Interest Rate Contracts

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both business operations and economic conditions. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of debt funding and the use of derivative financial instruments. Specifically, the Company entered into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by expected cash payments principally related to borrowings and interest rates. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company does not use derivatives for trading or speculative purposes.

Derivative Instruments

The Company entered into an interest rate swap agreement to hedge the variable cash flows associated with the LIBO Rate-based variable-rate debt on the Company's Revolving Credit Facility. The interest rate swap is effective for the period from April 1, 2016 to December 12, 2018 with a notional amount of $100.0 million.

Effective as of November 1, 2017, Griffin Capital Essential Asset Operating Partnership, L.P., an affiliated party of the Sponsor, novated one of its $100.0 million swaps to the Operating Partnership, as a result of the repayment of debt. The terms of the cash flow swap are listed in the table below.

On April 30, 2018, the Company settled the $100.0 million cash flow hedge contract purchased from Griffin Capital Essential Asset Operating Partnership, L.P., which resulted in the Company receiving a net settlement of approximately $0.1 million.

The change in the fair value of derivatives designated and qualifying as cash flow hedges is initially recorded in AOCI and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive income ("AOCI") related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt.

The following table sets forth a summary of the interest rate swaps at September 30, 2018 and December 31, 2017:



				Fair Value ⁽¹⁾
Derivative Instruments	Effective Date	Maturity Date/ Termination	Interest Strike Rate	September 30, 2018		December 31, 2017
Assets
Interest Rate Swap	4/1/2016	12/12/2018	0.74%	$	310	$	967
Interest Rate Swap (terminated on April 30, 2018)	11/1/2017	4/30/2018	1.50%	—		65
				$	310	$	1,032


(1)	The Company records all derivative instruments on a gross basis on the consolidated balance sheets, and accordingly, there are no offsetting amounts that net assets against liabilities. As of September 30, 2018, the Company's derivative was in an asset position, and as such, the fair value is included in the line item "Other Assets, net" on the consolidated balance sheet.

The following table sets forth the impact of the interest rate swaps on the consolidated financial statements for the nine months ended September 30, 2018 and 2017:



	Nine Months Ended September 30,
	2018			2017
Interest Rate Swaps in Cash Flow Hedging Relationship:
Amount of (gain) recognized in AOCI on derivatives	$	(281	)	$	(190	)
Amount of gain reclassified from AOCI into earnings under “Interest expense”	$	922		$	207
Total interest expense presented in the consolidated statement of operations in which the effects of cash flow hedges are recorded	$	14,775		$	11,445

During the twelve months subsequent to September 30, 2018, the Company estimates that an additional $0.3 million of income will be recognized from AOCI into earnings.

The Company's agreements with the derivative counterparties contain a provision where if the Company defaults on any of the Company's indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender within a specified time period, then the Company could also be declared in default on its derivative obligations.

As of September 30, 2018, the fair value of the interest rate swap was in an asset position excluding any adjustment for nonperformance risk related to the Company's derivative counterparty agreement, which was approximately $0.3 million. As of September 30, 2018, the Company had not posted any collateral related to the Company's derivative counterparty agreements.