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, interest rate swaps, foreign currency forward contracts, and foreign currency collars; 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 an interest rate cap, interest rate swaps, stock warrants, foreign currency forward contracts, and foreign currency collars (Note 10). The interest rate cap, interest rate swaps, foreign currency forward contracts, and foreign currency forward collars 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 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 (Note 10). These derivative instruments were measured at fair value using readily observable market inputs, such as quotations on interest rates, and 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 14). We determined the valuation of redeemable noncontrolling interest using widely accepted valuation techniques, including comparable transaction analysis, comparable public company analysis, and discounted cash flow analysis. We classified this liability as Level 3.

Equity Investment in CESH I — We have elected to account for our investment in CESH I at fair value by selecting the equity method fair value option available under U.S. GAAP (Note 7). The fair value of our equity investment in CESH I approximated its carrying value as of December 31, 2016.

We did not have any transfers into or out of Level 1, Level 2, and Level 3 category of measurements during either the years ended December 31, 2016 or 2015.

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



		December 31, 2016				December 31, 2015
	Level	Carrying Value		Fair Value		Carrying Value		Fair Value
Senior Unsecured Notes, net ^{(a) (b) (c)}	2	$	1,807,200	$	1,828,829	$	1,476,084	$	1,459,544
Non-recourse debt, net ^{(a) (b) (d)}	3	1,706,921		1,711,364		2,269,421		2,293,542
Note receivable ^(d)	3	10,351		10,046		10,689		10,610

__________

(a)

In accordance with ASU 2015-03, we reclassified deferred financing costs from Other assets, net to Non-recourse debt, net and Senior Unsecured Notes, net as of December 31, 2015 (Note 2). The carrying value of Non-recourse debt, net includes unamortized deferred financing costs of $1.3 million and $1.8 million at December 31, 2016 and 2015, respectively. The carrying value of Senior Unsecured Notes, net includes unamortized deferred financing costs of $12.1 million and $10.5 million at December 31, 2016 and 2015, respectively.


(b)	The carrying value of Non-recourse debt, net includes unamortized discount of $0.2 million at December 31, 2016 and unamortized premium of $3.8 million at December 31, 2015. The carrying value of Senior Unsecured Notes, net includes unamortized discount of $7.8 million at both December 31, 2016 and 2015.


(c)	We determined the estimated fair value of the Senior Unsecured Notes (Note 11) using quoted market prices in an open market with limited trading volume where available. In cases where there was no trading volume, we determined the estimated fair value using a discounted cash flow model using a rate that reflects the average yield of similar market participants.

(d)

We determined the estimated fair value of these financial instruments using a discounted cash flow model that estimates the present value of the future loan payments by discounting such payments at current estimated market interest rates. The estimated market interest rates take into account interest rate risk and the value of the underlying collateral, which includes quality of the collateral, the credit quality of the tenant/obligor, and the time until maturity.

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 December 31, 2016 and 2015.

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 held for use 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 not recoverable. 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, broker quotes, or third-party appraisals. 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 reporting. 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 assets for which we recorded an impairment charge and that were measured at fair value on a non-recurring basis (in thousands):



	Year Ended December 31, 2016				Year Ended December 31, 2015				Year Ended December 31, 2014
	Fair Value Measurements		Total Impairment Charges		Fair Value Measurements		Total Impairment Charges		Fair Value Measurements		Total Impairment Charges
Impairment Charges in Continuing Operations
Real estate	$	155,839	$	52,316	$	63,027	$	26,597	$	26,503	$	21,738
Net investments in direct financing leases	23,775		6,987		65,132		3,309		39,158		1,329
Equity investments in real estate	—		—		—		—		—		735
			$	59,303			$	29,906			$	23,802

Impairment charges, and their related triggering events and fair value measurements, recognized during 2016, 2015, and 2014 were as follows:

Real Estate

2016 — During the year ended December 31, 2016, we recognized impairment charges totaling $52.3 million, inclusive of an amount attributable to a noncontrolling interest of $1.2 million, on 18 properties, including a portfolio of 14 properties, in order to reduce the carrying values of the properties to their estimated fair values. The fair value measurements for substantially all of these properties approximated their estimated selling prices, less estimated costs to sell. We recognized impairment charges on the portfolio of 14 properties totaling $41.0 million, including $10.2 million allocated to goodwill. We disposed of 15 of these properties during 2016 (Note 17) and two of these properties in January 2017 (Note 20).

2015 — During the year ended December 31, 2015, we recognized impairment charges totaling $26.6 million, inclusive of an amount attributable to a noncontrolling interest of $1.0 million, on seven properties and a parcel of vacant land in order to reduce the carrying values of the properties to their estimated fair values. The fair value measurements for five of the properties and the parcel of vacant land approximated their estimated selling prices, and we recognized impairment charges totaling $10.9 million on these properties. We disposed of two of these properties during 2015, one of these properties during 2016, and one of these properties in January 2017 (Note 20).

We reduced the estimated holding period for another property due to the expected expiration of its related lease within one year after December 31, 2015 and recognized an impairment charge of $8.7 million on the property. The fair value measurement related to the impairment charge was determined by estimating discounted cash flows using three significant unobservable inputs, which are the cash flow discount rate, the residual discount rate, and the residual capitalization rate equal to 9.25%, 9.75%, and 8.5%, respectively. We disposed of this property in January 2017 (Note 20).

The building located on another property was demolished in connection with the redevelopment of the property, which commenced in December 2015 and was completed in October 2016 (Note 5), and the fair value of the building was reduced to zero. We recognized an impairment charge of $6.9 million on this property.

2014 — During the year ended December 31, 2014, we recognized impairment charges totaling $7.8 million on 13 properties in order to reduce the carrying values of the properties to their estimated fair values, which approximated their estimated selling prices.

Additionally, we recognized an impairment charge of $14.0 million on a property during the year ended December 31, 2014 as result of the tenant vacating the property. The fair value measurements relating to the $14.0 million impairment charge were determined by a direct cap approach and market approach and utilizing the average of these two approaches, as the property has potential utility as both a commercial net lease building (direct cap approach) and a redeveloped residential structure (market approach). The fair value under the market approach was determined by comparing the property to similar properties that have been sold or offered for sale, with adjustments made for differences in date of sale, age, condition, size, location, land/building ratio, local tax policies, and other physical characteristics and circumstances influencing the sale. The fair value under the direct cap approach was determined by estimating future net operating income of the leased up asset utilizing comparable market rents that have been leased or offered for lease, capitalizing the resulting net operating income utilizing a residual capitalization rate of 8.0%, offset by the leasing capital required to secure a tenant and the market vacancy assumptions.

Net Investments in Direct Financing Leases

2016 — During the year ended December 31, 2016, we recognized an impairment charge of $7.0 million on one property accounted for as Net investments in direct financing leases in order to reduce the carrying value of the property to its estimated fair value. The fair value measurement for the property approximated its estimated selling price, less estimated costs to sell. The property was classified as held for sale as of December 31, 2016. We sold this property in January 2017 (Note 20).

The fair value measurements related to the impairment charges recognized on our Net investments in direct financing leases during 2015 and 2014 were determined by estimating market rents at the time the leases expire, taking into account the following factors related to the properties and their locations: (i) estimated rent growth in property location; (ii) the quality of the property relative to other properties nearby; and (iii) the number of vacant properties nearby.

2015 — During the year ended December 31, 2015, we recognized impairment charges totaling $3.3 million on five properties accounted for as Net investments in direct financing leases in connection with an other-than-temporary decline in the estimated fair values of the buildings’ residual values.

2014 — During the year ended December 31, 2014, we recognized impairment charges totaling $1.3 million on eight properties accounted for as Net investments in direct financing leases in connection with an other-than-temporary decline in the estimated fair values of the buildings’ residual values.

Equity Investments in Real Estate

During the year ended December 31, 2014, we recognized an other-than-temporary impairment charge of $0.7 million 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 estimated fair value was computed 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. The valuation was also dependent upon the estimated date of a liquidity event for CPA^®:16 – Global because cash flows attributable to this investment would cease upon such event.