three-year period in increments of 33.3% per annum. Generally, such awards provide for accelerated vesting of (i) all unvested restricted shares upon a change in control or a termination without cause and (ii) the portion of the unvested restricted shares scheduled to vest in the year of voluntary termination or the failure to be re-elected to the board.

Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares receive cash dividends prior to the time that the restrictions on the restricted shares have lapsed. Any dividends payable in shares of common stock are subject to the same restrictions as the underlying restricted shares.

During the three months ended March 31, 2015, the board of directors approved, and the Company awarded, 279,365 restricted shares to employees of the Advisor, of which 79,805 restricted shares were subsequently forfeited. The awards vest over a four year period in increments of 25% per annum.

The following table displays restricted share award activity during the three months ended March 31, 2016:



	Number of Restricted Shares		Weighted-Average Issue Price
Unvested, December 31, 2015	316,570		$	10.59
Vested	(46,980	)	10.37
Unvested, March 31, 2016	269,590		$	10.63

Compensation expense related to restricted shares was $0.1 million and approximately $19,000 for the three months ended March 31, 2016 and 2015, respectively.

As of March 31, 2016, the Company had approximately $1.6 million of unrecognized compensation cost related to unvested restricted share awards granted under the Company’s RSP, which is expected to vest over a period of 2.9 years.

2014 Advisor Multi-Year Outperformance Agreement

On April 15, 2014 (the "Effective Date") in connection with the Listing, the Company entered into the 2014 Advisor Multi-Year Outperformance Agreement (as amended and restated effective August 5, 2015, the "OPP") with the OP and the Advisor. Under the OPP, the Advisor was issued 8,880,579 LTIP units in the OP with a maximum award value on the issuance date equal to 5.0% of the Company’s market capitalization (the “OPP Cap”). The LTIP units are structured as profits interests in the OP.

The Advisor is eligible to earn a number of LTIP units with a value equal to a portion of the OPP Cap upon the first, second and third anniversaries of the Effective Date based on the Company’s achievement of certain levels of total return to its stockholders (“Total Return”), including both share price appreciation and common stock dividends, as measured against a peer group of companies, as set forth below, for the three-year performance period commencing on the Effective Date (the “Three-year Period”); each 12-month period during the Three-Year Period (the “One-Year Periods”); and the initial 24-month period of the Three-Year Period (the “Two-Year Period”), as follows:



			Performance Period	Annual Period	Interim Period
Absolute Component: 4% of any excess Total Return if total stockholder return attained above an absolute hurdle measured from the beginning of such period:			21%	7%	14%
Relative Component: 4% of any excess Total Return attained above the Total Return for the performance period of the Peer Group*, subject to a ratable sliding scale factor as follows based on achievement of cumulative Total Return measured from the beginning of such period:
	•	100% will be earned if total stockholder return achieved is at least:	18%	6%	12%
	•	50% will be earned if total stockholder return achieved is:	0%	0%	0%
	•	0% will be earned if total stockholder return achieved is less than:	0%	0%	0%
	•	a percentage from 50% to 100% calculated by linear interpolation will be earned if the cumulative Total Return achieved is between:	0% - 18%	0% - 6%	0% - 12%

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*The “Peer Group” is comprised of certain companies in the SNL US REIT Office Index.

The potential outperformance award is calculated at the end of each One-Year Period, the Two-Year Period and the Three-Year Period. The award earned for the Three-Year Period is based on the formula in the table above less any awards earned for the Two-Year Period and One-Year Periods, but not less than zero; the award earned for the Two-Year Period is based on the formula in the table above less any award earned for the first and second One-Year Period, but not less than zero. Any LTIP units that are unearned at the end of the Performance Period will be forfeited. On April 15, 2015, 367,059 LTIP units were earned by the Advisor under the terms of the OPP. Based on the Advisor's calculations, 805,679 LTIP units were earned by the Advisor on April 15, 2016 under the terms of the OPP. Under the OPP, these LTIP units will not be earned until approved by the Company's compensation committee. See Note 16 — Subsequent Events.

Moreover, the OPP provides for early calculation of earned LTIP units and for the accelerated vesting of any earned LTIP units in the event the Advisor is terminated or in the event of a change in control of the Company, which could motivate the Advisor to recommend a transaction that would result in a change in control under the OPP when such a transaction would not otherwise be in the best interests of the Company's stockholders.

Subject to the Advisor’s continued service through each vesting date, one third of any earned LTIP units will vest on each of the third, fourth and fifth anniversaries of the Effective Date. Until such time as an LTIP unit is earned in accordance with the provisions of the OPP, the holder of such LTIP unit is entitled to distributions on such LTIP unit equal to 10% of the distributions made per OP unit. The Company paid $0.1 million in distributions related to LTIP units during the three months ended March 31, 2016 and 2015 which is included in non-controlling interest in the consolidated balance sheets. After an LTIP unit is earned, the holder of such LTIP unit is entitled to a catch-up distribution and then the same distribution as the holder of an OP unit. At the time the Advisor’s average capital account balance with respect to an LTIP unit is economically equivalent to the average capital account balance of an OP unit, the LTIP unit has been earned and it has been vested for 30 days, the Advisor, in its sole discretion, will be entitled to convert such LTIP unit into an OP unit in accordance with the provisions of the limited partnership agreement of the OP.

The Company records equity-based compensation expense associated with the OPP over the requisite service period of five years. Equity-based compensation expense is adjusted each reporting period for changes in the estimated value. The amortization of the fair value of the OPP awards recorded as equity-based compensation was $(6.5) million and $0.2 million, respectively, for the three months ended March 31, 2016 and 2015 and is included in general and administrative expenses.

The valuation of the OPP is determined using a Monte Carlo simulation. This analysis reflects the contractual terms of the OPP, including the performance periods and total return hurdles, as well as observable market-based inputs, including interest rate curves, and unobservable inputs, such as expected volatility. As a result, the Company has determined that its OPP valuation in its entirety is classified in Level 3 of the fair value hierarchy. See Note 7 — Fair Value of Financial Instruments.

The following table presents information about the Company's OPP, which is measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015, aggregated by the level in the fair value hierarchy within which the instrument falls:



(In thousands)	Quoted Prices in Active Markets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Total
March 31, 2016
OPP	$	—	$	—	$	25,200	$	25,200
December 31, 2015
OPP	$	—	$	—	$	43,500	$	43,500

Level 3 valuations

The following is a reconciliation of the beginning and ending balance for the changes in instruments with Level 3 inputs in the fair value hierarchy for the three months ended March 31, 2016:



(In thousands)	OPP
Beginning balance as of December 31, 2015	$	43,500
Fair value adjustment	(18,300		)
Ending balance as of March 31, 2016	$	25,200

The following table provides quantitative information about significant Level 3 input used:



Financial Instrument	Fair Value		Principal Valuation Technique	Unobservable Inputs	Input Value
	(In thousands)
March 31, 2016
OPP	$	25,200	Monte Carlo Simulation	Expected volatility	24.0%
December 31, 2015
OPP	$	43,500	Monte Carlo Simulation	Expected volatility	27.0%

Expected volatility is a measure of the variability in possible returns for an instrument, parameter or market index given how much the particular instrument, parameter or index changes in value over time. Generally, the higher the expected volatility of the underlying instrument, the wider the range of potential future returns. An increase in expected volatility, in isolation, would generally result in an increase in the fair value measurement of an instrument. For the relationship described above, the inverse relationship would also generally apply.