3.	Fair Value Measurements

REIT securities, loan securities and derivative financial instruments are reported at fair value. 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).

The Trust’s Level 3 loan securities carried at fair value primarily consist of non-agency mortgage-related securities. The Trust values the loan securities carried at fair value it holds based primarily on prices received from a pricing service. The techniques used by the pricing service to develop the prices generally are either: (a) a comparison to transactions involving instruments with similar collateral and risk profiles; or (b) industry standard modeling, such as a discounted cash flow model. The significant inputs and assumptions used to determine the fair value of the Trust’s loan securities include prepayment rates, probability of default, loss severity and yield to maturity percentages.

Recurring Measurements

The table below presents the Trust’s assets measured at fair value on a recurring basis as of March 31, 2014 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 (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		—		169		—		169

	$	—	$	169	$	226	$	395

The table below presents the Trust’s assets 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 (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

There were no inter-level transfers of assets or liabilities during the three months ended March 31, 2014 and March 31, 2013.

The tables below include a roll forward of the balance sheet amounts from January 1, 2014 to March 31, 2014 and from January 1, 2013 to March 31, 2013, including the change in fair value, for financial instruments classified by the Trust within Level 3 of the valuation hierarchy (in thousands). 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	Three Months Ended March 31, 2014		Three Months Ended March 31, 2013

Fair value, January 1	$	226	$	11
Net unrealized gain		—		—

Fair value, March 31	$	226	$	11


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	$	—	$	—

Quantitative Information about Level 3 Fair Value Measurements

At March 31, 2014 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.

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.

Non-Recurring Measurements

Non-recurring measurements of fair value of assets or liabilities would typically include investments in real estate and equity investments. During the three months ended March 31, 2014 the Trust recognized impairment charges totaling $9,200,000 on its Jacksonville, Florida, Lisle, Illinois and Greensboro, North Carolina properties. The Trust did not recognize any valuation adjustments as a result of non-recurring measurements for the three months ended March 31, 2013.

During April 2014 the Trust entered into a purchase and sale agreement on its Jacksonville, Florida property. A fair value measurement was prepared at March 31, 2014 based on the purchase contract and a $200,000 impairment charge was recorded. The purchase and sale agreement remains subject to the buyer’s diligence and the property remains classified as held for use at March 31, 2014. The sale of the property is expected to be consummated during the second quarter of 2014.

In light of the adoption of a plan of liquidation by the Board of Trustees on April 28, 2014, the Trust tested the tangible and intangible assets for impairment, which considered a probability analysis of various scenarios including a shortened holding period for all of its operating properties. The Trust’s estimates of future cash flows expected to be generated in the impairment tests are based on a number of assumptions. These assumptions are generally based on management’s experience in its real estate markets and the effects of current market conditions. The assumptions are subject to economic and market uncertainties including, among others, market capitalization rates, discount rates, demand for space, competition for tenants, changes in market rental rates, and costs to operate the property. As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the future cash flows estimated by management in its impairment analyses may not be achieved, and actual losses or impairment may be realized in the future.

The carrying value of the Trust’s wholly owned office property in Lisle, Illinois, referred to as 550 Corporetum, exceeded the estimated fair value resulting in a $8,500,000 impairment charge which was recorded at March 31, 2014. The carrying value of the Trust’s wholly owned retail property in Greensboro, North Carolina exceeded the estimated fair value resulting in a $500,000 impairment charge which was recorded at March 31, 2014. The fair value of these properties were calculated using the following key Level 3 inputs: discount rate of 8%, terminal capitalization rates of 8.5% to 10% and market rent and expense growth rates of 2%.

The Table below presents the Trust’s assets measured at fair value on a non-recurring basis as of March 31, 2014, 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 (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets
Investments in real estate	$	—	$	—	$	22,826	$	22,826

	$	—	$	—	$	22,826	$	22,826

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):


	March 31, 2014
					Fair value hierarchy level
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3

Loans receivable	$	48,667	$	56,952	$	—	$	—	$	56,952
Secured financing receivable		30,700		30,700		—		—		30,700
Mortgage loans payable		476,424		476,162		—		—		476,162
Senior notes payable		86,250		88,700		88,700		—		—
Notes payable		1,693		1,693		—		—		1,693

	December 31, 2013
					Fair value hierarchy level
	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

Loans Receivable and Mortgage Loans Payable

Fair values of loans receivable, secured financing receivable, mortgage loans payable and notes payable are primarily determined by discounting the expected cash flows at current interest rates plus an applicable risk spread, which reflects credit quality and maturity of the loans. The risk spread is based on loans with comparable credit quality, maturities and risk profile. Loans receivable may also be based on the fair value of the underlying real estate collateral less cost to sell, which is estimated using appraised values. These are classified as Level 3.

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 elected the fair value option for all loan securities and REIT securities acquired.

There was no change in the fair value of loan securities for the three months ended March 31, 2014. The Trust did not have any holdings of REIT securities at March 31, 2014 or December 31, 2013. During the three months ended March 31, 2013, the Trust recognized net unrealized gains of $1,718,000. The change in fair value of the REIT securities and loan securities for which the fair value option was elected is recorded as an unrealized gain or loss 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 March 31, 2014 and December 31, 2013 the Trust’s financial assets for which the fair value option was elected (in thousands):


Financial Instruments at Fair Value	March 31, 2014		December 31, 2013
Assets
Loan securities carried at fair value	$	226	$	226

	$	226	$	226

The table below presents as of March 31, 2014 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 March 31, 2014		Amount Due Upon Maturity		Difference
Assets
Loan securities carried at fair value	$	226	$	1,130	$	904

	$	226	$	1,130	$	904