Commitments and Contingencies

Commitments Under Existing Lease Agreements

Certain lease agreements include provisions that may obligate Piedmont to provide funding for tenant or building improvements and/or leasing commissions. Piedmont classifies such tenant and building improvements into two categories: (i) improvements which maintain the building's existing asset value and its revenue generating capacity (“non-incremental capital expenditures”); and (ii) improvements which incrementally enhance the building's asset value by expanding its revenue generating capacity (“incremental capital expenditures”). As of December 31, 2013, Piedmont anticipates funding potential non-incremental capital expenditures of approximately $85.1 million related to its existing lease portfolio over the respective lease terms. The timing of the actual funding of these tenant improvements is largely dependent upon tenant requests for reimbursement, and in some cases, these obligations may expire with the underlying lease without further recourse to Piedmont. As of December 31, 2013, commitments for incremental capital expenditures associated with new leases, totaled approximately $19.5 million. In addition, certain agreements contain provisions that require Piedmont to issue corporate or property guarantees to provide funding for such capital improvements or other financial obligations.

Contingencies Related to Tenant Audits/Disputes

Certain lease agreements include provisions that grant tenants the right to engage independent auditors to audit their annual operating expense reconciliations. Such audits may result in the re-interpretation of language in the lease agreements which could result in the refund of previously recognized tenant reimbursement revenues, resulting in financial loss to Piedmont. Piedmont recorded additional expense related to such tenant audits/disputes of approximately $1.2 million, $0.2 million and $0.7 million during the years ended December 31, 2013, 2012, and 2011, respectively.

Letters of Credit

As of December 31, 2013, Piedmont was subject to the following letters of credit, which reduce the total outstanding capacity under its $500 Million Unsecured Line of Credit:



Amount			Expiration of Letter of Credit ⁽¹⁾
$	1,805,480	⁽²⁾	July 2014
$	9,033,164	⁽²⁾	July 2014
$	382,556		July 2014


⁽¹⁾	All of Piedmont's outstanding letter of credit agreements contain an “evergreen” clause, which automatically renews for consecutive, one-year periods each anniversary, subject to certain limitations.


⁽²⁾	These letter of credit agreements were terminated in conjunction with repaying the notes payable secured by the Aon Center building in Chicago, Illinois on February 3, 2014.

Operating Lease Obligations

Two properties including the 2001 NW 64^th Street building in Ft. Lauderdale, Florida and the River Corporate Center building in Tempe, Arizona were subject to ground leases during the year with expiration dates of 2048 and 2101, respectively. The aggregate payments required under the terms of these operating leases as of December 31, 2013 are presented below (in thousands):



2014	$	451
2015	451
2016	451
2017	451
2018	451
Thereafter	41,071
Total	$	43,326

Ground rent expense was approximately $0.8 million, $0.8 million, and $0.6 million for the years ended December 31, 2013, 2012, and 2011, respectively, and is included in property operating costs in the accompanying consolidated statements of income. The net book value of the real estate assets of the related office buildings subject to operating ground leases is approximately $21.9 million and $31.8 million as of December 31, 2013 and 2012, respectively.

Litigation

Piedmont is from time to time a party to legal proceedings, which arise in the ordinary course of its business. None of these ordinary course legal proceedings are reasonably likely to have a material adverse effect on results of operations or financial condition. Piedmont is not aware of any such legal proceedings contemplated by governmental authorities.