Derivative Instruments

12 Months Ended

Dec. 31, 2011

Derivative Instruments [Abstract]

Derivative Instruments

Derivative Instruments

Risk Management Objective of Using Derivatives

In addition to operational risks which arise in the normal course of business, Piedmont is exposed to economic risks such as interest rate, liquidity, and credit risk. In certain situations, Piedmont has entered into derivative financial instruments such as interest rate swap and interest rate cap agreements to manage interest rate risk exposure arising from variable rate debt transactions that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Piedmont’s objective in using interest rate derivatives is to add stability to interest expense and to manage its exposure to interest rate movements.

Cash Flow Hedges of Interest Rate Risk

Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for Piedmont making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

During the year endedDecember 31, 2011, Piedmont used interest rate swap agreements to hedge the variable cash flows associated with its $250 Million Unsecured Term Loan through its maturity, as well as two interest rate cap agreements associated with the 500 W. Monroe Loans through their original maturity (see Notes 6 and 8), both of these derivatives were designated as effective cash flow hedges. On July 27, 2011, Piedmont entered into two new interest rate cap agreements effective on August 15, 2011 associated with the extension of the 500 W. Monroe Loans and elected to account for the agreements under mark-to-market accounting, which adjusts the value of the agreements to estimated fair value on a quarterly basis through earnings. As such, Piedmont recognized approximately $47,000 of expense related to mark-to-market accounting on the replacement interest rate caps during the year endedDecember 31, 2011. On November 21, 2011, Piedmont entered into four new interest rate swap agreements to hedge the variable cash flows associated with its new $300 Million Unsecured Term Loan facility, and has designated the swaps as cash flow hedges of interest rate risk.

A detail of Piedmont’s interest rate derivatives outstanding as of December 31, 2011 is as follows:

Interest Rate Derivatives:	Notional Amount (in millions)			Effective Date	Maturity Date
Interest rate swap	$	125		11/22/2011	11/22/2016
Interest rate swap	$	75		11/22/2011	11/22/2016
Interest rate swap	$	50		11/22/2011	11/22/2016
Interest rate swap	$	50		11/22/2011	11/22/2016
Total	$	300
Interest rate cap	$	140	(2)	8/15/2011	8/15/2012	(1)
Interest rate cap	$	62	(3)	8/15/2011	8/15/2012	(1)
Total	$	202

⁽¹⁾  Mirrors the monthly interest accrual period of the 500 W. Monroe Loans.

⁽²⁾  On January 9, 2012, Piedmont fully repaid the $140 Million 500 W. Monroe Mortgage Loan.

⁽³⁾  Interest rate cap agreement is inclusive of both the $45 Million 500 W. Monroe Mezzanine I Loan- A Participation payable to an unrelated third-party, as well as the loan participation formerly payable to Piedmont. On November 17, 2011, Piedmont fully repaid the $45 Million 500 W. Monroe Mezzanine I Loan- A Participation.

All of Piedmont's interest rate derivative agreements outstanding through August 9, 2011, as well as the interest rate swap agreements entered into in conjunction with the $300 Million Unsecured Term Loan, were designated as cash flow hedges of interest rate risk. The effective portion of changes in the fair value of derivatives designated as, and that qualify as, cash flow hedges is recorded in OCI and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.

The effective portion of Piedmont’s derivative financial instruments (interest rate caps prior to August 9, 2011 and all interest rate swaps outstanding during the respective periods) that was recorded in the accompanying consolidated statements of income for the years endedDecember 31, 2011, 2010, and 2009, respectively, is as follows (in thousands):

Derivative in Cash Flow Hedging Relationships (Interest Rate Swaps and Caps)	December 31, 2011			December 31, 2010			December 31, 2009
Amount of loss recognized in OCI on derivatives	$	3,064		$	1,529		$	2,812
Amount of previously recorded loss reclassified from accumulated OCI into interest expense	$	(1,218	)	$	(4,704	)	$	(7,903	)

No gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on Piedmont’s cash flow hedges during the years endedDecember 31, 2011, 2010, or 2009.

Amounts reported in accumulated other comprehensive loss related to Piedmont’s derivatives are reclassified to interest expense as interest is incurred. Piedmont estimates that an additional $2.1 million will be reclassified from accumulated other comprehensive loss as an increase to interest expense over the next twelve months.

Please see the accompanying statements of stockholders’ equity for a rollforward of Piedmont’s Other Comprehensive Loss account. Additionally, see Note 11 for fair value disclosures of Piedmont's derivative instruments.

Credit-risk-related Contingent Features

Piedmont has agreements with its derivative counterparties that contain a provision whereby if Piedmont defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then Piedmont could also be declared in default on its derivative obligation. If Piedmont breached any of the contractual provisions of the derivative contracts, it would be required to settle its obligations under the agreements at their termination value of the fair values plus accrued interest, or approximately $2.6 million.