Disclosure About Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2012

Disclosure About Fair Value of Financial Instruments [Line Items]

Disclosure About Fair Value of Financial Instruments

Disclosure About Fair Value of Financial Instruments

The following summarizes the three levels of inputs that we use to measure fair value, as well as the assets, noncontrolling interests in the Operating Partnership and liabilities that we recognize at fair value using those levels of inputs.

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

Our Level 1 assets are investments in marketable securities that we use to pay benefits under our non-qualified deferred compensation plan. Our Level 1 noncontrolling interests in the Operating Partnership relate to the ownership of Common Units by various individuals and entities other than the Company. Our Level 1 liability is our non-qualified deferred compensation obligation.

Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

Our Level 2 asset is the fair value of our mortgages and notes receivable, which was estimated by the income approach utilizing contractual cash flows and market-based interest rates to approximate the price that would be paid in an orderly transaction between market participants.

Our Level 2 liabilities include (1) the fair value of our mortgages and notes payable, which was estimated by the income approach utilizing contractual cash flows and market-based interest rates to approximate the price that would be paid in an orderly transaction between market participants and (2) interest rate swaps whose fair value is determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments of our interest rate swaps are based on the expectation of future LIBOR interest rates (forward curves) derived from observed market LIBOR interest rate curves. In addition, credit valuation adjustments are incorporated in the fair values to account for potential nonperformance risk, but were concluded to not be significant inputs to the calculation for the periods presented.

Level 3. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Our Level 3 assets include our tax increment financing bond, which is not routinely traded but whose fair value is determined by the income approach utilizing contractual cash flows and market-based interest rates to estimate the projected redemption value based on quoted bid/ask prices for similar unrated municipal bonds and, if any, real estate assets and for-sale residential condominiums recorded at fair value on a non-recurring basis as a result of our quarterly impairment analysis, which were valued using broker opinion of value and substantiated by internal cash flow projections.

Our Level 3 liabilities include the fair value of our contingent consideration to acquire real estate assets and financing obligations, which were estimated by the income approach to approximate the price that would be paid in an orderly transaction between market participants, utilizing: (1) contractual cash flows; (2) market-based interest rates; and (3) a number of other assumptions including demand for space, competition for customers, changes in market rental rates, costs of operation and expected ownership periods.

9. Disclosure About Fair Value of Financial Instruments - Continued

The following tables set forth the assets, noncontrolling interests in the Operating Partnership and liabilities that we measure at fair value by level within the fair value hierarchy. We determine the level based on the lowest level of substantive input used to determine fair value.

			Level 1		Level 2		Level 3
	September 30, 2012		Quoted Prices in Active Markets for Identical Assets or Liabilities		Significant Observable Inputs		Significant Unobservable Inputs
Assets:
Mortgages and notes receivable, at fair value (1)	$	17,382	$	—	$	17,382	$	—
Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)	3,264		3,264		—		—
Tax increment financing bond (in prepaid expenses and other assets)	15,270		—		—		15,270
Total Assets	$	35,916	$	3,264	$	17,382	$	15,270
Noncontrolling Interests in the Operating Partnership	$	123,141	$	123,141	$	—	$	—
Liabilities:
Mortgages and notes payable, at fair value (1)	$	1,889,775	$	—	$	1,889,775	$	—
Interest rate swaps (in accounts payable, accrued expenses and other liabilities)	10,274		—		10,274		—
Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)	3,264		3,264		—		—
Contingent consideration to acquire real estate assets (in accounts payable, accrued expenses and other liabilities)	563		—		—		563
Financing obligations, at fair value (1)	18,930		—		—		18,930
Total Liabilities	$	1,922,806	$	3,264	$	1,900,049	$	19,493

			Level 1		Level 2		Level 3
	December 31, 2011		Quoted Prices in Active Markets for Identical Assets or Liabilities		Significant Observable Inputs		Significant Unobservable Inputs
Assets:
Mortgages and notes receivable, at fair value (1)	$	18,990	$	—	$	18,990	$	—
Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)	3,149		3,149		—		—
Tax increment financing bond (in prepaid expenses and other assets)	14,788		—		—		14,788
Impaired real estate assets and for-sale residential condominiums	12,767		—		—		12,767
Total Assets	$	49,694	$	3,149	$	18,990	$	27,555
Noncontrolling Interests in the Operating Partnership	$	110,655	$	110,655	$	—	$	—
Liabilities:
Mortgages and notes payable, at fair value (1)	$	1,959,438	$	—	$	1,959,438	$	—
Interest rate swaps (in accounts payable, accrued expenses and other liabilities)	2,202		—		2,202		—
Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)	3,149		3,149		—		—
Financing obligations, at fair value (1)	18,866		—		—		18,866
Total Liabilities	$	1,983,655	$	3,149	$	1,961,640	$	18,866

__________

9. Disclosure About Fair Value of Financial Instruments - Continued

(1)    Amounts carried at historical cost on our Consolidated Balance Sheets at September 30, 2012 and December 31, 2011, respectively.

The following table sets forth the changes in our Level 3 asset and liability, which are recorded at fair value on our Consolidated Balance Sheets on a recurring basis:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2012			2011		2012			2011
Asset:
Tax Increment Financing Bond:
Beginning balance	$	15,371		$	15,228	$	14,788		$	15,699
Unrealized gains/(losses) (in AOCL)	(101		)	600		482			129
Ending balance	$	15,270		$	15,828	$	15,270		$	15,828
Liability:
Contingent Consideration to Acquire Real Estate Assets:
Beginning balance	$	677		$	—	$	677		$	—
Unrealized gains (in general and administrative)	(114		)	—		(114		)	—
Ending balance	$	563		$	—	$	563		$	—

During 2007, we acquired a tax increment financing bond associated with a parking garage developed by us. This bond amortizes to maturity in 2020. The estimated fair value at September 30, 2012 was $1.8 million below the outstanding principal due on the bond. If the discount rate used to fair value this bond was 100 basis points higher or lower, the fair value of the bond would have been $0.5 million lower or $0.6 million higher, respectively, as of September 30, 2012. We intend to hold this bond and have concluded that we will not be required to sell this bond before recovery of the bond principal. Payment of the principal and interest for the bond is guaranteed by us. We have recorded no credit losses related to the bond during the three and nine months endedSeptember 30, 2012 and 2011. There is no legal right of offset with the liability, which we report as a financing obligation, related to this tax increment financing bond.

The following table sets forth quantitative information about the unobservable inputs of our Level 3 asset and liability, which are recorded at fair value on our Consolidated Balance Sheets on a recurring basis:

	Fair Value at September 30, 2012		Valuation Technique	Unobservable Input	Rate/ Percentage
Tax increment financing bond	$	15,270	Income approach	Discount rate	10.73	%
Contingent consideration to acquire real estate assets	$	563	Income approach	Payout percentage	75.00	%

Highwoods Realty Limited Partnership [Member]

Disclosure About Fair Value of Financial Instruments [Line Items]

Disclosure About Fair Value of Financial Instruments

Disclosure About Fair Value of Financial Instruments

The following summarizes the three levels of inputs that we use to measure fair value, as well as the assets and liabilities that we recognize at fair value using those levels of inputs.

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

Our Level 1 assets are investments in marketable securities that we use to pay benefits under our non-qualified deferred compensation plan. Our Level 1 liability is our non-qualified deferred compensation obligation.

Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

Our Level 2 asset is the fair value of our mortgages and notes receivable, which was estimated by the income approach utilizing contractual cash flows and market-based interest rates to approximate the price that would be paid in an orderly transaction between market participants.

Our Level 2 liabilities include (1) the fair value of our mortgages and notes payable, which was estimated by the income approach utilizing contractual cash flows and market-based interest rates to approximate the price that would be paid in an orderly transaction between market participants and (2) interest rate swaps whose fair value is determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments of our interest rate swaps are based on the expectation of future LIBOR interest rates (forward curves) derived from observed market LIBOR interest rate curves. In addition, credit valuation adjustments are incorporated in the fair values to account for potential nonperformance risk, but were concluded to not be significant inputs to the calculation for the periods presented.

Level 3. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

9. Disclosure About Fair Value of Financial Instruments - Continued

Our Level 3 assets include our tax increment financing bond, which is not routinely traded but whose fair value is determined by the income approach utilizing contractual cash flows and market-based interest rates to estimate the projected redemption value based on quoted bid/ask prices for similar unrated municipal bonds and, if any, real estate assets and for-sale residential condominiums recorded at fair value on a non-recurring basis as a result of our quarterly impairment analysis, which were valued using broker opinion of value and substantiated by internal cash flow projections.

Our Level 3 liabilities include the fair value of our contingent consideration to acquire real estate assets and financing obligations, which were estimated by the income approach to approximate the price that would be paid in an orderly transaction between market participants, utilizing: (1) contractual cash flows; (2) market-based interest rates; and (3) a number of other assumptions including demand for space, competition for customers, changes in market rental rates, costs of operation and expected ownership periods.

The following tables set forth the assets and liabilities that we measure at fair value by level within the fair value hierarchy. We determine the level based on the lowest level of substantive input used to determine fair value.

			Level 1		Level 2		Level 3
	September 30, 2012		Quoted Prices in Active Markets for Identical Assets or Liabilities		Significant Observable Inputs		Significant Unobservable Inputs
Assets:
Mortgages and notes receivable, at fair value (1)	$	17,382	$	—	$	17,382	$	—
Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)	3,264		3,264		—		—
Tax increment financing bond (in prepaid expenses and other assets)	15,270		—		—		15,270
Total Assets	$	35,916	$	3,264	$	17,382	$	15,270
Liabilities:
Mortgages and notes payable, at fair value (1)	$	1,889,775	$	—	$	1,889,775	$	—
Interest rate swaps (in accounts payable, accrued expenses and other liabilities)	10,274		—		10,274		—
Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)	3,264		3,264		—		—
Contingent consideration to acquire real estate assets (in accounts payable, accrued expenses and other liabilities)	563		—		—		563
Financing obligations, at fair value (1)	18,930		—		—		18,930
Total Liabilities	$	1,922,806	$	3,264	$	1,900,049	$	19,493

9. Disclosure About Fair Value of Financial Instruments - Continued

			Level 1		Level 2		Level 3
	December 31, 2011		Quoted Prices in Active Markets for Identical Assets or Liabilities		Significant Observable Inputs		Significant Unobservable Inputs
Assets:
Mortgages and notes receivable, at fair value (1)	$	18,990	$	—	$	18,990	$	—
Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)	3,149		3,149		—		—
Tax increment financing bond (in prepaid expenses and other assets)	14,788		—		—		14,788
Impaired real estate assets and for-sale residential condominiums	12,767		—		—		12,767
Total Assets	$	49,694	$	3,149	$	18,990	$	27,555
Liabilities:
Mortgages and notes payable, at fair value (1)	$	1,959,438	$	—	$	1,959,438	$	—
Interest rate swaps (in accounts payable, accrued expenses and other liabilities)	2,202		—		2,202		—
Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)	3,149		3,149		—		—
Financing obligations, at fair value (1)	18,866		—		—		18,866
Total Liabilities	$	1,983,655	$	3,149	$	1,961,640	$	18,866

__________

(1)    Amounts carried at historical cost on our Consolidated Balance Sheets at September 30, 2012 and December 31, 2011, respectively.

The following table sets forth the changes in our Level 3 asset and liability, which are recorded at fair value on our Consolidated Balance Sheets on a recurring basis:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2012			2011		2012			2011
Asset:
Tax Increment Financing Bond:
Beginning balance	$	15,371		$	15,228	$	14,788		$	15,699
Unrealized gains/(losses) (in AOCL)	(101		)	600		482			129
Ending balance	$	15,270		$	15,828	$	15,270		$	15,828
Liability:
Contingent Consideration to Acquire Real Estate Assets:
Beginning balance	$	677		$	—	$	677		$	—
Unrealized gains (in general and administrative)	(114		)	—		(114		)	—
Ending balance	$	563		$	—	$	563		$	—

During 2007, we acquired a tax increment financing bond associated with a parking garage developed by us. This bond amortizes to maturity in 2020. The estimated fair value at September 30, 2012 was $1.8 million below the outstanding principal due on the bond. If the discount rate used to fair value this bond was 100 basis points higher or lower, the fair value of the bond would have been $0.5 million lower or $0.6 million higher, respectively, as of September 30, 2012. We intend to hold this bond and have concluded that we will not be required to sell this bond before recovery of the bond principal. Payment of the principal and interest for the bond is guaranteed by us. We have recorded no credit losses related to the bond during the three and nine months endedSeptember 30, 2012 and 2011. There is no legal right of offset with the liability, which we report as a financing obligation, related to this tax increment financing bond.

9. Disclosure About Fair Value of Financial Instruments - Continued

The following table sets forth quantitative information about the unobservable inputs of our Level 3 asset and liability, which are recorded at fair value on our Consolidated Balance Sheets on a recurring basis:

	Fair Value at September 30, 2012		Valuation Technique	Unobservable Input	Rate/ Percentage
Tax increment financing bond	$	15,270	Income approach	Discount rate	10.73	%
Contingent consideration to acquire real estate assets	$	563	Income approach	Payout percentage	75.00	%