3.	Fair Value Measurements

The accounting standards establish a framework for measuring fair value as well as disclosures about fair value measurements. They emphasize that fair value is a market based measurement, not an entity-specific measurement. Therefore a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that the Trust has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability other than quoted prices, such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Trust’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Level 1 financial investments include highly liquid government bonds, mortgage products and exchange-traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include certain derivative financial instruments. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Securities classified within Level 3 include, for example, residual interests in securitizations and other less liquid securities, investments in joint ventures and real estate investments.

The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Recurring Measurements

Securities Carried at Fair Value

Securities carried at fair value are classified within Level 1 of the fair value hierarchy.

Loan Securities Carried at Fair Value

The Trust uses a third party pricing model to establish values for the loan securities in its portfolio. The Trust also performs further analysis of the performance of the loans and collateral underlying the securities, the estimated value of the collateral supporting such loans and a consideration of local, industry and broader economic trends and factors. Significant judgment is utilized in the ultimate determination of fair value. The significant assumptions used in this analysis include market interest rates and interest rate spreads. This valuation methodology has been characterized as Level 3 in the fair value hierarchy.

Derivative Financial Instruments

The Trust uses interest rate swaps and interest rate caps to manage its interest rate risk. The valuation of these instruments is determined using both quantitative and qualitative valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative as well as potential credit risks with the swap counterparty. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, and implied volatilities. The fair values of interest rate swaps and interest rate caps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

The Trust incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Trust has considered the impact of netting as well as any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

Although the Trust 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 its derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. However, the Trust has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Trust has determined that the derivative valuations in their entirety should be classified in Level 2 of the fair value hierarchy.

The table below presents the Trust’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2013, according to the level in the fair value hierarchy within which those measurements fall (in thousands):


Recurring Basis	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets
Loan securities carried at fair value	$	—	$	—	$	226	$	226
Interest rate hedges		—		316		—		316

	$	—	$	316	$	226	$	542

The table below presents the Trust’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2012, according to the level in the fair value hierarchy within which those measurements fall (in thousands):


Recurring Basis	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets
Securities carried at fair value	$	19,694	$	—	$	—	$	19,694
Loan securities carried at fair value		—		—		11		11
Interest rate hedges		—		8		—		8

	$	19,694	$	8	$	11	$	19,713

There were no inter-level transfers of assets or liabilities during the years ended December 31, 2013 and 2012.

The table below includes a roll forward (in thousands) of the balance sheet amounts from January 1, 2011 to December 31, 2013, including the change in fair value, for financial instruments classified by the Trust within Level 3 of the valuation hierarchy. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement.


	Loan Securities Carried at Fair Value
Fair value, January 1, 2011	$	11,981
Purchases		—
Sale/repayment		(662	)
Payoff at par		(8,748	)
Realized gain		—
Unrealized gain		2,738
Transfers in/and or out of Level 3		—

Fair value, December 31, 2011		5,309

Purchases		—
Sale/repayment		(6,359	)
Realized gain		614
Unrealized gain		447
Transfers in and/or out of Level 3		—

Fair value, December 31, 2012		11

Purchases		—
Sale/repayment		—
Realized gain		—
Unrealized gain		215
Transfers in and/or out of Level 3		—

Fair value, December 31, 2013	$	226


	Year Ended December 31, 2013		Year Ended December 31, 2012

The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	215	$	23

Quantitative Information about Level 3 Fair Value Measurements

At December 31, 2013 the Trust held only one loan security which is valued at $226,000, or 20% of face value. The valuation reflects assumptions that would be considered by market participants along with management’s assessment of collectible future cash flows.

Non-Recurring Measurements

Equity and Preferred Equity Investments

Equity and preferred equity investments are assessed for other-than-temporary impairment when the carrying value of the Trust’s investment exceeds its fair value. The fair value of equity investments is determined using a discounted cash flow model which incorporates a residual value utilizing an income capitalization approach considering prevailing market capitalization rates. The Trust reviews each investment based on the highest and best use of the investment and market participation assumptions. The significant assumptions used in this analysis include rental revenues, operating expenses, inflation rates, market absorption rates, tenanting costs, the discount rate and capitalization rates used in the income capitalization valuation. The Trust has determined that the significant inputs used to value its Marc Realty and Sealy equity investments fall within Level 3. The Trust recognized other-than-temporary impairment losses of $7,687,000, $0, and $21,058,000, on these investments during the years ended December 31, 2013, 2012 and 2011, respectively. See Note 8-Equity Investments for further details on these impairments.

The Trust has determined that the significant inputs used to value certain of its preferred equity investments fall within Level 3. There were no impairment losses recorded on these preferred equity investments during the years ended December 31, 2013, 2012 and 2011.

Investments in Real Estate and Assets Held For Sale

During 2013, 2012, and 2011 the Trust recognized impairment charges of $2,904,000, $3,260,000 and $7,600,000, respectively, relative to investments in real estate and assets held for sale. The Trust assesses the assets in its portfolio for recoverability based upon a determination of the existence of impairment indicators including significant decreases in market pricing and market rents, a change in the extent or manner in which real estate assets are being used or a decline in their physical condition, current period losses combined with a history of losses or a projection of continuing losses, and a current expectation that real estate assets will be sold or otherwise disposed of before the end of their previously estimated useful lives. When such impairment indicators exists, management estimates the undiscounted cash flows from the expected use and disposition of the asset. Significant inputs for this recoverability analysis include the anticipated holding period for the asset as well as assumptions over rental revenues, operating expenses, inflation rates, market absorption rates, tenanting and other capital improvement costs and the asset’s estimated residual value. For those assets not deemed to be fully recoverable, the Trust records an impairment charge equal to the difference between the carrying value and estimated fair value of the asset less costs to sell the asset. Management determines the fair value of those assets using an income valuation approach based on assumptions it believes a market participant would utilize. Significant assumptions include discount and capitalization rates used in the income valuation approach.

The Trust’s Memphis, Tennessee property was placed into discontinued operations during the period ended September 30, 2012. The carrying value of the property exceeded the fair value less costs to sell resulting in a $698,000 impairment charge.

At December 31, 2012 the Trust re-evaluated its business plan and revised its holding period for two assets in the operating properties segment. As a result, it was determined that due to the shorter hold period, the carrying value of the Atlanta, Georgia and Denton, Texas properties were no longer fully recoverable. Impairment charges of $1,738,000 and $824,000 were recorded on the Atlanta, Georgia and Denton, Texas assets, respectively. During the quarter ended June 30, 2013 the Trust entered into a purchase and sale agreement on its Denton, Texas property. At June 30, 2013 the purchase deposit was non-refundable and it was probable that the sale would be consummated. As a result the property was classified as held for sale at June 30, 2013. A fair value measurement was prepared based on the purchase contract less costs to sell and a $154,000 impairment charge was recorded at June 30, 2013. The property was sold on July 2, 2013.

In light of continued leasing challenges and specific sub-market dynamics, at September 30, 2013 the Trust re-evaluated its business plan and revised its holding period for its operating property in Lisle, Illinois referred to as 701 Arboretum. As a result, it was determined that due to the shorter holding period, the carrying value of the 701 Arboretum property was no longer fully recoverable. The Trust had previously recorded a $3,000,000 impairment charge in 2011 as a result of continued declines in occupancy. The Trust recorded an additional $2,750,000 impairment charge in 2013 as a result of the purchase contract. The property was sold on December 17, 2013.

The table below presents the Trust’s assets and liabilities measured at fair value as of December 31, 2013, according to the level in the fair value hierarchy within which those measurements fall (in thousands):


Non-Recurring Basis	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total

Equity Investments	$	—	$	—	$	6,751	$	6,751
Assets held for sale		—		—		—		—

	$	—	$	—	$	6,751	$	6,751

The table below presents the Trust’s assets and liabilities measured at fair value as of December 31, 2012 according to the level in the fair value hierarchy within which those measurements fall (in thousands):


Non-Recurring Basis	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total

Investments in real estate	$	—	$	—	$	3,733	$	3,733

	$	—	$	—	$	3,733	$	3,733

The following table provides quantitative information about the significant unobservable inputs used for non-recurring fair value measurements categorized within Level 3 at December 31, 2013. Fair value measurements related to impairments involve Level 3 inputs.

Assets
Measured at
Fair Value
(in thousands)

Valuation Technique

Unobservable Input

Input Range

Weighted
Average

Equity Investment

6,551

Indicative Bids⁽¹⁾

Indicative Bids

N/A

Equity Investment

150

Indicative Bids⁽¹⁾

Indicative Bids

N/A

Equity Investment

Indicative Bids⁽¹⁾

Indicative Bids

N/A

⁽¹⁾	This fair value measurement was developed from a purchase contract currently in negotiation.

Financial Instruments Not Reported at Fair Value

The carrying value and estimated fair value of financial instruments not recorded at fair value on a recurring basis but required to be disclosed at fair value were as follows (in thousands):


	December 31, 2013
					Fair value hierarchy level
	Carrying
	Amount		Fair Value		Level 1		Level 2		Level 3

Loans receivable	$	101,100	$	105,045	$	—	$	—	$	105,045
Secured financing receivable		30,728		30,728		—		—		30,728
Mortgage loans payable		444,933		444,785		—		—		444,785
Senior notes payable		86,250		86,940		86,940		—		—
Secured financings		29,150		29,327		—		—		29,327
Notes payable		1,742		1,742		—		—		1,742


	December 31, 2012
					Fair value hierarchy level
	Carrying
	Amount		Fair Value		Level 1		Level 2		Level 3

Loans receivable	$	211,250	$	222,246	$	—	$	—	$	222,246
Mortgage loans payable		280,576		270,923		—		—		270,923
Senior notes payable		86,250		89,183		89,183		—		—
Secured financings		52,920		53,253		—		—		53,253
Notes payable		1,676		1,676		—		—		1,676

Fair Value Option

The current accounting guidance for fair value measurement provides a fair value option election that allows companies to irrevocably elect fair value as the measurement attribute for certain financial assets and liabilities. Changes in fair value for assets and liabilities for which the election is made are recognized in earnings on a quarterly basis based on the then market price regardless of whether such assets or liabilities have been disposed of at such time. The fair value option guidance permits the fair value option election to be made on an instrument by instrument basis when it is initially recorded or upon an event that gives rise to a new basis of accounting for that asset or liability. The Trust has elected the fair value option for all loan securities and REIT securities.

The Trust recognized a net unrealized gain of $73,000, $7,363,000 and $5,526,000 for the years ended December 31, 2013, 2012 and 2011 respectively, as a result of the change in fair value of the securities and loan securities carried at fair value, which is recorded as an unrealized gain in the Trust’s Consolidated Statements of Operations. Income related to securities carried at fair value is recorded as interest and dividend income.

The following table presents as of December 31, 2013 and December 31, 2012 the Trust’s financial assets for which the fair value option was elected (in thousands):


Financial Instruments at Fair Value	December 31, 2013		December 31, 2012

Assets
Securities carried at fair value:
REIT Common shares	$	—	$	19,694
Loan securities carried at fair value		226		11

	$	226	$	19,705

The table below presents as of December 31, 2013 the difference between fair values and the aggregate contractual amounts due for which the fair value option has been elected (in thousands):


	Fair Value at December 31, 2013		Amount Due Upon Maturity		Difference

Assets

Loan securities carried at fair value	$	226	$	1,130	$	904

	$	226	$	1,130	$	904