Disclosure About Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2013

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 certain 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 (1) certain of our mortgages and notes receivable, which were estimated by the income approach utilizing internal cash flow projections and market interest rates to estimate the price that would be paid in an orderly transaction between market participants, (2) 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 (3) any real estate assets recorded at fair value on a non-recurring basis as a result of our quarterly impairment analysis, which were valued using the terms of definitive sales contracts or the sales comparison approach and substantiated with 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
	March 31, 2013		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)	$	25,638	$	—	$	16,990	$	8,648
Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)	3,529		3,529		—		—
Impaired real estate assets	9,002		—		—		9,002
Tax increment financing bond (in prepaid expenses and other assets)	14,324		—		—		14,324
Total Assets	$	52,493	$	3,529	$	16,990	$	31,974
Noncontrolling Interests in the Operating Partnership	$	147,317	$	147,317	$	—	$	—
Liabilities:
Mortgages and notes payable, at fair value (1)	$	2,024,509	$	—	$	2,024,509	$	—
Interest rate swaps (in accounts payable, accrued expenses and other liabilities)	8,261		—		8,261		—
Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)	3,529		3,529		—		—
Contingent consideration to acquire real estate assets (in accounts payable, accrued expenses and other liabilities)	375		—		—		375
Financing obligations, at fair value (1)	23,986		—		—		23,986
Total Liabilities	$	2,060,660	$	3,529	$	2,032,770	$	24,361

			Level 1		Level 2		Level 3
	December 31, 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)	$	24,725	$	—	$	16,077	$	8,648
Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)	3,354		3,354		—		—
Tax increment financing bond (in prepaid expenses and other assets)	14,496		—		—		14,496
Total Assets	$	42,575	$	3,354	$	16,077	$	23,144
Noncontrolling Interests in the Operating Partnership	$	124,869	$	124,869	$	—	$	—
Liabilities:
Mortgages and notes payable, at fair value (1)	$	1,987,364	$	—	$	1,987,364	$	—
Interest rate swaps (in accounts payable, accrued expenses and other liabilities)	9,369		—		9,369		—
Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)	3,354		3,354		—		—
Contingent consideration to acquire real estate assets (in accounts payable, accrued expenses and other liabilities)	563		—		—		563
Financing obligations, at fair value (1)	23,252		—		—		23,252
Total Liabilities	$	2,023,902	$	3,354	$	1,996,733	$	23,815

__________

9. Disclosure About Fair Value of Financial Instruments - Continued

(1)    Amounts recorded at historical cost on our Consolidated Balance Sheets at March 31, 2013 and December 31, 2012.

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:

	Three Months Ended March 31,
	2013			2012
Asset:
Tax Increment Financing Bond:
Beginning balance	$	14,496		$	14,788
Principal repayment	(562		)	—
Unrealized gains (in AOCL)	390			287
Ending balance	$	14,324		$	15,075
Liability:
Contingent Consideration to Acquire Real Estate Assets:
Beginning balance	$	563		$	—
Unrealized gains (in general and administrative expenses)	(188		)	—
Ending balance	$	375		$	—

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 March 31, 2013 was $1.5 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 $0.5 million higher, respectively, as of March 31, 2013. 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 months endedMarch 31, 2013 and 2012. 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 impaired real estate assets that were measured in the first quarter of 2013 at fair value and deemed to be Level 3 assets were valued based primarily on market-based inputs and our assumptions about the use of the assets, as observable inputs were not available. In the absence of observable inputs, we estimate the fair value of real estate using unobservable data such as estimated discount and capitalization rates. We also utilize local and national industry market data such as comparable sales, sales contracts and appraisals to assist us in our estimation of fair value. Significant increases or decreases in any valuation inputs in isolation would result in a significantly lower or higher fair value measurement.

9. Disclosure About Fair Value of Financial Instruments - Continued

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

	Fair Value at March 31, 2013		Valuation Technique	Unobservable Input	Rate/ Percentage
Assets:
Tax increment financing bond	$	14,324	Income approach	Discount rate	10.4%
Impaired real estate assets	$	9,002	Income approach	Capitalization rate	8.5%-9.5%
				Discount rate	9.0%-10.0%
Liability:
Contingent consideration to acquire real estate assets	$	375	Income approach	Payout percentage	50.0%

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 certain 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 (1) certain of our mortgages and notes receivable, which were estimated by the income approach utilizing internal cash flow projections and market interest rates to estimate the price that would be paid in an orderly transaction between market participants, (2) 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 (3) any real estate assets recorded at fair value on a non-recurring basis as a result of our quarterly impairment analysis, which were valued using the terms of definitive sales contracts or the sales comparison approach and substantiated with 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
	March 31, 2013		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)	$	25,638	$	—	$	16,990	$	8,648
Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)	3,529		3,529		—		—
Impaired real estate assets	9,002		—		—		9,002
Tax increment financing bond (in prepaid expenses and other assets)	14,324		—		—		14,324
Total Assets	$	52,493	$	3,529	$	16,990	$	31,974
Liabilities:
Mortgages and notes payable, at fair value (1)	$	2,024,509	$	—	$	2,024,509	$	—
Interest rate swaps (in accounts payable, accrued expenses and other liabilities)	8,261		—		8,261		—
Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)	3,529		3,529		—		—
Contingent consideration to acquire real estate assets (in accounts payable, accrued expenses and other liabilities)	375		—		—		375
Financing obligations, at fair value (1)	23,986		—		—		23,986
Total Liabilities	$	2,060,660	$	3,529	$	2,032,770	$	24,361

9. Disclosure About Fair Value of Financial Instruments - Continued

			Level 1		Level 2		Level 3
	December 31, 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)	$	24,725	$	—	$	16,077	$	8,648
Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)	3,354		3,354		—		—
Tax increment financing bond (in prepaid expenses and other assets)	14,496		—		—		14,496
Total Assets	$	42,575	$	3,354	$	16,077	$	23,144
Liabilities:
Mortgages and notes payable, at fair value (1)	$	1,987,364	$	—	$	1,987,364	$	—
Interest rate swaps (in accounts payable, accrued expenses and other liabilities)	9,369		—		9,369		—
Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)	3,354		3,354		—		—
Contingent consideration to acquire real estate assets (in accounts payable, accrued expenses and other liabilities)	563		—		—		563
Financing obligations, at fair value (1)	23,252		—		—		23,252
Total Liabilities	$	2,023,902	$	3,354	$	1,996,733	$	23,815

__________

(1)    Amounts recorded at historical cost on our Consolidated Balance Sheets at March 31, 2013 and December 31, 2012.

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:

	Three Months Ended March 31,
	2013			2012
Asset:
Tax Increment Financing Bond:
Beginning balance	$	14,496		$	14,788
Principal repayment	(562		)	—
Unrealized gains (in AOCL)	390			287
Ending balance	$	14,324		$	15,075
Liability:
Contingent Consideration to Acquire Real Estate Assets:
Beginning balance	$	563		$	—
Unrealized gains (in general and administrative expenses)	(188		)	—
Ending balance	$	375		$	—

9. Disclosure About Fair Value of Financial Instruments - Continued

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 March 31, 2013 was $1.5 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 $0.5 million higher, respectively, as of March 31, 2013. 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 months endedMarch 31, 2013 and 2012. 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 impaired real estate assets that were measured in the first quarter of 2013 at fair value and deemed to be Level 3 assets were valued based primarily on market-based inputs and our assumptions about the use of the assets, as observable inputs were not available. In the absence of observable inputs, we estimate the fair value of real estate using unobservable data such as estimated discount and capitalization rates. We also utilize local and national industry market data such as comparable sales, sales contracts and appraisals to assist us in our estimation of fair value. Significant increases or decreases in any valuation inputs in isolation would result in a significantly lower or higher fair value measurement.

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

	Fair Value at March 31, 2013		Valuation Technique	Unobservable Input	Rate/ Percentage
Assets:
Tax increment financing bond	$	14,324	Income approach	Discount rate	10.4%
Impaired real estate assets	$	9,002	Income approach	Capitalization rate	8.5%-9.5%
				Discount rate	9.0%-10.0%
Liability:
Contingent consideration to acquire real estate assets	$	375	Income approach	Payout percentage	50.0%