Fair Value

Notes payable – Fixed Rate—The estimated fair value of notes payable – fixed rate measured using quoted prices and observable inputs from similar liabilities (Level 2) was approximately $133,197,000 and $131,984,000 as of June 30, 2016 and December 31, 2015, respectively, as compared to the outstanding principal of $129,665,000 and $131,233,000 as of June 30, 2016 and December 31, 2015, respectively.

Notes payable – Variable—The estimated fair value of notes payable – variable rate fixed through interest rate swap agreements (Level 2) was approximately $334,684,000 and $364,478,000 as of June 30, 2016 and December 31, 2015, respectively, as compared to the outstanding principal of $333,966,000 and $369,002,000 as of June 30, 2016 and December 31, 2015, respectively. The outstanding principal of the notes payable – variable was $42,348,000 and $43,097,000 as of June 30, 2016 and December 31, 2015, respectively, which approximated their fair value because they are interest rate adjustable.

Unsecured credit facility—The outstanding principal of the unsecured credit facility – variable was $218,000,000 and $238,000,000, which approximated its fair value, as of June 30, 2016 and December 31, 2015, respectively. The interest on the unsecured credit facility – variable is calculated at LIBOR, plus an applicable margin. The interest rate resets to market on a monthly basis. The fair value of the Company's unsecured credit facility – variable is estimated based on the interest rates currently offered to the Company by financial institutions. The estimated fair value of the unsecured credit facility – variable rate fixed through interest rate swap agreements (Level 2) was approximately $200,230,000 and $52,054,000 as of June 30, 2016 and December 31, 2015, respectively, as compared to the outstanding principal of $210,000,000 and $55,000,000 as of June 30, 2016 and December 31, 2015, respectively.

Notes receivable—The outstanding principal of the notes receivable approximated the fair value as of June 30, 2016 and December 31, 2015. The fair value of the Company’s notes receivable is estimated using significant unobservable inputs not based on market activity, but rather through particular valuation techniques (Level 3). The fair value was measured based on the income approach valuation methodology, which requires certain judgments to be made by management.

Contingent consideration—The Company has a contingent obligation to pay a former owner in conjunction with a certain acquisition if specified future operational objectives are met over future reporting periods. Liabilities for contingent consideration will be measured at fair value each reporting period, with the acquisition-date fair value included as part of the consideration transferred, and subsequent changes in fair value recorded in earnings as change in fair value of contingent consideration.

The estimated fair value of the contingent consideration was $5,585,000 and $5,340,000 as of June 30, 2016 and December 31, 2015, respectively, which is reported in the accompanying condensed consolidated balance sheets in accounts payable and other liabilities. The Company uses an income approach to value the contingent consideration liability, which is determined based on the present value of probability-weighted future cash flows. The Company has classified the contingent consideration liability as Level 3 of the fair value hierarchy due to the lack of relevant observable market data over fair value inputs such as probability-weighting for payment outcomes. Increases in the assessed likelihood of a high payout under a contingent consideration arrangement contributes to increases in the fair value of the related liability. Conversely, decreases in the assessed likelihood of a higher payout under a contingent consideration arrangement contributes to decreases in the fair value of the related liability. Changes in assumptions could have an impact on the payout of the contingent consideration arrangement with a maximum payout of $8,450,000 and a minimum payout of $0 as of June 30, 2016.

Derivative instruments—Considerable judgment is necessary to develop estimated fair values of financial instruments. Accordingly, the estimates presented herein are not necessarily indicative of the amount the Company could realize, or be liable for, on disposition of the financial instruments. The Company has determined that the majority of the inputs used to value its interest rate swaps fall within Level 2 of the fair value hierarchy. The credit valuation adjustments associated with these instruments utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and the respective counterparty. However, as of June 30, 2016, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions, and has determined that the credit valuation adjustments are not significant to the overall valuation of its interest rate swaps. As a result, the Company determined that its interest rate swaps valuation in its entirety is classified in Level 2 of the fair value hierarchy.

Preferred Equity Investment—The carrying value of the Preferred Equity Investment approximated its fair value as of June 30, 2016 and December 31, 2015. The fair value of the Preferred Equity Investment is estimated using significant unobservable inputs not based on market activity, but rather through particular valuation techniques (Level 3). The Company calculated the fair value of the Preferred Equity Investment using a dividend discount model, which calculates the present value of the future cash payments, discounted back to the present value using a discount rate that embodies the risk associated with the investment.

The following table shows the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015 (amounts in thousands):



	June 30, 2016
	Fair Value Hierarchy
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Assets:
Derivative assets	$	—	$	—		$	—		$	—
Total assets at fair value	$	—	$	—		$	—		$	—
Liabilities:
Derivative liabilities	$	—	$	(9,049	)	$	—		$	(9,049	)
Contingent consideration obligation	—		—			(5,585		)	(5,585		)
Total liabilities at fair value	$	—	$	(9,049	)	$	(5,585	)	$	(14,634	)

	December 31, 2015
	Fair Value Hierarchy
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Assets:
Derivative assets	$	—	$	61		$	—		$	61
Total assets at fair value	$	—	$	61		$	—		$	61
Liabilities:
Derivative liabilities	$	—	$	(2,641	)	$	—		$	(2,641	)
Contingent consideration obligation	—		—			(5,340		)	(5,340		)
Total liabilities at fair value	$	—	$	(2,641	)	$	(5,340	)	$	(7,981	)

The following table provides a rollforward of the fair value of recurring Level 3 fair value measurements for the three and six months ended June 30, 2016 and 2015 (amounts in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Liabilities:
Contingent consideration obligation:
Beginning balance	$	5,460	$	6,720	$	5,340	$	6,570
Additions to contingent consideration obligation	—		—		—		—
Total changes in fair value included in earnings	125		150		245		300
Ending balance	$	5,585	$	6,870	$	5,585	$	6,870
Unrealized losses still held (1)	$	125	$	150	$	245	$	300


(1)	Represents the unrealized losses recorded in earnings or other comprehensive income (loss) during the period for liabilities classified as Level 3 that are still held at the end of the period.