NOTES PAYABLE

As of December 31, 2012 and December 31, 2011, the Company’s notes payable consisted of the following (dollars in thousands):



	Principal as of December 31, 2012		Principal as of December 31, 2011		Contractual Interest Rate as of December 31, 2012⁽¹⁾	Effective Interest Rate as of December 31, 2012 ⁽¹⁾	Payment Type	Maturity Date
Portfolio Bridge Loan ⁽²⁾	$	—	$	42,250	⁽²⁾	⁽²⁾	⁽²⁾	⁽²⁾
Town Center Mortgage Loan	56,600		—		One-month LIBOR + 2.25%	2.46%	Interest Only	03/27/2013
U.S. Bank Portfolio Loan ⁽³⁾	63,200		—		One-month LIBOR + 2.00%	2.21%	Interest Only	05/01/2014
Total Notes Payable	$	119,800	$	42,250

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⁽¹⁾ Contractual interest rate represents the interest rate in effect under the loan as of December 31, 2012. Effective interest rate is calculated as the actual interest rate in effect as of December 31, 2012 (consisting of the contractual interest rate), using interest rate indices as of December 31, 2012, where applicable.

⁽²⁾ In connection with the closing of the U.S. Bank Portfolio Loan, the Company repaid this loan in full. See “U.S. Bank Portfolio Loan.”

⁽³⁾ As of December 31, 2012, the U.S. Bank Portfolio Loan was secured by Domain Gateway, Las Cimas IV, the McEwen Building and Gateway Tech Center. The Tower on Lake Carolyn was subsequently added as security. See “U.S. Bank Portfolio Loan” for events subsequent to December 31, 2012.

As of December 31, 2012 and 2011, the Company’s deferred financing costs were $0.9 million and $0.2 million, respectively, net of amortization, and are included in deferred financing costs, prepaid expenses and other assets on the accompanying consolidated balance sheets.

During the years ended December 31, 2012 and 2011, the Company incurred $3.6 million and $0.3 million of interest expense, respectively. As of December 31, 2012 and December 31, 2011, $0.2 million and $0.1 million of interest expense were payable. Included in interest expense for the years ended December 31, 2012 and 2011, were $0.9 million and $0.1 million of amortization of deferred financing costs, respectively.

The Company’s notes payable contain financial debt covenants. As of December 31, 2012, the Company was in compliance with these debt covenants.

U.S. Bank Portfolio Loan

On April 30, 2012, in connection with the Company’s acquisition of the McEwen Building, the Company, through indirect wholly owned subsidiaries, entered into a two-year portfolio loan with U.S. Bank National Association (the “Lender”), an unaffiliated lender, for an amount up to $100.0 million (the “U.S. Bank Portfolio Loan”), of which $40 million was term debt and $60 million was revolving debt. During the term of the U.S. Bank Portfolio Loan, the Company had an option to increase the loan amount by up to an additional $100.0 million to a maximum of $200 million, 60% of which amount would be revolving debt and 40% would be term debt, with the addition of one or more properties to secure the U.S. Bank Portfolio Loan, subject to certain conditions contained in the loan agreement. At the closing of the acquisition of the McEwen Building, the Company drew $80.7 million, of which $42.5 million was used to repay in full the principal balance outstanding under the Portfolio Bridge Loan. On May 9, 2012, in connection with the acquisition of Gateway Tech Center, the Company added Gateway Tech Center as additional collateral for the loan and drew an additional $19.3 million on the U.S. Bank Portfolio Loan, bringing the total funded amount to $100.0 million as of May 9, 2012. On June 8, 2012, the Company increased the amount available under the loan by an additional $8.0 million and paid down the revolving debt by $26.0 million. As of December 31, 2012, the outstanding balance under the loan was $63.2 million and was composed of $43.2 million of term debt and $20.0 million of revolving debt. As of December 31, 2012, an additional $44.8 million remained available for future disbursements, subject to certain conditions set forth in the loan agreement.

On January 29, 2013, the Company entered into a loan modification agreement, to add the Tower on Lake Carolyn as additional collateral to the U.S. Bank Portfolio Loan and to increase the amount available under the loan to $200.0 million, of which $80.0 million is non-revolving debt and $120.0 million is revolving debt. As a result of this modification, the Company has no further options to increase the maximum loan amount under the U.S. Bank Portfolio Loan, though a portion of the debt is revolving. The Company also extended the initial maturity date to February 1, 2016, with two one-year extension options, subject to certain conditions contained in the loan agreement. As of January 29, 2013, the outstanding balance under the loan was $98.2 million and was composed of $80.0 million of term debt and $18.2 million of revolving debt. As of January 29, 2013, an additional $101.8 million remained available for future disbursements, subject to certain conditions set forth in the loan agreement.

For each calendar quarter, the interest rate on the U.S. Bank Portfolio Loan will be determined by the borrowing base leverage ratio as defined in the loan agreement and will range from 185 to 300 basis points over one-month LIBOR. Monthly payments are interest only with the entire unpaid principal balance and all outstanding interest and fees due at maturity. The Company will have the right to prepay all or a portion of the U.S. Bank Portfolio Loan, subject to certain fees and conditions contained in the loan agreement.

The U.S. Bank Portfolio Loan is secured by Domain Gateway, Las Cimas IV, the McEwen Building, Gateway Tech Center and the Tower on Lake Carolyn. The Company and KBS REIT Properties III, LLC, the Company’s wholly owned subsidiary (together, the “Guarantors”), are providing a guaranty of up to 50% of the amount outstanding under the U.S. Bank Portfolio Loan. Additionally, the Guarantors are providing a guaranty of any deficiency, loss or damage suffered by the Lender that may result from certain intentional acts committed by the borrowers under the loan, or that may result from certain bankruptcy or insolvency proceedings involving the borrowers, pursuant to the terms of the repayment guaranty.