Fair Value Measurements

The fair value of an asset is defined as the exit price, which is the amount that would either be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy based on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for identical instruments are available in active markets, such as money market funds, equity securities and U.S. Treasury securities; Level 2, for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument, such as certain derivative instruments including interest rate caps and swaps; and Level 3, for securities that do not fall into Level 1 or Level 2 and for which little or no market data exists, therefore requiring us to develop our own assumptions.

Items Measured at Fair Value on a Recurring Basis

The methods and assumptions described below were used to estimate the fair value of each class of financial instrument. For significant Level 3 items we have also provided the unobservable inputs along with their weighted-average ranges.

Money Market Funds — Our money market funds, which are included in Cash and cash equivalents in the consolidated financial statements, are comprised of government securities and U.S. Treasury bills. These funds were classified as Level 1 as we used quoted prices from active markets to determine their fair values.

Derivative Assets — Our derivative assets, which are included in Other assets, net in the consolidated financial statements, are comprised of interest rate caps, interest rate swaps and stock warrants (Note 10). The interest rate caps and interest rate swaps were measured at fair value using readily observable market inputs, such as quotations on interest rates, and were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market. The stock warrants were measured at fair value using internal valuation models that incorporate market inputs and our own assumptions about future cash flows. We classified these assets as Level 3 because these assets are not traded in an active market.

Derivative Liabilities — Our derivative liabilities, which are included in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements, are comprised of interest rate swaps and foreign currency forward contracts (Note 10). These derivative instruments were measured at fair value using readily observable market inputs, such as quotations on interest rates. These derivative instruments were classified as Level 2 because they are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.

Redeemable Noncontrolling Interest — We account for the noncontrolling interest in W. P. Carey International, LLC, or WPCI, held by a third party as a redeemable noncontrolling interest (Note 13). We determined the valuation of the redeemable noncontrolling interest using widely accepted valuation techniques, including expected discounted cash flows of the investment as well as the income capitalization approach, which considers prevailing market capitalization rates. We classified this liability as Level 3. At June 30, 2014, unobservable inputs for WPCI include a discount for lack of marketability, a discount rate and earnings before interest, taxes, depreciation and amortization multiples with weighted-average ranges of 20% - 30%, 22% - 26% and 3x - 5x, respectively. Significant increases or decreases in any one of these inputs in isolation would result in significant changes in the fair value measurement.

We did not have any transfers into or out of Level 1, Level 2, and Level 3 measurements during either the six months ended June 30, 2014 or 2013. In connection with the CPA^®:16 Merger, we acquired stock warrants, which had previously been granted by Hellweg 2 to CPA^®:16 – Global, and which were classified as Level 3 at June 30, 2014 (Note 10).

Our other financial instruments had the following carrying values and fair values as of the dates shown (dollars in thousands):



		June 30, 2014				December 31, 2013
	Level	Carrying Value		Fair Value		Carrying Value		Fair Value
Non-recourse debt ^(a)	3	$	2,823,415	$	2,840,230	$	1,492,410	$	1,477,497
Senior unsecured notes ^(b)	2	498,255		498,255		—		—
Senior unsecured credit facility ^{(a) (c)}	3	476,700		476,700		275,000		275,000
Notes receivable ^{(a) (d)}	3	21,003		21,338		—		—
Deferred acquisition fees receivable ^(e)	3	18,515		19,665		19,684		20,733
Note receivable from CWI ^(f)	3	11,000		11,000		—		—
Unsecured term loan ^{(a) (c)}	3	—		—		300,000		300,000

__________

(a)

We determined the estimated fair value of these financial instruments using a discounted cash flow model with rates that take into account the credit of the tenant/obligor, where applicable, and interest rate risk. We also considered the value of the underlying collateral taking into account the quality of the collateral, the credit quality of the tenant/obligor, the time until maturity and the current market interest rate.


(b)	We determined the estimated fair value of our senior unsecured notes using quoted market prices in an open market with limited trading volume (Note 11).


(c)	As described in Note 11, the Prior Senior Credit Facility and the Unsecured Term Loan were repaid and terminated in January 2014.


(d)	We acquired these notes in the CPA^®:16 Merger (Note 6).

(e)

We determined the estimated fair value of our deferred acquisition fees receivable based on an estimate of discounted cash flows using two significant unobservable inputs, which are the leverage adjusted unsecured spread and an illiquidity adjustment with a weighted-average range of 109 - 355 basis points and 50 - 100 basis points, respectively at June 30, 2014. Significant increases or decreases to these inputs in isolation would result in a significant change in the fair value measurement.


(f)	In order to facilitate an acquisition by CWI, we made an $11.0 million loan to CWI on June 25, 2014. The loan, including accrued interest, was repaid in full prior to maturity on July 22, 2014 (Note 4).

We estimated that our other financial assets and liabilities (excluding net investments in direct financing leases) had fair values that approximated their carrying values at both June 30, 2014 and December 31, 2013.

Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)

We periodically assess whether there are any indicators that the value of our real estate investments may be impaired or that their carrying value may not be recoverable. For investments in real estate for which an impairment indicator is identified, we follow a two-step process to determine whether the investment is impaired and to determine the amount of the charge. First, we compare the carrying value of the property’s asset group to the future undiscounted net cash flows that we expect the property’s asset group will generate, including any estimated proceeds from the eventual sale of the property’s asset group. If this amount is less than the carrying value, the property’s asset group is considered to be impaired. We then measure the impairment charge as the excess of the carrying value of the property’s asset group over the estimated fair value of the property’s asset group, which is primarily determined using market information such as recent comparable sales or broker quotes. If relevant market information is not available or is not deemed appropriate, we perform a future net cash flow analysis, discounted for inherent risk associated with each investment. We determined that the significant inputs used to value these investments fall within Level 3 for fair value accounting. As a result of our assessments, we calculated impairment charges based on market conditions and assumptions that existed at the time. The valuation of real estate is subject to significant judgment and actual results may differ materially if market conditions or the underlying assumptions change.

The following table presents information about our other assets that were measured on a fair value basis (in thousands):



	Three Months Ended June 30, 2014				Three Months Ended June 30, 2013
	Fair Value Measurements		Total Impairment Charges		Fair Value Measurements		Total Impairment Charges
Impairment Charges from Continuing Operations:
Real estate	$	5,200	$	2,066	$	—	$	—
Equity investments in real estate	—		—		11,140		2,844
			2,066				2,844
Impairment Charges from Discontinued Operations:
Real estate	—		—		6,908		1,279
Operating real estate	—		—		—		—
			—				1,279
			$	2,066			$	4,123



	Six Months Ended June 30, 2014				Six Months Ended June 30, 2013
	Fair Value Measurements		Total Impairment Charges		Fair Value Measurements		Total Impairment Charges
Impairment Charges from Continuing Operations:
Real estate	$	5,200	$	2,066	$	—	$	—
Equity investments in real estate	—		735		11,140		5,528
			2,801				5,528
Impairment Charges from Discontinued Operations:
Real estate	—		—		6,908		3,487
Operating real estate	—		—		3,709		1,071
			—				4,558
			$	2,801			$	10,086

Significant impairment charges, and their related triggering events and fair value measurements, recognized during the three and six months ended June 30, 2014 and 2013 were as follows:

Real Estate

During the three and six months ended June 30, 2014, we recognized an impairment charge of $2.1 million on a property in order to reduce the carrying value of the property to its estimated fair value, which approximated its estimated selling price.

Equity Investments in Real Estate

During the six months ended June 30, 2014 and 2013, we recognized other-than-temporary impairment charges of $0.7 million and $5.5 million, respectively, on the Special Member Interest in CPA^®:16 – Global’s operating partnership to reduce its carrying value to its estimated fair value, which had declined. The fair value was obtained by estimating discounted cash flows using two significant unobservable inputs, which are the discount rate and the estimated general and administrative costs as a percentage of assets under management with a weighted-average range of 12.75% - 15.75% and 35 - 45 basis points, respectively.

Properties Sold

During the six months ended June 30, 2013, we recognized impairment charges on properties sold, including one of our hotels, totaling $4.6 million, to reduce the carrying values of the properties to their estimated selling prices less costs to sell. These impairment charges, which are included in discontinued operations, were the result of reducing these properties’ carrying values to their estimated fair values (Note 15), which approximated their estimated selling prices, in connection with anticipated sales. The fair value measurement related to these impairment charges was determined in part by third-party sources, subject to our corroboration for reasonableness.