6.	Fair Value Measurements

Prior to the adoption of liquidation accounting, REIT securities, loan securities and derivative financial instruments were 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 consisted of non-agency mortgage-related securities. The Trust valued the loan securities carried at fair value based primarily on prices received from a pricing service. The techniques used by the pricing service to develop the prices were generally 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 included prepayment rates, probability of default, loss severity and yield to maturity percentages.

Although the Trust 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 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 were not significant to the overall valuation of its derivatives. As a result, the Trust determined that the derivative valuations in their entirety should be classified in Level 2 of the fair value hierarchy.

Non-Recurring Measurements

Non-recurring measurements of fair value of assets or liabilities would typically include investments in real estate, assets held for sale and equity investments. During the seven months ended July 31, 2014 the Trust recognized impairment charges totaling $9,287,000 on its Jacksonville, Florida; Lisle, Illinois (550 Corporetum); Louisville, Kentucky and Greensboro, North Carolina properties. During the seven months ended July 31, 2014 the Trust also recognized $2,422,000 in other-than-temporary impairment charges on its equity investments. During the year ended December 31, 2013 the Trust recognized impairment charges totaling $2,904,000 on its Lisle, Illinois (701 Arboretum) and Denton, Texas properties. During the year ended December 31, 2013 the Trust recognized other-than-temporary impairment charges totaling $7,687,000 on its equity investments.

In light of the adoption of a plan of liquidation by the Board 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 were based on a number of assumptions. Those assumptions were generally based on management’s experience in its real estate markets and the effects of current market conditions. The assumptions were 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 those factors were difficult to predict and were 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.

Equity and Preferred Equity Investments

Under going concern accounting, equity and preferred equity investments were assessed for other-than-temporary impairment when the carrying value of the Trust’s investment exceeded its fair value. The fair value of equity investments was determined using a discounted cash flow model which incorporated a residual value utilizing an income capitalization approach considering prevailing market capitalization rates. The Trust reviewed each investment based on the highest and best use of the investment and market participation assumptions. The significant assumptions used in this analysis included 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 determined that the significant inputs used to value its Marc Realty and Sealy equity investments fell within Level 3. The Trust recognized other-than-temporary impairment losses of $2,422,000 and $7,687,000 on these investments during the seven months ended July 31, 2014 and the year ended December 31, 2013. See Note 9—Equity Investments for further details on these impairments.

Investments in Real Estate and Assets Held For Sale

During the seven months ended July 31, 2014 and the year ended December 31, 2013, the Trust recognized impairment charges of $9,287,000 and $2,904,000, respectively, relative to investments in real estate and assets held for sale. Under going concern accounting, the Trust assessed 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 existed, management estimated the undiscounted cash flows from the expected use and disposition of the asset. Significant inputs for this recoverability analysis included 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 recorded 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 determined the fair value of those assets using an income valuation approach based on assumptions it believed a market participant would utilize. Significant assumptions included discount and capitalization rates used in the income valuation approach.

During the quarter ended June 30, 2013 the Trust entered into a purchase and sale agreement on its Denton, Texas property. 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 recorded a $2,750,000 impairment charge in 2013 as a result of the purchase contract. The property was sold on December 17, 2013.

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 10.0% and market rent and expense growth rates of 2.0%.

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 sale of the property was not completed and the purchase contract was terminated.

During June 2014 the Trust entered into a purchase and sale agreement on its Louisville, Kentucky retail property. A fair value measurement was prepared at June 30, 2014 based on the purchase contract less costs to sell and an $87,000 impairment charge was recorded.