Fair Value Measurements

3 Months Ended

Mar. 31, 2013

Fair Value Disclosures

Fair Value Measurements

Note8.Fair Value Measurements

For 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 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 cap, foreign currency forward contracts and stock warrants (Note 9). The interest rate cap and foreign currency forward contracts 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 the open 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 9). 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 (“WPCI”) as a redeemable noncontrolling interest (Note 12). 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. Unobservable inputs for WPCI include a discount for lack of marketability, a discount rate and EBITDA 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.

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

		March 31, 2013				December 31, 2012
	Level	Carrying Value		Fair Value		Carrying Value		Fair Value
Non-recourse debt (a)	3	$	1,695,335	$	1,706,567	$	1,715,397	$	1,727,985
Senior Credit Facility	2		298,000		298,000		253,000		253,000
Deferred acquisition fees receivable (b)	3		21,531		25,330		28,654		33,632

__________

• We determined the estimated fair value of our debt instruments using a discounted cash flow model with rates that take into account the credit of the tenants, 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 company, the time until maturity and the current market interest rate.
• We determined the estimated fair value of our deferred acquisition feesbased 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 275 – 325 bps and 50 – 100 bps, respectively. Significant increases or decreases to these inputs in isolation would result in a significant change in the fair value measurement.

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 March 31, 2013 and December 31, 2012.

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 real estate to the future undiscounted net cash flows that we expect the real estate will generate, including any estimated proceeds from the eventual sale of the real estate. If this amount is less than the carrying value, the real estate is considered to be impaired, and we then measure the loss as the excess of the carrying value of the real estate over the estimated fair value of the real estate, 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. 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 tables present information about our other assets that were measured on a fair value basis (in thousands):

	Three Months Ended March 31, 2013				Three Months Ended March 31, 2012
	Total Fair Value		Total Impairment		Total Fair Value		Total Impairment
	Measurements		Charges		Measurements		Charges
Net investments in properties (a) (b)	$	3,350	$	2,208	$	-	$	-
Operating real estate (a) (c)		3,812		1,071		-		-
Total impairment charges included in expenses		7,162		3,279		-		-
Equity investments in real estate (d)		14,220		2,684		27,460		298
Total impairment charges included in income from continuing operations		21,382		5,963		27,460		298
Impairment charges included in discontinued operations (a) (e)		-		-		27,047		5,724
Total impairment charges	$	21,382	$	5,963	$	54,507	$	6,022

__________

• These fair value measurements were developed by third-party sources, subject to our corroboration for reasonableness.
• During the three months ended March 31, 2013, we recognized an impairment charge of $2.2 million on a property previously leased to American Pad & Paper LLC, which is currently classified as Real estate on the consolidated balance sheet, in order to reduce the carrying value of the property to its estimated fair value, which approximated its estimated selling price. The guarantor of the lease filed for bankruptcy in March 2012 after the tenant stopped making lease payments. As a result, we terminated the tenant's right to possess the property in January 2013 and entered into a contract to sell the property to a third party. There can be no assurance that we will be able to sell this property at an acceptable price or at all.
• During the three months ended March 31, 2013, we recognized an impairment charge of $1.1 million on our hotel property, which is currently classified as Operating estate on the consolidated balance sheet, to write down the property's carrying value to its fair value, which approximated its estimated selling price. There can be no assurance that we will be able to sell this property at an acceptable price or at all.
• During the three months ended March 31, 2013 and 2012, we incurred other-than-temporary impairment chargesof$2.7 million and $0.3 million, respectively, on our investment in the special member interestin CPA®:16 – Global's operating partnership to reduce its carrying value to its estimated fair value, which had declined. This investment's fair value was obtained using an estimate of 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 bps – 45 bps, respectively. Significant increases or decreases to these inputs in isolation would result in a significant change in the fair value measurement. 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. Therefore, the fair value of this investment may decline in the future as the estimated liquidation date approaches.
• During the three months ended March 31, 2012, we recorded impairment charges on properties sold totaling $5.7 million. These impairment charges, which are included in discontinued operations, were the result of reducing these properties' carrying values to their estimated fair value in connection with and prior to anticipated sales.