Disclosure About Fair Value of Financial Instruments

The following summarizes the three levels of inputs that we use to measure fair value.

Level 1. Quoted prices in active markets for identical assets or liabilities.

Our Level 1 asset is our investments in marketable securities that we use to pay benefits under our non-qualified deferred compensation plan. Our Level 1 liability is our non-qualified deferred compensation obligation. The Company's Level 1 noncontrolling interests in the Operating Partnership relate to the ownership of Common Units by various individuals and entities other than the Company.

Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

Our Level 2 assets include the fair value of certain of our mortgages and notes receivable and certain of our interest rate swaps. Our Level 2 liabilities include the fair value of our mortgages and notes payable and the remainder of our interest rate swaps.

The fair value of mortgages and notes receivable and mortgages and notes payable is estimated by the income approach utilizing contractual cash flows and market-based interest rates to approximate the price that would be paid in an orderly transaction between market participants. The fair value of interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments of interest rate swaps are based on the expectation of future LIBOR interest rates (forward curves) derived from observed market LIBOR interest rate curves. In addition, credit valuation adjustments are incorporated in the fair values to account for potential nonperformance risk, but were concluded to not be significant inputs to the calculation for the periods presented.

Level 3. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Our Level 3 assets include (1) certain of our mortgages and notes receivable, which were estimated by the income approach utilizing internal cash flow projections and market interest rates to estimate the price that would be paid in an orderly transaction between market participants, (2) our tax increment financing bond, which is not routinely traded but whose fair value is determined by the income approach utilizing contractual cash flows and market-based interest rates to estimate the projected redemption value based on quoted bid/ask prices for similar unrated municipal bonds, and (3) any real estate assets recorded at fair value on a non-recurring basis as a result of our quarterly impairment analysis, which were valued using the terms of definitive sales contracts or the sales comparison approach and substantiated with internal cash flow projections.

Our Level 3 liabilities include the fair value of our contingent consideration to acquire real estate assets and financing obligations, which were estimated by the income approach to approximate the price that would be paid in an orderly transaction between market participants, utilizing: (1) contractual cash flows; (2) market-based interest rates; and (3) a number of other assumptions including demand for space, competition for customers, changes in market rental rates, costs of operation and expected ownership periods.


9.	Disclosure About Fair Value of Financial Instruments - Continued

The following table sets forth our assets and liabilities and the Company's noncontrolling interests in the Operating Partnership that are measured at fair value within the fair value hierarchy.



			Level 1		Level 2		Level 3
	Total		Quoted Prices in Active Markets for Identical Assets or Liabilities		Significant Observable Inputs		Significant Unobservable Inputs
Fair Value at June 30, 2014:
Assets:
Mortgages and notes receivable, at fair value (1)	$	10,144	$	—	$	239	$	9,905
Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)	3,869		3,869		—		—
Impaired real estate assets	4,922		—		—		4,922
Tax increment financing bond (in prepaid expenses and other assets)	13,673		—		—		13,673
Total Assets	$	32,608	$	3,869	$	239	$	28,500
Noncontrolling Interests in the Operating Partnership	$	123,205	$	123,205	$	—	$	—
Liabilities:
Mortgages and notes payable, at fair value (1)	$	2,152,505	$	—	$	2,152,505	$	—
Interest rate swaps (in accounts payable, accrued expenses and other liabilities)	2,744		—		2,744		—
Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)	3,869		3,869		—		—
Financing obligations, at fair value (1)	22,466		—		—		22,466
Total Liabilities	$	2,181,584	$	3,869	$	2,155,249	$	22,466



Fair Value at December 31, 2013:
Assets:
Mortgages and notes receivable, at fair value (1)	$	26,485	$	—	$	17,029	$	9,456
Interest rate swaps (in prepaid expenses and other assets)	301		—		301		—
Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)	3,996		3,996		—		—
Tax increment financing bond (in prepaid expenses and other assets)	13,403		—		—		13,403
Total Assets	$	44,185	$	3,996	$	17,330	$	22,859
Noncontrolling Interests in the Operating Partnership	$	106,480	$	106,480	$	—	$	—
Liabilities:
Mortgages and notes payable, at fair value (1)	$	2,037,385	$	—	$	2,037,385	$	—
Interest rate swaps (in accounts payable, accrued expenses and other liabilities)	510		—		510		—
Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)	3,996		3,996		—		—
Financing obligations, at fair value (1)	22,478		—		—		22,478
Total Liabilities	$	2,064,369	$	3,996	$	2,037,895	$	22,478

__________

(1) Amounts recorded at historical cost on our Consolidated Balance Sheets at June 30, 2014 and December 31, 2013.


9.	Disclosure About Fair Value of Financial Instruments - Continued

The following table sets forth the changes in our Level 3 asset and liability, which are recorded at fair value on our Consolidated Balance Sheets:



	Three Months Ended June 30,					Six Months Ended June 30,
	2014		2013			2014		2013
Asset:
Tax Increment Financing Bond:
Beginning balance	$	13,568	$	14,324		$	13,403	$	14,496
Principal repayment	—		—			—		(562		)
Unrealized gains/(losses) (in AOCL)	105		(91		)	270		299
Ending balance	$	13,673	$	14,233		$	13,673	$	14,233
Liability:
Contingent Consideration to Acquire Real Estate Assets:
Beginning balance	$	—	$	375		$	—	$	563
Unrecognized (gains)/losses (in general and administrative expenses)	—		9			—		(179		)
Ending balance	$	—	$	384		$	—	$	384

During 2007, we acquired a tax increment financing bond associated with a parking garage developed by us. This bond amortizes to maturity in 2020. The estimated fair value at June 30, 2014 was $0.8 million below the outstanding principal due on the bond. If the discount rate used to fair value this bond was 100 basis points higher or lower, the fair value of the bond would have been $0.4 million lower or $0.4 million higher, respectively, as of June 30, 2014. We intend to hold this bond and have concluded that we will not be required to sell this bond before recovery of the bond principal. Payment of the principal and interest for the bond is guaranteed by us. We have recorded no credit losses related to the bond during the three and six months ended June 30, 2014 and 2013. There is no legal right of offset with the liability, which we report as a financing obligation, related to this tax increment financing bond.

The impaired real estate assets that were measured in the second quarter of 2014 at fair value and deemed to be Level 3 assets were valued based primarily on market-based inputs and our assumptions about the use of the assets, as observable inputs were not available. In the absence of observable inputs, we estimate the fair value of real estate using unobservable data such as estimated discount and capitalization rates. We also utilize local and national industry market data such as comparable sales, sales contracts and appraisals to assist us in our estimation of fair value. Significant increases or decreases in any valuation inputs in isolation would result in a significantly lower or higher fair value measurement.

The following table sets forth quantitative information about the unobservable input of our Level 3 assets, which are recorded at fair value on our Consolidated Balance Sheets:



	Valuation Technique	Unobservable Input	Rate
Assets:
Tax increment financing bond	Income approach	Discount rate	9.0%
Impaired real estate assets	Income approach	Capitalization rate	9.5%
		Discount rate	10.0%