FAIR VALUE MEASUREMENTS

GAAP defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. GAAP emphasizes that fair value is intended to be a market-based measurement, as opposed to a transaction-specific measurement.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate the fair value. Assets and liabilities are measured using inputs from three levels of the fair value hierarchy, as follows:

Level 1 — Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 — Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).

Level 3 — Unobservable inputs, which are only used to the extent that observable inputs are not available, reflect the Company’s assumptions about the pricing of an asset or liability.

The following describes the methods the Company uses to estimate the fair value of the Company’s financial assets and liabilities:

Notes payable and credit facility — The fair value is estimated by discounting the expected cash flows based on estimated borrowing rates available to the Company as of the measurement date. Current and prior period liabilities’ carrying and fair values exclude net deferred financing costs. These financial instruments are valued using Level 2 inputs. As of June 30, 2017, the estimated fair value of the Company’s debt was $2.45 billion, compared to the carrying value of $2.44 billion. The estimated fair value of the Company’s debt as of December 31, 2016 was $2.25 billion, compared to the carrying value of $2.26 billion.

Derivative instruments — The Company’s derivative instruments are comprised of interest rate swaps. All derivative instruments are carried at fair value and are valued using Level 2 inputs. The fair value of these instruments is determined using interest rate market pricing models. In addition, credit valuation adjustments are incorporated into the fair values to account for the Company’s potential nonperformance risk and the performance risk of the respective counterparties.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparties. However, as of June 30, 2017 and December 31, 2016, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of the Company’s derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Contingent consideration arrangements — The contingent consideration arrangements are carried at fair value and are valued using Level 3 inputs. The fair value of additional consideration paid in connection with the acquisition of properties subject to contingent consideration arrangements is determined based on key assumptions, including, but not limited to, rental rates, discount rates and the estimated timing and probability of successfully leasing vacant space subsequent to the Company’s acquisition of certain properties.

Revenue bonds — The fair value estimates of the Company’s revenue bonds are based on assumptions that management believes market participants would use in pricing, using widely accepted valuation techniques including discounted cash flow analysis. This analysis reflects the contractual terms of the bonds, including the period to maturity, and uses unobservable market-based inputs, including discount rates ranging from 7.75% to 9.0%. As a result, the Company has determined that its revenue bonds are classified in Level 3 of the fair value hierarchy. As of June 30, 2017, the estimated fair value of the Company’s revenue bonds was $2.1 million.

Other financial instruments — The Company considers the carrying values of its cash and cash equivalents, restricted cash, tenant receivables, accounts payable and accrued expenses, other liabilities, due to affiliates and distributions payable in order to approximate their fair values because of the short period of time between their origination and their expected realization as well as their highly-liquid nature. Due to the short-term maturities of these instruments, Level 1 inputs are utilized to estimate the fair value of these financial instruments.

Considerable judgment is necessary to develop estimated fair values of financial assets and liabilities. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize, or be liable for, upon disposition of the financial assets and liabilities. As of June 30, 2017 and December 31, 2016, there have been no transfers of financial assets or liabilities between fair value hierarchy levels.

In accordance with the fair value hierarchy described above, the following tables show the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016 (in thousands):



	Balance as of June 30, 2017			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Financial assets:
Interest rate swaps	$	3,137		$	—	$	3,137		$	—
Total financial assets	$	3,137		$	—	$	3,137		$	—
Financial liabilities:
Interest rate swaps	$	(3,925	)	$	—	$	(3,925	)	$	—
Contingent consideration	(87		)	—		—			(87		)
Total financial liabilities	$	(4,012	)	$	—	$	(3,925	)	$	(87	)

	Balance as of December 31, 2016			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Financial assets:
Interest rate swaps	$	2,327		$	—	$	2,327		$	—
Total financial assets	$	2,327		$	—	$	2,327		$	—
Financial liabilities:
Interest rate swaps	$	(3,351	)	$	—	$	(3,351	)	$	—
Contingent consideration	(337		)	—		—			(337		)
Total financial liabilities	$	(3,688	)	$	—	$	(3,351	)	$	(337	)

The following are reconciliations of the changes in financial assets and liabilities with Level 3 inputs in the fair value hierarchy for the six months ended June 30, 2017 and 2016 (in thousands):



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Beginning Balance, December 31, 2016	$	(337	)
Purchases and fair value adjustments:
Purchases	2,081
Fair value adjustments	250
Ending Balance, June 30, 2017	$	1,994



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Beginning Balance, December 31, 2015	$	(4,538	)
Purchases and fair value adjustments:
Purchases	—
Fair value adjustments	1,347
Ending Balance, June 30, 2016	$	(3,191	)