Fair Value of Assets and Liabilities

The table below presents certain of our assets and liabilities measured at fair value during 2016 and 2015, categorized by the level of inputs used in the valuation of each asset and liability (dollars in thousands):



			Fair Value at December 31, 2016 Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Recurring Fair Value Measurements:
Effective portion of interest rate cap contract	$	314	$	—	$	314	$	—



				Fair Value at December 31, 2015 Using
				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs			Significant Unobservable Inputs
Description	Total			(Level 1)		(Level 2)			(Level 3)
Recurring Fair Value Measurements:
Effective portion of interest rate swap contracts	$	(3,687	)	$	—	$	(3,687	)	$	—
Derivative liability	(7,219		)	—		—			(7,219		)

Effective Portion of Interest Rate Swap and Cap Contracts

The fair value of our interest rate swap and cap contracts is determined using the net discounted cash flows of each derivative based on the market based interest rate curve (level 2 inputs) and adjusted for our credit spread and the actual and estimated credit spreads of the counterparties (level 3 inputs). Although we have determined that the majority of the inputs used to value our derivatives fall within level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and the counterparties. As of December 31, 2016, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified as level 2 inputs in the fair value hierarchy.

Derivative Liability

On July 31, 2014, our shareholders voted to approve the reimbursement of verified expenses incurred by Related Fund Mangement, LLC and Corvex Management LP (Related/Corvex) (see Note 18 for additional information). Approximately $16.7 million was paid during the year ended December 31, 2014. Up to $8.4 million was to be reimbursed only if the average closing price of our common shares was at least $26.00 (as adjusted for any share splits or share dividends) during the one year period after the date on which the reimbursement was approved by shareholders, and up to $8.4 million was to be reimbursed only if the average closing price of our common shares was at least $26.00 (as adjusted for any share splits or share dividends) during the one year period between the first and second anniversaries of the date on which the reimbursement was approved by shareholders. The average closing price of our common shares was at least $26.00 during both the first and second one year periods after the date on which the reimbursement was approved by shareholders, and as a result, in August 2016 and 2015 we paid $8.2 million and $8.4 million, respectively, to Related/Corvex.

Prior to the payment of the reimbursement in August 2016, the potential future reimbursement of $8.4 million for the second one year period represented a derivative instrument as codified in ASC 815 Derivatives and Hedging which required the potential future reimbursement to be recorded at fair value at each reporting date. We recognized expense of $1.0 million and $9.0 million, which was recorded in general and administrative expenses in our consolidated statements of operations for the years ended December 31, 2016 and 2015, respectively. The valuation techniques and significant unobservable inputs used for our level 3 fair value measurement at December 31, 2015 were as follows:



Description	Fair Value at December 31, 2015		Primary Valuation Technique	Unobservable Inputs	Rate
Derivative liability	$	7,219	Monte Carlo simulation	Risk-free rate	0.52%
				Volatility	20.0%

Properties Held and Used

As part of our disposition plan, and pursuant to our accounting policy, in 2016, we evaluated the recoverability of the carrying values of each of the real estate assets that comprised our portfolio and determined that due to the shortening of the expected periods of ownership as a result of the disposition plan and current estimates of market value, it was necessary to reduce the net book value of a portion of the real estate assets in our portfolio to their estimated fair values. We anticipate the potential disposition of certain properties prior to the end of their remaining useful lives. As a result, in the second quarter of 2016, we recorded an impairment charge related to 111 Monument Circle, 101-115 W. Washington Street and 100 East Wisconsin Avenue of $43.7 million for the year ended December 31, 2016 in accordance with our impairment analysis procedures. We reduced the aggregate carrying value of these properties from $308.6 million to their estimated fair value of $264.9 million. These properties were sold in August 2016 (see Note 3 for additional information). In the fourth quarter of 2016, we recorded an impairment charge related to Parkshore Plaza, Cabot Business Park Land, 625 Crane Street and 111 Market Place of $14.7 million for the year ended December 31, 2016 in accordance with our impairment analysis procedures. We reduced the aggregate carrying value of these properties from $98.2 million to their estimated fair value of $83.5 million. 111 Market Place was sold in January 2017 (see Note 20 for additional information). We determined these impairments based on third party offer prices and independent third party broker information, which are level 2 inputs according to the fair value hierarchy established in ASC 820. We evaluated each of our properties and determined there were no additional valuation adjustments necessary at December 31, 2016.

As part of our disposition plan, and pursuant to our accounting policy, in 2015, we evaluated the recoverability of the carrying values of each of the real estate assets that comprised our portfolio and determined that due to the shortening of the expected periods of ownership as a result of the disposition plan, it was necessary to reduce the net book value of a portion of the real estate assets in our portfolio to reduce the assets to their estimated fair values. During the year ended December 31, 2015, we recorded an impairment charge of $17.2 million in accordance with our impairment analysis procedures.

Financial Instruments

In addition to the assets and liabilities described in the above table, our financial instruments include our cash and cash equivalents, real estate mortgages receivable, restricted cash, senior unsecured debt and mortgage notes payable. At December 31, 2016 and 2015, the fair value of these additional financial instruments were not materially different from their carrying values, except as follows (in thousands):



	December 31, 2016				December 31, 2015
	Principal Balance		Fair Value		Principal Balance		Fair Value
Senior unsecured debt and mortgage notes payable	$	1,151,634	$	1,167,031	$	1,711,666	$	1,749,211

The fair values of our senior notes and mortgage notes payable are based on estimates using discounted cash flow analyses and currently prevailing interest rates adjusted by credit risk spreads (level 3 inputs).

Other financial instruments that potentially subject us to concentrations of credit risk consist principally of rents receivable; however, as of December 31, 2016, no single tenant of ours is responsible for more than 5.5% of our total annualized rents.

Our derivative financial instruments, including interest rate swaps and caps, are entered with major financial institutions and we monitor the amount of credit exposure to any one counterparty.