Griffin Capital Essential Asset REIT, Inc. - FORM 10-Q - May 13, 2015

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________________________

FORM 10-Q
____________________________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission File Number: 000-54377
_______________________________________________
Griffin Capital Essential Asset REIT, Inc.
(Exact name of Registrant as specified in its charter)
________________________________________________
Maryland
 
26-3335705
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)

Griffin Capital Plaza
1520 E. Grand Ave
El Segundo, California 90245
(Address of principal executive offices)
(310) 469-6100
(Registrant’s telephone number)

__________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large accelerated filer
 
¨
 
Accelerated filer
 
¨
Non-accelerated filer
 
x  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x




Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 11, 2015: 131,114,820 shares of common stock, $0.001 par value per share.


FORM 10-Q
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
TABLE OF CONTENTS
 
 
Page No.
 
 
Item 1.
Financial Statements:
 
 
Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014
 
Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014 (unaudited)
 
Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2015 and 2014 (unaudited)
 
Consolidated Statements of Equity for the Year Ended December 31, 2014 and the Three Months Ended March 31, 2015 (unaudited)
 
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (unaudited)
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

3

PART I. FINANCIAL INFORMATION
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q of Griffin Capital Essential Asset REIT, Inc., other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements include, in particular, statements about our plans, strategies, and prospects and are subject to risks, uncertainties, and other factors. Such statements are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations and provide distributions to stockholders, our ability to find suitable investment properties, and our ability to be in compliance with certain debt covenants, may be significantly hindered. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the Securities and Exchange Commission ("SEC"). We cannot guarantee the accuracy of any such forward-looking statements contained in this Form 10-Q, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
See the risk factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2014 as filed with the SEC for a discussion of some, although not all, of the risks and uncertainties that could cause actual results to differ materially from those presented in our forward-looking statements.

4

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 
March 31,
2015
 
December 31,
2014
 
(unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
59,511

 
$
68,915

Restricted cash
40,178

 
42,201

Restricted cash - real estate funds held for exchange
—

 
10,105

Real estate:
 
 
 
Land
263,997

 
259,597

Building and improvements
1,293,290

 
1,240,115

Tenant origination and absorption cost
388,889

 
379,419

Construction in progress
63,349

 
35,838

Total real estate
2,009,525

 
1,914,969

Less: accumulated depreciation and amortization
(129,040
)
 
(109,636
)
Total real estate, net
1,880,485

 
1,805,333

Real estate assets and other assets held for sale, net
—

 
8,004

Investments in unconsolidated entities
63,501

 
66,249

Intangible assets, net
23,435

 
24,344

Deferred rent
20,165

 
17,189

Deferred financing costs, net
11,229

 
11,791

Real estate acquisition deposits
1,000

 
—

Other assets, net
12,212

 
11,316

Total assets
$
2,111,716

 
$
2,065,447

LIABILITIES AND EQUITY
 
 
 
Debt:
 
 
 
Mortgages payable, plus unamortized premium of $1,778 and $1,858, respectively
$
325,128

 
$
325,696

Unsecured Term Loan
300,000

 
300,000

Unsecured Revolver
50,000

 
—

Total debt
675,128

 
625,696

Restricted reserves
34,899

 
38,089

Accounts payable and other liabilities
51,655

 
44,174

Distributions payable
5,162

 
5,083

Due to affiliates
1,949

 
1,949

Below market leases, net
39,022

 
40,394

Liabilities of real estate assets held for sale
—

 
113

Total liabilities
807,815

 
755,498

Commitments and contingencies (Note 8)

 

Preferred units subject to redemption, 24,319,066 units eligible towards redemption as of March 31, 2015 and December 31, 2014
250,000

 
250,000

Noncontrolling interests subject to redemption, 531,000 units eligible towards redemption as of March 31, 2015 and December 31, 2014
12,543

 
12,543

Common stock subject to redemption
68,771

 
56,421

Stockholders’ equity:
 
 
 
Preferred Stock, $0.001 par value; 200,000,000 shares authorized; no shares outstanding, as of March 31, 2015 and December 31, 2014
—

 
—

Common Stock, $0.001 par value; 700,000,000 shares authorized; 130,877,314 and 129,763,016 shares outstanding as of March 31, 2015 and December 31, 2014, respectively
1,338

 
1,326

Additional paid-in capital
1,127,019

 
1,128,318

Cumulative distributions
(126,687
)
 
(104,429
)
Accumulated deficit
(45,169
)
 
(51,285
)
Accumulated other comprehensive loss
(841
)
 
(423
)
Total stockholders’ equity
955,660

 
973,507

Noncontrolling interests
16,927

 
17,478

Total equity
972,587

 
990,985

Total liabilities and equity
$
2,111,716

 
$
2,065,447

See accompanying notes.

5

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except share and per share amounts)
 
Three Months Ended
 
March 31,
 
2015
 
2014
Revenue:
 
 
 
Rental income
$
44,715

 
$
39,469

Property expense recoveries
10,498

 
8,523

Total revenue
55,213

 
47,992

Expenses:
 
 
 
Asset management fees to affiliates
3,787

 
2,522

Property management fees to affiliates
1,474

 
1,212

Property operating
6,899

 
6,863

Property tax
6,878

 
5,224

Acquisition fees and expenses to non-affiliates
402

 
715

Acquisition fees and expenses to affiliates
1,980

 
6,735

General and administrative
1,126

 
1,215

Depreciation and amortization
19,465

 
15,207

Total expenses
42,011

 
39,693

Income from operations
13,202

 
8,299

Other income (expense):
 
 
 
Interest expense
(5,428
)
 
(5,572
)
Interest income
106

 
—

Loss (income) from investment in unconsolidated entities
(392
)
 
13

Gain from sale of depreciable operating property
3,613

 
—

Net income
11,101

 
2,740

Distributions to redeemable preferred unit holders
(4,687
)
 
(4,687
)
Less: Net (income) loss attributable to noncontrolling interests
(210
)
 
113

Net income (loss) attributable to controlling interest
6,204

 
(1,834
)
Distributions to redeemable noncontrolling interests attributable to common stockholders
(88
)
 
(86
)
Net income (loss) attributable to common stockholders
$
6,116

 
$
(1,920
)
Net income (loss) attributable to common stockholders per share, basic and diluted
$
0.05

 
$
(0.03
)
Weighted average number of common shares outstanding, basic and diluted
130,106,364

 
69,131,944

See accompanying notes.

6

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited; in thousands)

 
Three Months Ended
 
March 31,
 
2015
 
2014
Net income
$
11,101

 
$
2,740

Other comprehensive loss:
 
 
 
Equity in other comprehensive loss of unconsolidated joint venture
(418
)
 
—

Total comprehensive income
10,683

 
2,740

   Distributions to redeemable preferred unit holders
(4,687
)
 
(4,687
)
   Less: Net (income) loss attributable to noncontrolling interests
(210
)
 
113

Comprehensive income (loss) attributable to controlling interests
5,786

 
(1,834
)
Distributions to redeemable noncontrolling interests attributable to common stockholders
(88
)
 
(86
)
Comprehensive income (loss) attributable to common stockholders
$
5,698

 
$
(1,920
)
See accompanying notes.




7

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share data)
 
Common Stock
 
Additional
Paid-In
Capital
 
Cumulative
Distributions
 
Accumulated
Deficit
 
Accumulated Other Comprehensive Loss
 
Total
Stockholders’
Equity
 
Non-
controlling
Interests
 
Total
Equity
 
Shares
 
Amount
 
BALANCE December 31, 2013
49,893,502

 
$
508

 
$
433,644

 
$
(26,683
)
 
$
(32,631
)
 
—

 
$
374,838

 
$
19,736

 
$
394,574

Gross proceeds from issuance of common stock
75,545,500

 
776

 
775,831

 
—

 
—

 
—

 
776,607

 
—

 
776,607

Stock-based compensation
10,000

 
—

 
108

 
—

 
—

 
—

 
108

 
—

 
108

Discount on issuance of common stock
—

 
—

 
(1,885
)
 
—

 
—

 
—

 
(1,885
)
 
—

 
(1,885
)
Offering costs including dealer manager fees to affiliates
—

 
—

 
(76,638
)
 
—

 
—

 
—

 
(76,638
)
 
—

 
(76,638
)
Distributions to common stockholders
—

 
—

 
—

 
(32,799
)
 
—

 
—

 
(32,799
)
 
—

 
(32,799
)
Issuance of shares for distribution reinvestment plan
4,572,953

 
45

 
44,902

 
(44,947
)
 
—

 
—

 
—

 
—

 
—

Repurchase of common stock
(258,939
)
 
(3
)
 
(2,557
)
 
—

 
—

 
—

 
(2,560
)
 
—

 
(2,560
)
Additions to common stock subject to redemption
—

 
—

 
(44,947
)
 
—

 
—

 
—

 
(44,947
)
 
—

 
(44,947
)
Issuance of limited partnership units
—

 
—

 
(140
)
 
 
 
 
 
—

 
(140
)
 
1,504

 
1,364

Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(3,050
)
 
(3,050
)
Distributions to noncontrolling interests subject to redemption
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(14
)
 
(14
)
Net loss
—

 
—

 
—

 
—

 
(18,654
)
 
(423
)
 
(19,077
)
 
(698
)
 
(19,775
)
BALANCE December 31, 2014
129,763,016

 
$
1,326

 
$
1,128,318

 
$
(104,429
)
 
$
(51,285
)
 
$
(423
)
 
$
973,507

 
$
17,478

 
$
990,985

Stock-based compensation
—

 
—

 
2

 
—

 
—

 
—

 
2

 
—

 
2

Offering costs
—

 
—

 
(49
)
 
—

 
—

 
—

 
(49
)
 
—

 
(49
)
Distributions to common stockholders
—

 
—

 
—

 
(9,362
)
 
—

 
—

 
(9,362
)
 
—

 
(9,362
)
Issuance of shares for distribution reinvestment plan
1,240,054

 
13

 
12,883

 
(12,896
)
 
—

 
—

 
—

 
—

 
—

Repurchase of common stock
(125,756
)
 
(1
)
 
(1,239
)
 
—

 
—

 
—

 
(1,240
)
 
—

 
(1,240
)
Additions to common stock subject to redemption
—

 
—

 
(12,896
)
 
—

 
—

 
—

 
(12,896
)
 
—

 
(12,896
)
Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(758
)
 
(758
)
Distributions to noncontrolling interests subject to redemption
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(3
)
 
(3
)
Net income (loss)
—

 
—

 
—

 
—

 
6,116

 
(418
)
 
5,698

 
210

 
5,908

BALANCE March 31, 2015
130,877,314

 
$
1,338

 
$
1,127,019

 
$
(126,687
)
 
$
(45,169
)
 
$
(841
)
 
$
955,660

 
$
16,927

 
$
972,587

See accompanying notes.

8

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
 
Three Months Ended
 
 March 31,
 
2015
 
2014
Operating Activities:
 
 
 
Net income
$
11,101

 
$
2,740

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of building and building improvements
8,017

 
5,651

Amortization of leasing costs and intangibles, including ground leasehold interests
11,448

 
9,556

Amortization of above and below market leases
(551
)
 
935

Amortization of deferred financing costs
562

 
714

Amortization of debt premium
(80
)
 
(34
)
Deferred rent
(3,185
)
 
(2,185
)
Termination fee revenue receivable from tenant, net
—

 
(6,696
)
Gain from sale of depreciable operating property
(3,613
)
 
—

(Income) loss from investment in unconsolidated entities
392

 
(13
)
Stock-based compensation
2

 
103

Change in operating assets and liabilities:
 
 
 
Other assets
(949
)
 
(8,610
)
Rent collections received in restricted cash collateral account
(239
)
 
842

Operating reserves
(941
)
 
186

Reserves for tenant improvements
13

 
(369
)
Accounts payable and other liabilities
(3,459
)
 
(183
)
Due to affiliates, net
—

 
(796
)
Net cash provided by operating activities
18,518

 
1,841

Investing Activities:
 
 
 
Acquisition of properties, net
(66,000
)
 
(224,493
)
Proceeds from disposition of properties
11,809

 
—

Real estate acquisition deposits
(1,000
)
 
3,100

Real estate funds held for exchange
10,105

 
—

Improvements to real estate
(115
)
 
—

Payments for construction in progress
(765
)
 
(33
)
Real estate development, net of unpaid construction costs
(17,299
)
 
—

Distributions of capital from investment in unconsolidated entities
1,938

 
26

Net cash used in investing activities
(61,327
)
 
(221,400
)
Financing Activities:
 
 
 
Proceeds from borrowings - KeyBank Credit Facility
—

 
148,900

Proceeds from borrowings - Mortgage Debt
—

 
110,640

Proceeds from borrowings - Unsecured Revolver
50,000

 
—

Principal payoff of secured indebtedness - KeyBank Credit Facility
—

 
(193,400
)
Principal payoff of secured indebtedness - KeyBank Term Loan
—

 
(55,000
)
Principal amortization payments on secured indebtedness
(488
)
 
(376
)
Deferred financing costs
—

 
(1,953
)
Financing deposits
—

 
1,913

Offering costs
(49
)
 
(48,835
)
Issuance of common stock, net
—

 
490,937

Issuance of noncontrolling interests, net
—

 
1,364

Repurchase of common stock
(1,240
)
 
(251
)
Dividends paid on preferred units subject to redemption
(4,687
)
 
(4,687
)
Distributions to noncontrolling interests
(849
)
 
(824
)
Distributions to common stockholders
(9,282
)
 
(4,246
)
Net cash provided by financing activities
33,405

 
444,182

Net (decrease) increase in cash and cash equivalents
(9,404
)
 
224,623

Cash and cash equivalents at the beginning of the period
68,915

 
10,407

Cash and cash equivalents at the end of the period
$
59,511

 
$
235,030

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid for interest
$
4,867

 
$
4,639

Restricted cash - assumed upon acquisition of real estate assets
$
—

 
$
21,500

Supplemental Disclosures of Non-cash Transactions:
 
 
 
Change in fair value of swap agreement
$
(418
)
 
$
—

Construction in progress costs - real estate development
$
(27,593
)
 
$
—

Unpaid construction in progress costs - real estate development
$
10,294

 
$
—

Increase in distributions payable to noncontrolling interests
$
—

 
$
1

Increase in distributions payable to common stockholders
$
79

 
$
955

Distributions to redeemable noncontrolling interests attributable to common stockholders as reflected on the consolidated statements of operations
$
88

 
$
86

Common stock issued pursuant to the distribution reinvestment plan
$
12,896

 
$
6,496

Common stock redemptions funded subsequent to period-end
$
1,716

 
$
499

See accompanying notes.

9
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)


1.
Organization
Griffin Capital Essential Asset REIT, Inc., a Maryland corporation (the “Company”), was formed on August 28, 2008 under the Maryland General Corporation Law. The Company was organized primarily with the purpose of acquiring single tenant properties that are essential to the tenant’s business, and used a substantial amount of the net proceeds from the Public Offerings (as defined below) to invest in these properties. The Company satisfied requisite financial and non-financial requirements and elected to be taxed as a REIT for each taxable year ended since December 31, 2010. The Company’s year end is December 31.
Griffin Capital Corporation, a California corporation (the “Sponsor”), has sponsored the Company’s Public Offerings. The Company’s Sponsor began operations in 1995, and was incorporated in 1996, to engage principally in acquiring and developing office and industrial properties. Kevin A. Shields, the Company's Chief Executive Officer and Chairman, is the sole shareholder of Griffin Capital Corporation.
Griffin Capital Essential Asset Advisor, LLC, a Delaware limited liability company (the “Advisor”), was formed on August 27, 2008. Griffin Capital REIT Holdings, LLC ("Holdings") is the sole member of the Advisor, and the Sponsor is the sole member of Holdings. The Company has entered into an advisory agreement for the Public Offerings (as amended and restated, the “Advisory Agreement”), which states that the Advisor is responsible for managing the Company’s affairs on a day-to-day basis and identifying and making acquisitions and investments on behalf of the Company. The officers of the Advisor are also officers of the Sponsor. The Advisory Agreement has a one-year term, and it may be renewed for an unlimited number of successive one-year periods by the Company’s board of directors.
On August 28, 2008, the Advisor purchased 100 shares of common stock for $1,000 and became the Company’s initial stockholder. On February 20, 2009, the Company began to offer shares of common stock, pursuant to a private placement offering to accredited investors (the “Private Offering”), which included shares for sale pursuant to the distribution reinvestment plan (“DRP”). On November 6, 2009, the Company's registration statement was declared effective by the Securities and Exchange Commission and began to offer, in a public offering, a maximum of 82,500,000 shares of common stock, consisting of 75,000,000 shares at $10.00 per share (the “Primary Public Offering”) and 7,500,000 shares pursuant to the DRP at $9.50 per share (together with the Primary Public Offering, the “Initial Public Offering”) and terminated the Private Offering.
On February 15, 2013, the Company announced the revised share offering price under the Initial Public Offering of $10.28 per share, and a revised price under the DRP equal to 95% of the revised share offering price, which was approximately $9.77 per share.
On April 25, 2013, the Company terminated its Initial Public Offering having issued approximately 19,200,570 shares of the Company’s common stock for gross proceeds of approximately $191.5 million, including shares issued pursuant to the DRP. On April 26, 2013, the Company began to offer, in a follow-on offering, up to $1.0 billion in shares of common stock, consisting of approximately 97.2 million shares at $10.28 per share in the primary offering (the “Primary Follow-On Offering” and together with the Primary Public Offering, the “Primary Public Offerings”) and $100 million in shares of common stock, consisting of approximately 10.2 million shares, pursuant to the DRP (together with the Primary Follow-On Offering, the “Follow-On Offering” and, collectively with the Initial Public Offering, the “Public Offerings”). On April 22, 2014, the Company announced that it was no longer accepting subscriptions in the Follow-On Offering, as the maximum amount of offering proceeds was expected to have been reached. The Company issued 107,144,337 total shares of the Company’s common stock for gross proceeds of approximately $1.1 billion in the Follow-On Offering, including 1,774,208 shares, or $17.3 million, issued pursuant to the DRP.
On May 7, 2014, the Company filed a Registration Statement on Form S-3 with the SEC for the registration of $75.0 million in shares for sale pursuant to the DRP (the “DRP Offering”). On December 15, 2014, the Company announced a revised offering price for shares pursuant to the DRP Offering of $10.40 per share, effective December 27, 2014. The DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders. In connection with the DRP Offering, the Company had issued 4,766,084 shares of the Company's common stock for gross proceeds of approximately $47.6 million through March 31, 2015.
As of March 31, 2015, the Company had received aggregate gross offering proceeds of approximately $1.3 billion from the sale of shares in the Private Offering, the Public Offerings, and the DRP Offering. There were 130,877,314 shares

10
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

outstanding at March 31, 2015, including shares issued pursuant to the DRP, less shares redeemed pursuant to the share redemption plan. As of March 31, 2015 and December 31, 2014, the Company had issued $70.6 million and $57.7 million, respectively, in shares pursuant to the DRP, which are classified on the consolidated balance sheets as common stock subject to redemption, net of redemptions payable totaling approximately $1.8 million and $1.2 million, respectively, which is included in accounts payable and other liabilities on the consolidated balance sheets. See Note 6, Equity — Share Redemption Program. Since inception and through March 31, 2015, the Company had redeemed 481,655 shares of common stock for approximately $4.7 million pursuant to the share redemption plan.
Griffin Capital Securities, Inc. (the “Dealer Manager”) is an affiliate of the Sponsor, and on November 1, 2013 became a wholly-owned subsidiary of the Sponsor. The Dealer Manager was responsible for marketing the Company’s shares offered during the Public Offerings. The dealer manager agreement was terminated in accordance with its terms upon the termination of the Follow-On Offering.
Griffin Capital Essential Asset Operating Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”), was formed on August 29, 2008. The Operating Partnership owns, directly or indirectly, all of the properties that the Company has acquired. The Advisor purchased an initial 99% limited partnership interest in the Operating Partnership for $200,000, and the Company contributed the initial $1,000 capital contribution, received from the Advisor, to the Operating Partnership in exchange for a 1% general partner interest. As of March 31, 2015, the Company owned approximately 82% of the limited partnership units of the Operating Partnership (approximately 96% of the common units), and, as a result of the contribution of five properties to the Company, the Sponsor and certain of its affiliates, including the Company’s Chief Executive Officer and Chairman, Kevin A. Shields, and certain officers of the Company, owned approximately 2% of the limited partnership units of the Operating Partnership. The remaining approximately 16% of the limited partnership units were owned by third parties, of which approximately 15% represented a preferred unit investment as discussed in Note 6, Equity. No limited partnership units of the Operating Partnership have been redeemed during the three months ended March 31, 2015 and year ended December 31, 2014. The Operating Partnership may conduct certain activities through the Company’s taxable REIT subsidiary, Griffin Capital Essential Asset TRS, Inc., a Delaware corporation (the “TRS”) formed on September 2, 2008, which is a wholly-owned subsidiary of the Operating Partnership. The TRS had no activity as of March 31, 2015.
The Company’s property manager is Griffin Capital Essential Asset Property Management, LLC, a Delaware limited liability company (the “Property Manager”), which was formed on August 28, 2008 to manage the Company’s properties. The Property Manager derives substantially all of its income from the property management services it performs for the Company.

2.
Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements of the Company are prepared by management on the accrual basis of accounting and in accordance with principles generally accepted in the United States (“GAAP”) for interim financial information as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), and in conjunction with rules and regulations of the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited consolidated financial statements include accounts and related adjustments, which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim period. Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The unaudited consolidated financial statements include accounts of the Company, the Operating Partnership, including a consolidated VIE (see Note 4, Investments), and the TRS. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statement and accompanying notes. Actual results could materially differ from those estimates.

11
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

Change in Consolidated Financial Statements Presentation
Certain amounts in the Company's prior period consolidated financial statements have been reclassified to conform to the current period presentation.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments that are readily convertible to cash with a maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents may include cash and short-term investments. Short-term investments are stated at cost, which approximates fair value. There were no restrictions on the use of the Company’s operating cash balance as of March 31, 2015 and December 31, 2014.
The Company maintains cash accounts with major financial institutions. The cash balances consist of business checking accounts and money market accounts. These accounts are insured by the Federal Deposit Insurance Corporation up to $250,000 at each institution. At times, the balances in these accounts may exceed the insured amounts. The Company considers balances in excess of the insured amounts to potentially be a concentration of credit risk. However, the Company has not experienced any losses with respect to cash balances in excess of government-provided insurance and does not anticipate any losses in the future.
Restricted Cash
In conjunction with the contribution of certain assets, as required by certain lease provisions or certain lenders in conjunction with an acquisition or debt financing, or credits received by the seller of certain assets, the Company assumed or funded reserves for specific property improvements and deferred maintenance, rent abatement, re-leasing costs, and taxes and insurance (see Note 3, Real Estate). As of March 31, 2015 and December 31, 2014, the balance of these reserves, included in the consolidated balance sheets as restricted cash, was $40.2 million and $42.2 million, respectively. The balance as of March 31, 2015 includes $1.7 million in rent collections from the eight properties which serve as collateral under the Midland Mortgage Loan, $0.6 million in rent received from the GE Aviation property, which is to be held in a separate bank account until the sale of the Will Partners property, as a tax-deferred exchange of real estate assets as permitted by Section 1031 of the Internal Revenue Code, is consummated, $36.1 million designated for deferred maintenance and re-leasing costs, and $1.8 million of taxes and insurance reserves to be applied to future amounts incurred.
Real Estate
Purchase Price Allocation
The Company applies the provisions in ASC 805-10, Business Combinations, to account for the acquisition of real estate, or real estate related assets, in which a lease, or other contract, is in place representing an active revenue stream, as a business combination. In accordance with the provisions of ASC 805-10, the Company recognizes the assets acquired, the liabilities assumed and any noncontrolling interest in the acquired entity at their fair values as of the acquisition date, on an “as if vacant” basis. Further, the Company recognizes the fair value of assets acquired, liabilities assumed and any noncontrolling interest in acquisitions of less than a 100% interest when the acquisition constitutes a change in control of the acquired entity. The accounting provisions have also established that acquisition-related costs and restructuring costs are considered separate and not a component of a business combination and, therefore, are expensed as incurred. Acquisition-related costs for the three months ended March 31, 2015 and 2014 totaled $2.4 million and $7.4 million, respectively.
Acquired in-place leases are valued as above-market or below-market as of the date of acquisition. The valuation is measured based on the present value (using an interest rate, which reflects the risks associated with the leases acquired) of the difference between (a) the contractual amounts to be paid pursuant to the in-place leases and (b) management’s estimate of fair market lease rates for the corresponding in-place leases over a period equal to the remaining non-cancelable term of the lease for above-market leases, taking into consideration below-market extension options for below-market leases. In addition, renewal options are considered and will be included in the valuation of in-place leases if (1) it is likely that the tenant will exercise the option, and (2) the renewal rent is considered to be sufficiently below a fair market rental rate at the time of renewal. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities and amortized as an adjustment to rental income over the remaining terms of the respective leases.
The aggregate fair value of in-place leases includes direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals, which are avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated

12
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated using methods similar to those used in independent appraisals and management’s consideration of current market costs to execute a similar lease. These direct costs are considered intangible lease assets and are included with real estate assets on the consolidated balance sheets. The intangible lease assets are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid, including real estate taxes, insurance, and other operating expenses, pursuant to the in-place leases over a market lease-up period for a similar lease. Customer relationships are valued based on management’s evaluation of certain characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics management will consider in allocating these values include the nature and extent of the Company’s existing business relationships with tenants, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors. These intangibles are included in intangible lease assets on the consolidated balance sheets and are amortized to expense over the remaining term of the respective leases.
 
The determination of the fair values of the assets and liabilities acquired requires the use of significant assumptions about current market rental rates, rental growth rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the purchase price allocations, which could impact the amount of the Company’s reported net income.
Depreciation and Amortization
The purchase price of real estate acquired and costs related to development, construction, and property improvements are capitalized. Repairs and maintenance costs include all costs that do not extend the useful life of the real estate asset and are expensed as incurred. The Company considers the period of future benefit of an asset to determine the appropriate useful life. The Company anticipates the estimated useful lives of its assets by class to be generally as follows:
 
Buildings
25-40 years
Building Improvements
5-20 years
Land Improvements
15-25 years
Tenant Improvements
Shorter of estimated useful life or remaining contractual lease term
Tenant origination and absorption cost
Remaining contractual lease term
In-place lease valuation
Remaining contractual lease term with consideration as to below-market extension options for below-market leases
Depreciation expense for buildings and improvements for the three months ended March 31, 2015 and 2014 was approximately $8.0 million and $5.7 million, respectively. Amortization expense for intangibles, including but not limited to, tenant origination and absorption costs for the three months ended March 31, 2015 and 2014 was approximately $11.4 million and $9.5 million, respectively. See Note 3, Real Estate, for amortization related to in-place lease valuations.
Assets Held for Sale
The Company will account for properties held for sale in accordance with ASC Topic 360, Property, Plant, and Equipment, ("ASC Topic 360"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and Accounting Standards Update ("ASU") No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU No. 2014-08"). Under ASU No. 2014-08, a discontinued operation is (i) a component of an entity or group of components that has been disposed of by sale, that has been disposed of other than by sale, or that is classified as held for sale that represents a strategic shift that has or will have a major effect on an entity's operations and financial results or (ii) an acquired business or nonprofit activity that is classified as held for sale on the date of the acquisition.
In accordance with ASC 205, a component of an entity or a group of components of an entity, or a business or nonprofit activity (the entity to be sold), shall be classified as held for sale in the period in which all of the following criteria are met:
•
Management, having the authority to approve the action, commits to a plan to sell the entity to be sold.

13
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

•
The entity to be sold is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such entities to be sold.
•
An active program to locate a buyer or buyers and other actions required to complete the plan to sell the entity to be sold have been initiated.
•
The sale of the entity to be sold is probable, and transfer of the entity to be sold is expected to qualify for recognition as a completed sale, within one year, except as permitted by ASC Topic 360.
•
The entity to be sold is being actively marketed for sale at a price that is reasonable in relation to its current fair value.
•
The price at which an entity to be sold is being marketed is indicative of whether the entity currently has the intent and ability to sell the entity to be sold. A market price that is reasonable in relation to fair value indicates that the entity to be sold is available for immediate sale, whereas a market price in excess of fair value indicates that the entity to be sold is not available for immediate sale.
•
Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
In accordance with ASC Topic 360, upon being classified as held for sale, a property is carried at the lower of (i) its carrying amount or (ii) fair value less costs to sell. In addition, a property being held for sale ceases to be depreciated. As of March 31, 2015, no properties met the criteria to be classified as held for sale. See Note 3, Real Estate.
Impairment of Real Estate and Related Intangible Assets
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of real estate and related intangible assets may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, management assesses whether the carrying value of the assets will be recovered through the future undiscounted operating cash flows expected from the use of the assets and the eventual disposition. If, based on this analysis, the Company does not believe that it will be able to recover the carrying value of the asset, the Company will record an impairment charge to the extent the carrying value exceeds the net present value of the estimated future cash flows of the asset.
Projections of expected future undiscounted cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to re-lease the property and the number of years the property is held for investment. As of March 31, 2015 and December 31, 2014, the Company did not record any impairment charges related to its real estate assets or intangible assets.
Intangible Assets and Liabilities Arising from In-Place Leases Where the Company is the Lessee
In-place ground leases where the Company is the lessee may have value associated with effective contractual rental rates that are above or below market rates. Such values are calculated based on the present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place lease and (ii) management's estimate of fair market lease rates for the corresponding in-place lease, measured over a period equal to the remaining terms of the lease. The capitalized above-market and below-market in-place lease values are recorded as intangible lease assets and liabilities, respectively, and are amortized as an adjustment to property operating expense over the remaining term of the respective lease.
The Operating Partnership, through a single purpose entity, assumed a ground lease with the acquisition of the Waste Management property on January 16, 2014. The ground lease has a remaining term of approximately 81 years, expiring on December 31, 2095. See Note 3, Real Estate.
Investments
ASC 810-10, Consolidation, provides a framework for identifying variable interest entities (“VIEs”) and determining when a company should include the assets, liabilities, noncontrolling interests, and results of activities of the VIE in its consolidated financial statements. In general, a VIE is an entity or other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of

14
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. Generally, a VIE should be consolidated if a party with an ownership, contractual, or other financial interest in the VIE (a variable interest holder) has the power to direct the VIE’s most significant activities and the obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must record all of the VIE’s assets, liabilities, and noncontrolling interest at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. If the variable interest holder is not the primary beneficiary, the interest in the VIE is recorded under the equity method of accounting. See Note 4, Investments.
Revenue Recognition
Leases associated with the acquisition and contribution of certain real estate assets (see Note 3, Real Estate), have net minimum rent payment increases during the term of the lease and are recorded to rental revenue on a straight-line basis, commencing as of the contribution or acquisition date. If a lease provides for contingent rental income, the Company will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved.
During the three months ended March 31, 2015 and 2014, the Company recognized deferred rent from tenants of $3.2 million and $2.2 million, respectively. As of March 31, 2015 and December 31, 2014, the cumulative deferred rent balance was $20.2 million and $17.2 million, respectively, and is included in deferred rent on the consolidated balance sheets.
Tenant reimbursement revenue, which is comprised of additional amounts collected from tenants for the recovery of repair and maintenance expenses and certain other operating and capital expenses, including property taxes and insurance (collectively “Recoverable Expenses”), is recognized as revenue when the additional rent is due. Recoverable Expenses to be reimbursed by a tenant are determined based on the Company's estimate of the property's operating expenses for the year, pro rated based on leased square footage of the property, and are collected in equal installments as additional rent from the tenant, pursuant to the terms of the lease. At the end of the calendar year, the Company reconciles the amount of additional rent paid by the tenant during the year to the actual amount of Recoverable Expenses incurred by the Company for the same period. The difference, if any, is either charged or credited to the tenant pursuant to the provisions of the lease. In certain instances the lease may restrict the amount the Company can recover from the tenant such as a cap on certain or all property operating expenses. As of December 31, 2014, the Company estimated that approximately $0.3 million, net, was over collected from tenants throughout the year, and as a result, the Company recorded a liability. Tenant reimbursement reconciliations were also performed during the three months ended March 31, 2015, which resulted in an additional $0.1 million in net over collections. The combined net over collection of $0.4 million is included in accounts payable and other accrued liabilities on the accompanying consolidated balance sheets as of March 31, 2015. The net over collections have been, and will continue to be, refunded to the tenant either by a credit to contractual rent payments or as a disbursement from operating cash flow.
Organizational and Offering Costs
Organizational and offering costs of the Primary Public Offerings are paid either by the Company or the Sponsor, on behalf of the Advisor, for the Company, which were reimbursed from the proceeds of the Public Offerings at the estimated rate. Organizational and offering costs consist of all expenses (other than sales commissions and dealer manager fees) paid by the Company in connection with the Public Offerings, including legal, accounting, printing, mailing and filing fees, charges from the escrow holder and other accountable offering expenses, including, but not limited to, (i) amounts to reimburse the Advisor for all marketing-related costs and expenses, such as salaries and direct expenses of employees of the Advisor and its affiliates in connection with registering and marketing the Company’s shares; (ii) technology costs associated with the offering of the Company’s shares; (iii) costs of conducting training and education meetings; (iv) costs of attending seminars conducted by participating broker-dealers; and (v) payment or reimbursement of bona fide due diligence expenses.
Pursuant to the Advisory Agreement, the Company was obligated to reimburse the Advisor for organizational and offering expenses incurred in connection with the Primary Public Offerings in an amount not to exceed 3.5% of gross offering proceeds of the terminated or completed Primary Public Offerings for issuer costs (excluding sales commissions and dealer manager fees). In addition, pursuant to the Advisory Agreement, organization and offering expenses (including sales commissions and dealer manager fees and non-accountable due diligence expense allowance but excluding acquisition fees and expenses) were subject to a limitation of 15% of gross offering proceeds of the terminated or completed Public Offerings. If the organization and offering expenses exceeded such limits discussed above, within 60 days after the end of the month in which the Public

15
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

Offerings terminated or were completed, the Advisor would have been obligated to reimburse the Company for any excess amounts. As long as the Company is subject to the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association (“NASAA REIT Guidelines”), such limitations discussed above will also apply to any future public offerings. As of closing of the Follow-On Offering, organizational and offering costs were 2.3% and 0.3% of gross offering proceeds, excluding sales commissions and dealer manager fees, for the Initial Public Offering and the Follow-On Offering, respectively, and 11.9% and 10.1% of gross offering proceeds, including sales commissions and dealer manager fees, for the Initial Public Offering and the Follow-On Offering, respectively. (See Note 7, Related Party Transactions.)
The Company has incurred organizational and offering costs, including those due to the Advisor for organizational and offering expenses incurred on the Company’s behalf, as follows:
 
March 31, 2015
 
December 31, 2014
Cumulative offering costs - Private and Public Offerings
$
130,602

 
$
130,553

Cumulative organizational costs - Private and Public Offerings
$
811

 
$
811

Deferred Financing Costs
Deferred financing costs represent commitment fees, loan fees, and other fees associated with obtaining financing. These costs are amortized to, and included as a component of, interest expense over the terms of the respective financing agreements. Amortization expense for the three months ended March 31, 2015 and 2014 was $0.6 million and $0.7 million, respectively. Amortization expense for the three months ended March 31, 2014 includes $0.3 million of write-offs related to the refinancing through the AIG Loan on January 24, 2014. The Company’s deferred financing costs balance as of March 31, 2015 is comprised of financing costs incurred for the loan assumption related to the Ace Hardware property acquisition, Unsecured Credit Facility, Midland Mortgage Loan, AIG Loan and TW Telecom Loan, discussed in Note 5, Debt. As of March 31, 2015 and December 31, 2014, the Company’s deferred financing costs, net of accumulated amortization, were $11.2 million and $11.8 million, respectively.
Other Assets
Other assets consist primarily of tenant and non-tenant receivables, prepaid expenses, and deferred leasing commissions and other leasing costs ("Deferred Leasing Costs"), net of amortization. Non-tenant receivables primarily consist of a $5.7 million termination fee, net of $1.0 million in collections, as a result of the lease termination with World Kitchen, LLC, the previous tenant at the Will Partners property, on January 24, 2014, which was financed over approximately 5.5 years at 5.5%. Prepaid expenses, which are capitalized as other assets, will be expensed as incurred. Leasing commissions for new, renewal or expansion leases are amortized using the straight-line method over the term of the related lease. Amortization of Deferred Leasing Costs is included in depreciation and amortization in the Company's accompanying consolidated statements of operations. Deferred Leasing Costs as of March 31, 2015 and December 31, 2014 totaled $2.6 million and $2.7 million, respectively. Deferred Leasing Costs as of December 31, 2014 are net of the Deferred Leasing Costs related to real estate held for sale of $1.0 million.
Noncontrolling Interests
Due to the Company’s control through the general partner interest in the Operating Partnership and the limited rights of the limited partners, the Operating Partnership, including its wholly-owned subsidiaries, is consolidated with the Company and the limited partners’ interests are reflected as noncontrolling interests on the accompanying consolidated balance sheets.
The Company reports noncontrolling interests in subsidiaries within equity in the consolidated financial statements, but separate from total stockholders’ equity. Also, any acquisitions or dispositions of noncontrolling interests that do not result in a change of control are accounted for as equity transactions. Further, the Company recognizes a gain or loss in net income (loss) when a subsidiary is deconsolidated upon a change in control. Net income (loss) allocated to noncontrolling interests is shown as an adjustment to net income (loss) attributable to common stockholders. Any future purchase or sale of an interest in an entity that results in a change of control may have a material impact on the financial statements, as the interest in the entity will be recognized at fair value with gains and losses included in net income (loss).

16
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

If noncontrolling interests are determined to be redeemable, they are classified as temporary equity and reported at their redemption value as of the balance sheet date. Since redeemable noncontrolling interests are carried at the redemption amount, net income (loss) and distributions are not allocated to redeemable noncontrolling interests. Distributions to redeemable noncontrolling interest holders are allocated between common stockholders and noncontrolling interests based on their respective weighted-average ownership percentage of the Operating Partnership. (See Note 6, Equity.)
Share-Based Compensation
The Company has adopted an Employee and Director Long-Term Incentive Plan (the “Plan”) pursuant to which the Company may issue stock-based awards to its directors and full-time employees (should the Company ever have employees), executive officers and full-time employees of the Advisor and its affiliate entities that provide services to the Company, and certain consultants who provide significant services to the Company. The term of the Plan is 10 years and the total number of shares of common stock reserved for issuance under the Plan is 10% of the outstanding shares of stock at any time, not to exceed 10,000,000 shares in the aggregate. Awards granted under the Plan may consist of stock options, restricted stock, stock appreciation rights and other equity-based awards. The stock-based payment will be measured at fair value and recognized as compensation expense over the vesting period.
On March 3, 2014, the compensation committee of the board of directors authorized the issuance of 5,000 shares of restricted stock to each of the Company's independent directors. These restricted shares were immediately vested upon issuance. In addition, the compensation committee authorized the future issuance of 1,000 shares of restricted stock to each of the Company's independent directors for each 12-consecutive-month period during which each independent director continuously remains a director for the Company. The future shares granted will vest over a three year period, or will immediately vest upon a change in control of the Company. Upon re-election of each independent director at the June 12, 2014 annual stockholders' meeting, the Company measured and began recognizing director compensation expense for the 1,000 shares of restricted stock granted, subject to the vesting period. The fair value of both issuances was estimated at $10.28 per share, the then most recent price paid to acquire a share of the Company's common stock. All issuances of restricted stock are entitled to dividends upon vesting of the shares.
Fair Value Measurements
The fair value of financial and nonfinancial assets and liabilities is based on a fair value hierarchy established by the FASB that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:
•
Level 1. Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets;
•
Level 2. Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
•
Level 3. Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
When available, the Company utilizes quoted market prices for similar assets or liabilities from independent third-party sources to determine fair value. Financial instruments as of March 31, 2015 consisted of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and other accrued expenses, and mortgage payable and other borrowings, as defined in Note 5, Debt. With the exception of the mortgage loans in the table below, the amounts of the financial instruments presented in the consolidated financial statements substantially approximate their fair value as of March 31, 2015 and December 31, 2014, including the Unsecured Term Loan and Unsecured Revolver, both of which originated under the Unsecured Credit Agreement and the TW Telecom Loan, as discussed in Note 5, Debt. The fair value of the seven mortgage loans in the table below is estimated by discounting each loan’s principal balance over the remaining term of the mortgage using current borrowing rates available to the Company for debt instruments with similar terms and maturities. The Company determined that the mortgage debt valuation in its entirety is classified in Level 2 of the fair value hierarchy, as the fair value is based on current pricing for debt with similar terms as the in-place debt, and there were no transfers into and out of fair value measurement levels during the three months ended March 31, 2015 and year ended December 31, 2014.

17
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

 
March 31, 2015
 
December 31, 2014
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Plainfield
$
20,843

 
$
19,550

 
$
20,994

 
$
19,638

Emporia Partners
4,351

 
4,020

 
4,434

 
4,108

LTI (1)
32,457

 
31,942

 
32,742

 
32,128

TransDigm (2)
6,690

 
6,541

 
6,748

 
6,576

Ace Hardware (3)
26,468

 
23,557

 
26,424

 
23,648

Midland Mortgage Loan
105,962

 
105,600

 
105,155

 
105,600

AIG Loan
123,289

 
110,640

 
122,062

 
110,640

(1)
The carrying value does not include the debt premium of $0.08 million and $0.10 million as of March 31, 2015 and December 31, 2014, respectively.
(2)
The carrying value does not include the debt premium of $0.06 million and $0.07 million as of March 31, 2015 and December 31, 2014, respectively.
(3)
The carrying value does not include the debt premium of $1.64 million and $1.68 million as of March 31, 2015 and December 31, 2014, respectively.
Income Taxes
The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a REIT, the Company must meet certain organizational and operational requirements. The Company intends to adhere to these requirements and maintain its REIT status for the current year and subsequent years. As a REIT, the Company generally will not be subject to federal income taxes on taxable income that is distributed to stockholders. However, the Company may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed taxable income, if any. If the Company fails to qualify as a REIT in any taxable year, the Company will then be subject to federal income taxes on the taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the IRS grants the Company relief under certain statutory provisions. Such an event could materially adversely affect net income and net cash available for distribution to stockholders. As of March 31, 2015, the Company satisfied the REIT requirements and distributed all of its taxable income. 
Pursuant to the Code, the Company has elected to treat its corporate subsidiary as a taxable REIT subsidiary (“TRS”). In general, the TRS may perform non-customary services for the Company’s tenants and may engage in any real estate or non real estate-related business. The TRS will be subject to corporate federal and state income tax. As of March 31, 2015, the TRS had not commenced operations.
Per Share Data
The Company reports earnings per share for the period as (1) basic earnings per share computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period, and (2) diluted earnings per share computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding, including common stock equivalents. As of March 31, 2015 and December 31, 2014, there were no common stock equivalents that would have a dilutive effect on earnings (loss) per share for common stockholders.
Distributions declared and paid per common share assumes each share was issued and outstanding each day during the three months ended March 31, 2015. Distributions declared per common share was based on daily declaration and record dates selected by the Company’s board of directors of $0.001901096 per day per share on the outstanding shares of common stock.
Segment Information
ASC Topic 280, Segment Reporting, establishes standards for reporting financial and descriptive information about a public entity’s reportable segments. The Company internally evaluates all of the properties and interests therein as one reportable segment.
Unaudited Data
Any references to the number of buildings, square footage, number of leases, occupancy, and any amounts derived from these values in the notes to the consolidated financial statements are unaudited and outside the scope of the Company's

18
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

independent registered public accounting firm's review of its consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board.
Recently Issued Accounting Pronouncements
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU No. 2014-08"). ASU No. 2014-08 raises the threshold for disposals of components of an entity to qualify as discontinued operations. Under ASU No. 2014-08, a discontinued operation is (i) a component of an entity or group of components that has been disposed of by sale, that has been disposed of other than by sale, or that is classified as held for sale that represents a strategic shift that has or will have a major effect on an entity's operations and financial results or (ii) an acquired business or nonprofit activity that is classified as held for sale on the date of the acquisition. A strategic shift that has or will have a major effect on an entity's operations and financial results could include the disposal of (i) a major line of business, (ii) a major geographic area, (iii) a major equity method investment, or (iv) other major parts of an entity. Under current GAAP, an entity is prohibited from reporting a discontinued operation if it has certain continuing cash flows or involvement with the component after the disposal. ASU No. 2014-08 eliminates this criteria and is effective for public companies during the interim and annual periods, beginning after December 15, 2014. The Company elected to early adopt the provisions in ASU No. 2014-08 as of December 31, 2014. As a result, the Company presented the results of operations for the College Park property, which was classified as held for sale as of December 31, 2014 and subsequently sold as of March 31, 2015, in continuing operations on the consolidated statements of operations, as such disposal does not represent a strategic shift in the Company's operations. The Company expects the adoption of ASU No. 2014-08 to result in fewer real estate sales qualifying as discontinued operations reported in its consolidated financial statements and accompanying notes.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”). ASU No. 2014-09 replaces substantially all industry-specific revenue recognition requirements and converges areas under this topic with International Financial Reporting Standards.  ASU No. 2014-09 implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards.  ASU No. 2014-09 also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers.  Other major provisions in ASU No. 2014-09 include capitalizing and amortizing certain contract costs, ensuring the time value of money is considered in the applicable transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances.  Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption.  ASU No. 2014-09 is currently effective for reporting periods beginning after December 15, 2016, and early adoption is prohibited.  On April 1, 2015, the FASB voted to defer the effective date of ASU No. 2014-09, which if the proposed deferral is approved, adoption would be required for annual reporting periods beginning after December 15, 2017. ASU No. 2014-09 does not apply to lease contracts accounted for under Leases (Topic 840).  The Company is currently evaluating the potential impact of the pending adoption of this new guidance on its consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation: Amendments to the Consolidation Analysis ("ASU No. 2015-02"), which amended the existing accounting standards for consolidation under both the variable interest model and the voting model. Under ASU No. 2015-02, companies will need to re-evaluate whether an entity meets the criteria to be considered a VIE, whether companies still meet the definition of primary beneficiaries, and whether an entity needs to be consolidated under the voting model. ASU No. 2015-02 may be applied using a modified retrospective approach or retrospectively, and is effective for reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the potential impact of the pending adoption of this new guidance on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30) (“ASU 2015-03”) to amend the accounting guidance for the presentation of debt issuance costs. The standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for public business entities for fiscal years beginning after December 15, 2015 and retrospective application is required. Early adoption of the guidance is permitted. The Company is currently evaluating the potential impact of the pending adoption of this new guidance on its consolidated financial statements.

19
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

3.
Real Estate
As of March 31, 2015, the Company’s real estate portfolio consisted of 56 properties in 18 states consisting substantially of office, warehouse, and manufacturing facilities with a combined acquisition value of $1.9 billion, including the allocation of the purchase price to above and below-market lease valuation.
2015 Acquisitions
During the three months ended March 31, 2015, the Company acquired one property from an unaffiliated party. The purchase price of the acquisition was $66.0 million as shown below.
Property
 
Location
 
Tenant/Major Lessee
 
Acquisition
Date
 
Purchase
Price
 
Square
Feet
 
Acquisition
Fees and
Reimbursable
Expenses
Paid to the
Advisor (1)
 
KeyBank Unsecured Credit
Facility (2)
 
Year of
Lease
Expiration (for Major Lessee)
 
2015
Annualized
Net Rent (3)
GE Aviation
 
West Chester, OH
 
General Electric Company
 
2/19/2015
 
$
66,000

 
409,800

 
$
1,980

 
$
50,000

 
2020
 
$
4,855

(1)
The Advisor is entitled to receive acquisition fees equal to 2.5% and acquisition expense reimbursement of up to 0.5% of the contract purchase price for each property acquired. The total is included in acquisition fees and expenses to affiliates on the consolidated statements of operations.
(2)
Represents borrowings from the Unsecured Revolver discussed in Note 5, Debt. The remaining purchase price was funded with net proceeds raised in the Follow-On Offering.
(3)
Net rent represents contractual rental payments pursuant to the lease terms. Total base rental income received for the GE Aviation property for the three months ended March 31, 2015 was $0.6 million based on an acquisition date of February 19, 2015.

The following summarizes the purchase price allocation of the 2015 acquisition:
Property
 
Land
 
Building and
improvements
 
Tenant origination
and absorption cost
 
In-place lease
valuation -
above/(below) market
 
Total
GE Aviation
 
$
4,400

 
$
52,211

 
$
9,470

 
$
(81
)
 
$
66,000

2014 Acquisitions
During the year ended December 31, 2014, the Company acquired 15 properties from unaffiliated parties. The aggregate purchase price of the acquisitions was $684.7 million as shown below. Also, as discussed in Note 4, Investments, the Company acquired an 80% noncontrolling interest in a data center located in Ashburn, Virginia, with an initial investment of $68.4 million, which is included in investments in unconsolidated entities on the accompanying consolidated balance sheet. The gross acquisition value of the property acquired by the unconsolidated joint venture was $187.5 million, including closing costs, which was partially financed with debt of $102.0 million.

20
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

Property
 
Location
 
Tenant/Major Lessee
 
Acquisition
Date
 
Purchase
Price
 
Square
Feet
 
Acquisition
Fees and
Reimbursable
Expenses Paid
to the Advisor (1)
 
KeyBank Credit
Facility (2)
 
Mortgage Debt (3)
 
Year of
Lease
Expiration (for Major Lessee)
 
2015
Annualized
Net Rent (4)
Caterpillar
 
Joliet, IL
 
Caterpillar, Inc.
 
1/7/2014
 
$
57,000

 
1,380,070

 
$
1,710

 
$
56,900

 
$
—

 
2018
 
$
6,055

DigitalGlobe
 
Westminster, CO
 
DigitalGlobe, Inc. (5)
 
1/14/2014
 
92,000

 
430,000

 
2,760

 
92,000

 
—

 
2030
 
6,343

Waste Management
 
Phoenix, AZ
 
Waste Management
of AZ
 
1/16/2014
 
22,825

 
131,850

 
685

 
—

 
—

 
2023
 
1,962

BT Infonet
 
El Segundo, CA
 
Infonet Services Corporation
 
2/27/2014
 
52,669

 
157,000

 
1,580

 
—

 
—

 
2021
 
4,246

Wyndham Worldwide
 
Parsippany, NJ
 
Wyndham Worldwide Operations, Inc.
 
4/23/2014
 
96,600

 
249,400

 
2,898

 
—

 
—

 
2029
 
6,389

Ace Hardware
 
Oak Brook, IL
 
Ace Hardware Corporate HQ
 
4/24/2014
 
37,000

 
206,000

 
1,110

 
—

 
23,843

 
2024
 
2,833

Equifax I
 
St. Louis, MO
 
Equifax, Inc.
 
5/20/2014
 
14,200

 
94,000

 
426

 
—

 
—

 
2023
 
1,105

American Express
 
Phoenix, AZ
 
American Express Travel Related Services Co.
 
5/22/2014
 
51,000

 
337,400

 
1,530

 
—

 
—

 
2019
 
3,865

SoftBank
 
San Carlos, CA
 
SoftBank Regional HQ
 
5/28/2014
 
90,100

 
207,900

 
2,703

 
—

 
—

 
2020
 
6,006

Vanguard
 
Charlotte, NC
 
The Vanguard
Group, Inc.
 
6/19/2014
 
33,200

 
224,600

 
996

 
—

 
—

 
2024
 
2,447

Parallon
 
Largo (Tampa Bay),
FL
 
Parallon Business Performance Group
 
6/25/2014
 
17,235

 
83,200

 
517

 
—

 
—

 
2025
 
1,206

TW Telecom
 
Lone Tree, CO
 
tw telecom holdings inc.
 
8/1/2014
 
43,000

 
166,700

 
1,290

 
—

 
21,500

 
2024
 
2,941

Equifax II
 
Earthy City, MO
 
Equifax, Inc.
 
10/1/2014
 
13,916

 
99,300

 
417

 
—

 
—

 
2024
 
1,073

Mason I (6)
 
Mason, OH
 
Community Insurance Company
 
11/7/2014
 
22,500

 
213,000

 
675

 
—

 
—

 
2026
 
1,573

Wells Fargo
 
Charlotte, NC
 
Wells Fargo Bank, N.A.
 
12/15/2014
 
41,486

 
155,600

 
1,245

 
—

 
—

 
2025
 
2,686

 
 
 
 
 
 
 
 
$
684,731

 
4,136,020

 
$
20,542

 
$
148,900

 
$
45,343

 
 
 
$
50,730

(1)
The Advisor is entitled to receive acquisition fees equal to 2.5% and acquisition expense reimbursement of up to 0.5%, of the contract purchase price for each property acquired. The total is included in acquisition fees and expenses to affiliates on the consolidated statements of operations. For the year ended December 31, 2014, the Company had incurred approximately $4.5 million in acquisition fees and reimbursable expenses related to the 80% interest investment in the Digital Realty joint venture.
(2)
Represents borrowings from the KeyBank Credit Facility discussed in Note 5, Debt. The remaining purchase price was funded with net proceeds raised in the Follow-On Offering.
(3)
Represents loan assumption related to the Ace Hardware property and the mortgage debt obtained to partially fund the acquisition of the TW Telecom property. See Note 5, Debt.
(4)
Net rent represents (1) contractual rental payments pursuant to the lease terms; or (2) contractual rent payments less certain operating expenses that are the responsibility of the Company for the 12-month period subsequent to March 31, 2015 and includes assumptions that may not be indicative of the actual future performance of a property, including the assumption that the tenant will perform its obligations under its lease agreement during the next 12 months.
(5)
The DigitalGlobe property is leased entirely to the previous owner, Avaya, Inc., through June 2015, immediately after which a lease with DigitalGlobe, Inc. will commence.
(6)
Approximately $0.7 million of affiliated acquisition fees and acquisition expense reimbursement and $0.1 million of non-affiliated acquisition expenses were allocated between land and building as the property was acquired in a sale-leaseback transaction.  


21
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

The following summarizes the purchase price allocation of the 2014 acquisitions:
Property
 
Land
 
Building and
improvements
 
Tenant origination
and absorption cost
 
In-place lease
valuation -
above/(below)
market
 
Ground leasehold interests - below market
 
Debt premium
 
Total
Caterpillar
 
$
6,000

 
$
37,904

 
$
8,607

 
$
4,489

 
$
—

 
$
—

 
$
57,000

Digital Globe
 
8,600

 
52,145

 
31,255

 
—

 
—

 
—

 
$
92,000

Waste Management (1)
 
—

 
11,757

 
4,758

 
4,056

 
2,254

 
—

 
$
22,825

BT Infonet
 
9,800

 
34,244

 
7,239

 
1,386

 
—

 
—

 
$
52,669

Wyndham Worldwide
 
6,200

 
76,333

 
14,819

 
(752
)
 
—

 
—

 
$
96,600

Ace Hardware
 
6,900

 
27,437

 
6,508

 
(2,045
)
 
—

 
(1,800
)
 
$
37,000

Equifax I
 
1,850

 
7,971

 
4,738

 
(359
)
 
—

 
—

 
$
14,200

American Express
 
15,000

 
32,096

 
13,796

 
(9,892
)
 
—

 
—

 
$
51,000

SoftBank
 
22,789

 
53,945

 
15,005

 
(1,639
)
 
—

 
—

 
$
90,100

Vanguard
 
2,230

 
23,685

 
7,376

 
(91
)
 
—

 
—

 
$
33,200

Parallon
 
1,000

 
12,729

 
4,043

 
(537
)
 
—

 
—

 
$
17,235

TW Telecom
 
11,097

 
26,096

 
9,722

 
(3,915
)
 
—

 
—

 
$
43,000

Equifax II
 
2,200

 
8,654

 
4,102

 
(1,040
)
 
—

 
—

 
$
13,916

Mason I
 
4,776

 
18,489

 
—

 
—

 
—

 
—

 
$
23,265

Wells Fargo
 
2,150

 
32,816

 
7,990

 
(1,470
)
 
—

 
—

 
$
41,486

Total property acquisitions
 
$
100,592

 
$
456,301

 
$
139,958

 
$
(11,809
)
 
$
2,254

 
$
(1,800
)
 
$
685,496

Restoration Hardware (2)
 
15,185

 
34,739

 
375

 
—

 
—

 
—

 
$
50,299

Total
 
$
115,777

 
$
491,040

 
$
140,333

 
$
(11,809
)
 
$
2,254

 
$
(1,800
)
 
$
735,795

 
(1)
The land associated with the property is subject to a ground lease with the State of Arizona expiring on December 31, 2095. The ground lease was considered below market, thus, an in-place ground lease valuation was recorded as an asset on the acquisition date.
(2)
Represents the purchase of land and the development costs for the Restoration Hardware distribution facility, included in construction-in-progress, as of December 31, 2014 and discussed in Note 4, Investments.

22
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

Pro Forma Financial Information    
The following condensed pro forma operating information is presented as if the Company’s properties acquired in 2015 had been included in operations as of January 1, 2014. The pro forma operating information excludes certain nonrecurring adjustments, such as acquisition fees and expenses incurred, to reflect the pro forma impact these acquisitions would have on earnings on a continuous basis:
 
Three Months Ended March 31,
 
2015
 
2014
Revenue
$
56,171

 
$
49,743

Net income
$
13,840

 
$
10,761

Net income (loss) attributable to noncontrolling interests
$
300

 
$
364

Distributions to redeemable noncontrolling interests attributable to common stockholders
$
(88
)
 
$
(86
)
Net income (loss) attributable to common stockholders (1)
$
9,365

 
$
6,352

Net income (loss) attributable to common stockholders per share, basic and diluted
$
0.07

 
$
0.09


(1)
Amount is net of net income (loss) attributable to noncontrolling interests and distributions to redeemable noncontrolling interests attributable to common stockholders.
The future minimum contractual rent payments pursuant to the lease terms, with lease expirations ranging from 2015 to 2030, are shown in the table below:
2015
$
129,579

2016
176,565

2017
177,794

2018
170,170

2019
152,865

Thereafter
639,973

Total
$
1,446,946


Revenue Concentration
No lessee or property, based on annualized net rent for the 12-month period subsequent to March 31, 2015, pursuant to the respective in-place leases, was greater than 10% as of March 31, 2015.
The percentage of annualized net rent for the 12-month period subsequent to March 31, 2015, by state, based on the respective in-place leases, is as follows:

23
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

State
 
Annualized
Net Rent
 
Number of
Properties
 
Percentage of
Annualized
Net Rent
California
 
$
19,536

 
6

 
12.9
%
Ohio
 
18,657

 
7

 
12.4

Illinois
 
15,043

 
6

 
10.0

Colorado
 
14,261

 
5

 
9.4

Arizona
 
12,311

 
4

 
8.2

Georgia
 
12,108

 
3

 
8.0

New Jersey
 
11,021

 
3

 
7.3

Texas
 
7,929

 
3

 
5.3

North Carolina
 
7,766

 
3

 
5.1

All others (1)
 
32,253

 
16

 
21.4

Total
 
$
150,885

 
56

 
100.0
%
(1)     All others account for less than 5% of total annualized net rent on an individual basis.
The percentage of annualized net rent for the 12-month period subsequent to March 31, 2015, by industry, based on the respective in-place leases, is as follows: 
Industry (1)
 
Annualized
Net Rent
 
Number of
Lessees
 
Percentage of
Annualized
Net Rent
Manufacturing
 
$
49,841

 
20

 
33.0
%
Finance & Insurance
 
36,291

 
23

 
24.1

Information (2)
 
19,854

 
6

 
13.2

Professional, Scientific & Technical Services (3)
 
10,767

 
4

 
7.1

All others (4)
 
34,132

 
16

 
22.6

Total
 
$
150,885

 
69

 
100.0
%

(1)     Industry classification based on the 2012 North American Industry Classification System.
(2)     Includes Telecommunications.
(3)     Includes, but is not limited to: Scientific Research and Development Services; Architectural, Engineering, and Related Services; and Legal Services.
(4)     All others account for less than 5% of total annualized net rent on an individual basis.

24
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

The tenant lease expirations by year based on annualized net rent for the 12-month period subsequent to March 31, 2015 are as follows:
Year of Lease Expiration
 
Annualized
Net Rent
 
Number of
Lessees
 
Square Feet
 
Percentage of
Annualized
Net Rent
2015
 
$
22

 
1

 
12,800

 
—
%
2016
 
864

 
2

 
42,300

 
0.6
%
2017
 
5,224

 
4

 
276,700

 
3.5
%
2018
 
17,910

 
7

 
2,236,570

 
11.9
%
2019
 
16,653

 
7

 
1,273,700

 
11.0
%
2020
 
21,905

 
10

 
1,771,900

 
14.5
%
2021
 
9,409

 
5

 
983,100

 
6.2
%
2022
 
11,749

 
5

 
1,014,100

 
7.8
%
2023
 
8,566

 
5

 
597,050

 
5.7
%
2024
 
19,806

 
10

 
1,501,600

 
13.1
%
2025
 
19,953

 
8

 
1,479,700

 
13.2
%
2026
 
4,194

 
2

 
432,500

 
2.8
%
2027
 
1,898

 
1

 
81,600

 
1.3
%
2029
 
6,389

 
1

 
249,400

 
4.2
%
2030
 
6,343

 
1

 
430,000

 
4.2
%
Vacant
 
—

 
—

 
700,200

 
—
%
Total
 
$
150,885

 
69

 
13,083,220

 
100.0
%
Tenant and Portfolio Risk
The Company monitors the credit of all tenants to stay abreast of any material changes in credit quality. The Company monitors tenant credit by (1) reviewing the credit ratings of tenants (or their parent companies) that are rated by nationally recognized rating agencies; (2) reviewing financial statements and related metrics and information that are publicly available or that are required to be provided pursuant to the lease; (3) monitoring news reports and press releases regarding the tenants and their underlying business and industry; and (4) monitoring the timeliness of rent collections.
In June 2013, World Kitchen, LLC vacated the Will Partners property located in Monee, Illinois (a manufacturing and distribution facility) but remained obligated for the rental payments over the remaining lease term of approximately 7 years, or through February 29, 2020, with no option for early termination. On January 24, 2014, the Company agreed to and executed a termination agreement with World Kitchen, LLC in which the Company agreed to a termination fee of $7.125 million, which is included in rental income on the consolidated statements of operations for the year ended December 31, 2014, and a restoration amount of approximately $0.5 million. The Company financed the termination fee, net of certain adjustments and the initial payment, for a total of $6.7 million at 5.5% over an approximate 5.5 year term, with payments made quarterly in arrears. As of March 31, 2015, $1.0 million had been collected resulting in a net balance of $5.7 million. In return, the Company released World Kitchen, LLC from any and all obligations under the lease in place. Upon the execution of the termination agreement, KeyBank released the property as collateral of the KeyBank Credit Facility, and released the re-tenanting reserves funded pursuant to the second amended and restated KeyBank Credit Agreement. During the year ended December 31, 2014, and as a result of the termination, the Company wrote off approximately $3.4 million of unamortized in-place lease intangible assets that were recorded as part of the purchase price allocation when the property was acquired and approximately $0.3 million of deferred rent.
Tenant security deposits as of March 31, 2015 and December 31, 2014, which were included in the accounts payable and other liabilities balance on the consolidated balance sheets, totaled $0.3 million as required pursuant to the leases for certain tenants. The Company bears the full risk of tenant rent collections for those leases in which a security deposit is not required. Certain leases do, however, require the tenant to pay a penalty in the event of early termination, which fee would be utilized for

25
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

re-tenanting and restoration. Tenant receivables as of March 31, 2015 and December 31, 2014 totaled $0.6 million and $0.4 million, respectively.
In conjunction with certain assets contributed to the Company in exchange for limited partnership units of the Operating Partnership, the Company effected tax protection agreements in favor of the contributor whereby the Company would be liable to reimburse the contributor, through a special distribution, for any tax liability incurred by the contributor as a result of the disposal of the contributed asset, for a time period specified in the tax protection agreement. As of March 31, 2015, the Company has not been obligated to any contributor for a tax liability incurred as a result of an asset disposition.
Sale of College Park
On February 20, 2015, the Company sold the College Park property located in Indianapolis, Indiana for total proceeds of $14.3 million, less closing costs and other closing credits of approximately $2.5 million. The carrying value of the College Park property on the closing date was approximately $8.2 million, which was comprised of $6.4 million of real estate assets, net, $0.8 million of deferred rent, and $1.0 million of other leasing costs, such as leasing commissions. Upon the sale of the property, the Company recognized a gain of $3.6 million. In conjunction with the sale, the Advisor was paid a disposition fee of approximately $0.1 million, in accordance with the advisory agreement. The Company elected to complete the sale as part of a tax-deferred exchange of real estate as permitted by Section 1031 of the Internal Revenue Code, and thus, the proceeds of the sale of the property were deposited with a qualified intermediary. The funds were subsequently released upon the acquisition of the GE Aviation property. No additional assets were classified as held for sale as of March 31, 2015.
The following is a summary of the income (loss) included in the Company's income from continuing operations for the three months ended March 31, 2015 and 2014, from assets classified as held for sale subsequent to the Company's adoption of the new ASU:
 
Three Months Ended March 31,
 
2015
 
2014
Total revenues
$
295

 
$
825

Operating expenses
(221
)
 
(428
)
   Total revenues less operating expenses from assets classified
     as "held for sale," not qualifying as discontinued operations
74

 
397

Depreciation and amortization expense
—

 
(447
)
Interest expense
—

 
(36
)
   Income (loss) from assets classified as "held for sale," not
     qualifying as discontinued operations
$
74

 
$
(86
)
Intangibles
The Company allocated a portion of the acquired and contributed real estate asset value to in-place lease valuation and tenant origination and absorption cost, as discussed above and as shown below, net of the write-off of intangibles related to the College Park and Eagle Rock properties as of March 31, 2015 and December 31, 2014, respectively. In-place leases were measured against comparable leasing information and the present value of the difference between the contractual, in-place rent, and the fair market rent was calculated using, as the discount rate, the capitalization rate utilized to compute the value of the real estate at acquisition or contribution. The discount rate used to compute the present value of the intangible assets for the Westinghouse property was adjusted to consider the potential risk that the tenant would exercise the termination option pursuant to the lease.
 

26
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

 
Balance
March 31, 2015
 
Balance
December 31, 2014
In-place lease valuation (above market)
$
27,102

 
$
27,102

In-place lease valuation (above market) - accumulated amortization
(5,888
)
 
(4,986
)
In-place lease valuation (above market), net
21,214

 
22,116

Ground leasehold interest (below market)
2,254

 
2,254

Ground leasehold interest (below market) - accumulated amortization
(33
)
 
(26
)
Ground leasehold interest (below market), net
2,221

 
2,228

Intangible assets, net
$
23,435

 
$
24,344

In-place lease valuation (below market)
$
(48,529
)
 
$
(48,448
)
In-place lease valuation (below market) - accumulated amortization
9,507

 
8,054

In-place lease valuation (below market), net
$
(39,022
)
 
$
(40,394
)
Tenant origination and absorption cost
$
388,889

 
$
379,419

Tenant origination and absorption cost - accumulated amortization
(73,386
)
 
(61,999
)
Tenant origination and absorption cost, net
$
315,503

 
$
317,420

The intangible assets are amortized over the remaining lease term of each property, which on a weighted-average basis, was approximately 7.5 years and 7.9 years as of March 31, 2015 and December 31, 2014, respectively. The amortization of the intangible assets and other leasing costs for the respective periods is as follows:
 
Amortization (income) expense for the three months ended March 31,
 
2015
 
2014
In-place lease valuation
$
(551
)
 
$
935

Tenant origination and absorption cost
$
11,387

 
$
9,541

Ground leasehold amortization (below market)
$
7

 
$
6

Other leasing costs amortization
$
54

 
$
9

The following table sets forth the estimated annual amortization (income) expense for in-place lease valuation, net, tenant origination and absorption costs, ground leasehold improvements, and other leasing costs as of March 31, 2015 for the next five years:
Year
In-place lease valuation, net
 
Tenant origination and absorption costs
 
Ground leasehold improvements
 
Other leasing costs
 Remaining 2015
$
(1,972
)
 
$
35,879

 
$
21

 
$
166

2016
$
(2,648
)
 
$
47,705

 
$
28

 
$
221

2017
$
(2,740
)
 
$
46,750

 
$
28

 
$
221

2018
$
(3,076
)
 
$
42,814

 
$
28

 
$
221

2019
$
(3,905
)
 
$
37,196

 
$
28

 
$
221

Restricted Cash
In conjunction with the contribution of certain assets, as required by certain lease provisions or certain lenders in conjunction with an acquisition or debt financing, or credits received by the seller of certain assets, the Company assumed or funded reserves for specific property improvements and deferred maintenance, re-leasing costs, and taxes and insurance, which are included on the consolidated balance sheets as restricted cash. Additionally, an ongoing replacement reserve is funded by certain tenants pursuant to each tenant’s respective lease as follows:
 

27
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)


Description
Balance
December 31, 2014
 
Additions
 
Deductions
 
Balance
March 31, 2015
Tenant improvement reserves (1)
$
38,380

 
$
26

 
$
(2,786
)
 
$
35,620

Midland Mortgage Loan repairs reserves (2)
453

 
—

 
—

 
453

Real estate tax reserve (Emporia Partners and TW Telecom) (3)
1,074

 
378

 
—

 
1,452

Property insurance reserve (Emporia Partners) (3)
251

 
126

 
—

 
377

Restricted deposits (4)
20

 
10

 
(2
)
 
28

Midland Mortgage Loan restricted lockbox (5)
2,023

 
1,689

 
(2,023
)
 
1,689

Restricted rent receipts (6)
—

 
559

 
—

 
559

Total
$
42,201

 
$
2,788

 
$
(4,811
)
 
$
40,178

 
(1)
Additions represent tenant improvement reserves either funded by the seller or the Company and held by the lender or in escrow. Deductions represent tenant improvement reimbursements made to certain tenants during the current period.
(2)
Represents a deferred maintenance reserve funded by the Company as part of the refinancing that occurred on February 28, 2013, whereby certain properties became collateral for the Midland Mortgage Loan, as discussed in Note 5, Debt.
(3)
Additions represent monthly funding of real estate taxes and insurance by the tenant during the current period.
(4)
Addition represents an impressed balance in the lender controlled account for the TW Telecom property.
(5)
As part of the terms of the Midland Mortgage Loan, as discussed in Note 5, Debt, rent collections from the eight properties which serve as collateral thereunder are received in a designated cash collateral account which is controlled by the lender until the designated payment date, as defined in the loan agreement, and the excess cash is transferred to the operating account.
(6)
Addition represents the March rent received from GE Aviation, which will be held in a separate bank account until the sale of the Will Partners property, to be treated as a tax-deferred exchange of real estate assets as permitted by Section 1031 of the Internal Revenue Code, is consummated.
4.
Investments
Investments in Unconsolidated Entities
On April 10, 2013, a Delaware Statutory Trust (“DST”) affiliated with the Sponsor acquired a two-building, single-story office campus located in Nashville, Tennessee (the “HealthSpring property”) for a purchase price of $36.4 million. The DST was then syndicated for $39.6 million which consists of mortgage debt of $23.6 million and an equity contribution of $16.0 million. The HealthSpring property is leased in its entirety pursuant to a triple-net lease to HealthSpring, Inc. (“HealthSpring”), obligating HealthSpring to all costs and expenses to operate and maintain the property, including certain capital expenditures. On the acquisition date, the remaining term was approximately nine years. On April 12, 2013, the Company, through the Operating Partnership, acquired a 10% beneficial ownership interest in the DST, net of a 10% discount associated with offering expenses. The Operating Partnership has two exchange rights in which it can acquire additional beneficial interests in the DST in the future. The initial exchange right, which may be exercised at any point after the beneficial owners have held their interest in the DST for at least one year, allows each investor to sell or retain its interest in the DST or exchange its interest in the DST for units in the Operating Partnership. The secondary exchange right, which may not be exercised until at least five years after the date of the agreement, allows each investor to either exchange its interest in the DST for units in the Operating Partnership or cash. If a beneficial owner elects to contribute their beneficial interest in the DST for limited partnership units of the Operating Partnership, such exchange will be dilutive to the existing limited partnership unit holders. As of March 31, 2015, the Company had begun the process of exercising its right to acquire additional beneficial interests in the DST.
On September 9, 2014, the Company, through a special purpose entity ("SPE"), wholly-owned by the Operating Partnership, acquired an 80% interest in a joint venture with an affiliate of Digital Realty Trust, Inc. for $68.4 million, which was funded with equity proceeds raised in our Public Offering. The gross acquisition value of the property was $187.5 million, plus closing costs, which was partially financed with debt of $102.0 million. The joint venture was created for purposes of directly or indirectly acquiring, owning, financing, operating and maintaining a data center facility located in Ashburn, Virginia (the "Property"). The Property consists of approximately 132,000 square feet. The data center consists of certain data processing and communications equipment that is fully leased to a social media company and a financial services company with an average remaining lease term of approximately 8 years.
The joint venture currently uses an interest rate swap to manage its interest rate risk associated with its variable rate debt. The interest rate swap is designated as an interest rate hedge of its exposure to the volatility associated with interest rates. As a

28
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

result of the hedge designation and in satisfying the requirement for cash flow hedge accounting, the joint venture records changes in the fair value in accumulated other comprehensive loss. In conjunction with the investment in the joint venture discussed above, the Company recognized its 80% share, or $0.4 million, of other comprehensive loss for both periods, the three months ended March 31, 2015 and the year ended December 31, 2014.
The interests discussed above are deemed to be a variable interest in a VIE, and, based on an evaluation of the variable interest against the criteria for consolidation, the Company determined that it is not the primary beneficiary of the investments, as the Company does not have power to direct the activities of the entity that most significantly affect its performance. As such, the interests in the VIEs are recorded using the equity method of accounting in the accompanying consolidated financial statements. Under the equity method, the investments in the unconsolidated entities are stated at cost and adjusted for the Company’s share of net earnings or losses and reduced by distributions. Equity in earnings of real estate ventures is generally recognized based on the allocation of cash distributions upon liquidation of the investment at book value in accordance with the joint venture agreements.
As of March 31, 2015, the balance of the investments totaled $63.5 million as shown below:
 

HealthSpring DST
 
Digital Realty
Joint Venture
 

Total
Balance December 31, 2014
$
1,351

 
$
64,898

 
$
66,249

Other comprehensive loss
—

 
(418
)
 
(418
)
Net income (loss)
9

 
(401
)
 
(392
)
Distributions
(17
)
 
(1,921
)
 
(1,938
)
Balance March 31, 2015
$
1,343

 
$
62,158

 
$
63,501

Investments in Joint Ventures
Effective June 16, 2014, WRRH Patterson, LLC (an affiliate of Weeks Robinson Properties) and Griffin Capital JVII Patterson, LLC, a wholly-owned SPE of the Operating Partnership, entered into an operating agreement as Managing Member and Investor Member, respectively, for purposes of forming WR Griffin Patterson, LLC ("WR Griffin"). WR Griffin's purpose is to acquire, own, develop, construct, and otherwise invest and manage a development project located in Patterson, California (the "Project") in which a warehouse and distribution facility consisting of approximately 1.5 million square feet will be developed and constructed (the "Restoration Hardware" property). The Restoration Hardware property is leased to Restoration Hardware, Inc. and Restoration Hardware Holdings, Inc. as co-tenants (collectively, "Restoration Hardware") pursuant to a 15-year triple-net lease, obligating Restoration Hardware to all costs and expenses to operate and maintain the property, including certain capital expenditures. The lease term commences upon completion of the project, which is expected to occur in the first half of 2015. The business and affairs of WR Griffin will be managed by the Managing Member. However, all major decisions, as provided in the operating agreement, must be approved by both the Managing Member and Investor Member. Additionally, the Managing Member interest in the purchase and sale agreement has been assigned to the Investor Member in exchange for a mandatory redemption fee. As a result of the assignment, the Managing Member will transfer all membership interest to the Investor Member upon completion of the project.
On June 20, 2014, the Company, through WR Griffin, entered into a real estate development agreement with Weeks Robinson Development & Management, LLC ("Weeks Robinson"), to develop and construct the Restoration Hardware property. On June 20, 2014, the land on which the property will be constructed was purchased by WR Griffin for approximately $15.2 million, including closing costs. The Company determined that control of the joint venture lies with its wholly-owned SPE. As such, the Company, in consolidation with the joint venture, included the following amounts on its consolidated balance sheet as of March 31, 2015 and December 31, 2014. See Note 3, Real Estate.

29
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

 
Balance
March 31, 2015
 
Balance
December 31, 2014
Cash on hand
$
296

 
$
6,985

Construction in progress - paid by the joint venture
62,333

 
34,739

Construction in progress - paid by the Company
1

 
70

Construction in progress - capitalized interest
489

 
—

Leasing commissions
375

 
375

Land
15,185

 
15,185

Construction in progress payable
(23,717
)
 
(13,423
)
Noncontrolling interest
(7,656
)
 
(7,656
)
Total investment
$
47,306

 
$
36,275



30
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

5.
Debt
As of March 31, 2015 and December 31, 2014, the Company’s debt consisted of the following:
 
 
Balance as of March 31, 2015
 
Balance as of December 31, 2014
 
Contractual Interest Rate (1)
 
Payment Type
 
Loan Maturity
 
Plainfield Mortgage Loan
$
19,550

 
$
19,638

 
6.65%

Principal and 
Interest
 
November 2017
 
Emporia Partners Mortgage Loan
4,020

 
4,108

 
5.88%

Principal and 
Interest
 
September 2023
 
LTI Mortgage Loan
31,942

 
32,128

 
5.80%

Principal and 
Interest
 
March 2016
 
LTI Mortgage Loan Premium
79

 
102

 
—

—
 
—
 
TransDigm Mortgage Loan
6,541

 
6,576

 
5.98%

Principal and 
Interest
 
June 2016
 
TransDigm Mortgage Loan Premium
61

 
75

 
—

—
 
—
 
Ace Hardware Mortgage Loan
23,557

 
23,648

 
5.588%

Principal and 
Interest
 
October 2024
 
Ace Hardware Mortgage Loan Premium
1,638

 
1,681

 
—

—
 
—
 
Midland Mortgage Loan
105,600

 
105,600

 
3.94%
 
Interest Only 
through March 
2017/Principal and 
Interest thereafter
 
April 2023
 
AIG Loan
110,640

 
110,640

 
4.96%
 
Interest Only
through January
2017/Principal and
Interest thereafter
 
February 2029
 
TW Telecom Loan
21,500

 
21,500

 
2.61%
(2)
Interest Only
through July
2015/Principal and
Interest thereafter
 
August 2019
 
Mortgage Loan Total
325,128

 
325,696

 

 
 
 
 
 
Unsecured Term Loan
300,000

 
300,000

 
1.63%
(3)
Interest Only
 
May 2019
 
Unsecured Revolver
50,000

 
—

 
1.68%
(4)
Interest Only
 
May 2019
(5)
Total
$
675,128


$
625,696

 
 
 
 
 
 
 
 
(1)
The weighted average interest rate as of March 31, 2015 was approximately 3.2% for the Company’s fixed-rate and variable-rate debt combined and 5.0% for the Company’s fixed-rate debt only.
(2)
As discussed below, the interest rate is a one-month LIBO Rate + 2.45%. As of March 31, 2015, the LIBO Rate was 0.17% (effective as of March 1, 2015).
(3)
As discussed below, the interest rate is a one-month LIBO Rate + 1.45%. As of March 31, 2015, the LIBO Rate was 0.18% (effective as of March 12, 2015).
(4)
As discussed below, the interest rate is a one-month LIBO Rate + 1.50%. As of March 31, 2015, the LIBO Rate was 0.18% (effective as of March 27, 2015).
(5)
The Unsecured Revolver, per the Unsecured Credit Agreement, as discussed below, allows for a one-year extension. Maturity date assumes the one-year extension is exercised.
KeyBank Credit Facility
On June 13, 2013, the Company, through the Operating Partnership, and seven of its wholly-owned property-owning SPEs, entered into that certain Second Amended and Restated Credit Agreement (the “Second Restated KeyBank Credit Agreement”) with KeyBank National Association ("KeyBank"), as administrative agent, Bank of America as syndication agent,

31
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

and a syndicate of lenders (collectively, the “Lenders”), pursuant to which the Lenders initially provided available financing commitments of $190.0 million, of a total $400.0 million Credit Facility (the “KeyBank Credit Facility”). During the first two years under the term of the Second Restated KeyBank Credit Agreement, the Company could request additional commitments up to the $400.0 million available Credit Facility, and the administrative agent would act on a best efforts basis to obtain such increases or additional commitments. Availability under the Second Restated KeyBank Credit Agreement was limited to the lesser of certain loan-to-value and debt service coverage ratio ("DSCR") calculations set forth in the Second Restated KeyBank Credit Agreement. Per the terms of the Second Restated KeyBank Credit Agreement, the maximum loan available under the KeyBank Credit Facility was the lesser of the total commitments ($335.0 million) or the aggregate borrowing base availability less the outstanding balance.
Under the terms of the Second Restated KeyBank Credit Agreement, the Company had the option of selecting the applicable variable rate for each revolving loan, or portion thereof, of either (a) LIBOR multiplied by the Statutory Reserve Rate (as defined in the Second Restated KeyBank Credit Agreement) to which the administrative agent is subject, with respect to this rate, for Eurocurrency funding, plus (i) 1.75%, assuming a leverage ratio of less than 50%, (ii) 2.00% assuming a leverage ratio of 50% to 55%, (iii) 2.25% assuming a leverage ratio of 55% to 60%, and (iv) 2.50% assuming a leverage ratio greater than 60% (“LIBOR-based”), or (b) an alternate base rate, which is the greater of the (i) Prime Rate or (ii) Federal Funds Rate plus 0.50%.
On January 24, 2014, a principal payment in the amount of $109.0 million was made on the KeyBank Credit Facility in conjunction with a refinancing whereby five properties, which previously served as security for the KeyBank Credit Facility became collateral for the AIG Loan discussed below. In connection with the acquisitions during the three months ended March 31, 2014, the Company, through the Operating Partnership, made draws totaling $148.9 million under the KeyBank Credit Facility and repaid $193.4 million, which includes the $109.0 million repaid in conjunction with the AIG Loan.
The KeyBank Credit Facility was terminated on May 8, 2014, at which time there was no outstanding balance, upon execution of the Unsecured Credit Agreement discussed below. The properties serving as collateral under the loan were released as collateral.
Midland Mortgage Loan
On February 28, 2013, certain property-owning SPEs wholly-owned by the Operating Partnership, entered into a fixed-rate mortgage loan agreement with Midland National Life Insurance Company (the “Midland Mortgage Loan”), whereby certain properties, which previously served as security for the KeyBank Credit Facility, were refinanced in the amount of $105.6 million and now serve as collateral for the Midland Mortgage Loan. The Midland Mortgage Loan has a fixed interest rate of 3.94%, a term of 10 years and requires monthly interest-only payments for the first four years of the term, followed by principal and interest payments based on a 30-year amortization schedule with all remaining principal and unpaid interest due at maturity. The Midland Mortgage Loan is guaranteed by the Operating Partnership and is secured by a first lien and individual security agreements on the Operating Partnership’s underlying interest in the SPEs owning the AT&T, Westinghouse, Renfro, Zeller Plastik, Travelers, Quad/Graphics, ITT and Health Net properties, along with individual fixture filings, and assignments of leases, rents, income and profits related to each such property.
KeyBank Term Loan
On November 5, 2013, the Company, through 18 borrower SPEs wholly-owned by the Operating Partnership, entered into a loan agreement with KeyBank to partially finance the acquisition of the properties comprising the Investment Grade Portfolio whereby a $300.0 million term loan was obtained (the "KeyBank Term Loan"). The KeyBank Term Loan had an initial funding of $282.0 million, with the remaining $18.0 million available to draw upon for specific future projected tenant improvements and leasing costs for the properties comprised in the Investment Grade Portfolio (the "Mortgaged Properties"). The KeyBank Term Loan was secured by cross-collateralized, first mortgage liens on the properties comprising the Mortgaged Properties.
The KeyBank Term Loan had an interest rate of LIBO plus 2.0%, or Base Rate plus 1.0%, where Base Rate would be the greater of (i) Agent Prime or (ii) the Fed Funds plus 0.50%. The KeyBank Term Loan had a term of three years, maturing on November 5, 2016, subject to two, one-year extension options (subject to the fulfillment of certain conditions), and required monthly interest-only payments.
The KeyBank Term Loan was terminated on May 8, 2014 upon execution of the Unsecured Credit Agreement discussed below. The properties serving as collateral under the loan were released as collateral.

32
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

AIG Loan
On January 24, 2014, the Company, through five SPEs wholly owned by the Operating Partnership, entered into various loan agreements (the “AIG Loan Documents”) with National Union Fire Insurance Company and The Variable Annuity Life Insurance Company of Pittsburgh, Pa. (collectively, the “Lenders”), pursuant to which the Lenders provided such SPEs with a loan in the aggregate amount of $110.64 million (the “AIG Loan”). The funds were utilized to refinance five of the properties previously serving as security for the KeyBank Credit Facility. The AIG Loan is secured by cross-collateralized and cross-defaulted first mortgage liens or first lien deeds of trust and second mortgage liens or second lien deeds of trust on the Verizon, Avnet, Northrop, Schlumberger, and UTC properties. The AIG Loan has a term of 15 years, maturing on February 1, 2029. The AIG Loan bears interest at a fixed rate of 4.96% and requires monthly payments of interest only for the first three years and fixed monthly payments based on a 360-month amortization period of principal and interest thereafter.
Unsecured Credit Facility
On May 8, 2014, the Company, through the Operating Partnership, entered into an unsecured credit agreement (the “Unsecured Credit Agreement”) co-led by KeyBank and Bank of America, with KeyBank as administrative agent and Bank of America as syndication agent, along with a syndicate of lenders. Pursuant to the Unsecured Credit Agreement, the Company was provided with a $750.0 million senior unsecured credit facility (the "Unsecured Credit Facility"), consisting of a $450.0 million senior unsecured revolver (the "Unsecured Revolver") and a $300.0 million senior unsecured term loan (the "Unsecured Term Loan"). The Unsecured Credit Facility may be increased up to $500.0 million for a maximum of $1.25 billion by increasing the Unsecured Revolver, the Unsecured Term Loan or a combination of both. The Unsecured Revolver has an initial term of four years, maturing on May 8, 2018 and may be extended for a one-year period if certain conditions are met. The Unsecured Term Loan has a term of five years, maturing on May 8, 2019. Availability under the Unsecured Credit Agreement is limited to the lesser of a (i) a specified leverage ratio applied to a portfolio real estate pool value computed as adjusted net operating income divided by specified capitalization rate; or (ii) debt service coverage ratio ("DSCR") calculation, all as set forth in the Unsecured Credit Agreement.
The Unsecured Revolver and Unsecured Term Loan both have an interest rate based on the leverage ratio reported with quarterly compliance certificate, as discussed below, and calculated based on the LIBO Rate plus the applicable LIBO Rate margin, as provided in the Unsecured Credit Agreement, or Base Rate plus the applicable base rate margin, as provided in the Unsecured Credit Agreement. The Base Rate is calculated as the greater of (i) the KeyBank Prime rate or (ii) the Federal Funds rate plus 0.50%. Payments under the Unsecured Credit Facility are interest only and are due on the first day of each quarter.
In connection with the acquisition made during the three months ended March 31, 2015, the Company, through the Operating Partnership, made a draw totaling $50.0 million under the Unsecured Revolver. As of March 31, 2015, there was an outstanding balance of $300.0 million and $50.0 million on the Unsecured Term Loan and Unsecured Revolver, respectively.
Debt Covenant Compliance
Pursuant to the terms of the Second Restated KeyBank Credit Agreement, the Operating Partnership, in consolidation with the Company, was subject to certain loan compliance covenants including, but not limited to (as defined therein), (1) a maximum total leverage ratio (65%); (2) a minimum interest coverage ratio (2.0 to 1); (3) a minimum fixed charge ratio (1.75 to 1); (4) a maximum unhedged variable debt ratio (30%); and (5) minimum tangible net worth of at least $157,650,464 plus 80% of the net proceeds of any equity issuance after the effective date and 100% of the equity in any properties contributed to the Company after the effective date, the violation of which would constitute an event of default. The KeyBank Credit Facility was terminated on May 8, 2014 upon execution of the Unsecured Credit Agreement.
Pursuant to the terms of the Midland Mortgage Loan, the Operating Partnership is required to maintain a debt service coverage ratio (as defined in there in), of 1.60 to 1 and must maintain a minimum net worth of $75.0 million.
Pursuant to the terms of the KeyBank Term Loan, the Operating Partnership was required to maintain a debt service coverage ratio (as defined in the loan agreement) as follows: (1) if the Pool DSCR is less than 1.25x, the Borrower SPEs must fund all excess cash flow after debt service on a monthly basis into a cash collateral reserve account with KeyBank. These funds may be released to the Borrower SPEs upon achievement of a Pool DSCR of 1.25x or greater for two consecutive quarters; (2) If the Pool DSCR falls below 1.20x, the Borrower SPEs will make a principal payment (or post other cash collateral) in an amount to bring the Pool DSCR up to no less than 1.30x. Any collateral would be released upon the achievement of the required 1.30x Pool DSCR for two consecutive quarters. The KeyBank Term Loan was terminated on May 8, 2014 upon execution of the Unsecured Credit Agreement.

33
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

Pursuant to the terms of the AIG Loan, the Operating Partnership is required to maintain (1) a minimum debt service coverage ratio, as defined in the loan agreement, for the secured properties of 1.60x; (2) a maximum loan-to-value ratio of 60%; (3) minimum annual base rent of $14.75 million; and (4) minimum net worth of $110.6 million.
Pursuant to the terms of the Unsecured Credit Facility, the Operating Partnership, in consolidation with the Company, is subject to certain loan compliance covenants including, but not limited to (as defined in the credit agreement), (1) a maximum consolidated leverage ratio (60% or 65% for two consecutive quarters following a material acquisition); (2) a minimum fixed charges coverage ratio (1.5 to 1); (3) a minimum tangible net worth of at least $861,987,871 plus 75% of the net proceeds generated by any common or preferred share issuances plus 75% of units issued in connection with the contribution of any properties; (4) a maximum secured debt ratio (40%); (5) a maximum secured recourse debt ratio (5%); (6) a maximum unhedged variable rate debt (30%); (7) a maximum payout ratio of 95% of distribution to core funds from operations, as defined in the Unsecured Credit Agreement; (8) minimum unencumbered asset pool DSCR (1.35 to 1); and (9) maximum unencumbered asset pool leverage ratio (60% or 65% for two consecutive quarters following a material acquisition).
Pursuant to the terms of the TW Telecom Loan, the Operating Partnership is required to maintain a minimum debt service coverage ratio, as defined in the loan agreement, for the property 1.60x beginning with the quarter ended December 31, 2014.
The Company was in compliance with all debt covenants as of March 31, 2015.
The following summarizes the future principal repayments of all loans as of March 31, 2015 per the loan terms discussed above:
 
March 31, 2015
 
2015
$
1,444

  
2016
39,745

(1) 
2017
23,198

(2) 
2018
5,347

 
2019
373,672

(3) 
Thereafter
229,944

(4) 
Total principal
673,350

  
Unamortized debt premium
1,778

  
Total
$
675,128

  
(1)    Amount includes payment of the balances of the LTI and TransDigm property mortgage loans which mature in 2016. Principal repayments on both
mortgage loans do not include the unamortized valuation premium of $0.1 million.
(2)
Amount includes payment of the balance of the Plainfield property mortgage loan which matures in 2017.
(3)
Amount includes payment of the balance of the TW Telecom Loan and the Unsecured Term Loan, both of which mature in 2019, as well as the balance of the Unsecured Revolver which matures in 2019, assuming the one-year extension is exercised.
(4)
Amount includes payment of the balances of:
•
the Midland Mortgage Loan and Emporia Partners Mortgage Loan, both of which mature in 2023,
•
the Ace Hardware Mortgage Loan, which matures in 2024, and
•
the AIG Loan, which matures in 2029.
Principal repayments on the Ace Hardware Mortgage Loan do not include the unamortized valuation premium of $1.6 million.

6.    Equity
Preferred Equity
On November 5, 2013, in connection with the acquisition of the Investment Grade Portfolio, the Operating Partnership entered into a purchase agreement with an affiliate (the “Preferred Equity Investor”) of Starwood Property Trust (“Starwood”), pursuant to which Starwood provided a $250.0 million equity investment in the Operating Partnership in exchange for 24,319,066 Series A Cumulative Exchangeable Preferred Units of limited partnership interest (the “Preferred Units”) of the Operating Partnership. The Preferred Equity Investor is entitled to monthly distributions calculated as follows:
•
From November 5, 2013 through October 31, 2015, a rate of LIBO plus 7.25% per annum of the Liquidation Preference (defined below) per Preferred Unit;

34
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

•
From November 1, 2015 through October 31, 2016, a rate of LIBO plus 8.25% per annum of the Liquidation Preference per Preferred Unit;
•
From November 1, 2016 through October 31, 2017, a rate of LIBO plus 9.25% per annum of the Liquidation Preference per Preferred Unit;
•
From November 1, 2017 through October 31, 2018, a rate of LIBO plus 10.25% per annum of the Liquidation Preference per Preferred Unit.

At all times, LIBOR will be subject to a minimum floor of 0.25%.
The Preferred Units may be redeemed by the Operating Partnership, in whole or in part, at any time. The redemption price for the Preferred Units will be equal to the sum of (i) $10.28 per Preferred Unit, plus all accumulated and unpaid distributions (the “Liquidation Preference”); (ii) 1.81% of the Liquidation Preference; and (iii) all accumulated and unpaid distributions through the date of redemption, plus interest thereon. No redemptions had been made as of March 31, 2015. The Operating Partnership may, however, redeem up to 75% of the Preferred Units after the units have been outstanding for 18 months and the remaining 25% of the outstanding Preferred Units on the 24th month.
Pursuant to the terms of the purchase agreement with Starwood, the Operating Partnership, in consolidation with the Company, is subject to certain covenants including, but not limited to, covenants that limit the Operating Partnership’s discretion in utilizing cash flows and require that distributions on the Preferred Units be given priority over other disbursements, including distributions on Common Units and redemptions of the Company's shares. In addition, the covenants require (1) a maximum Senior Loan-to-Value Ratio on the Company's aggregate property portfolio of 54% during the 12 month period following the date the Preferred Units were issued and 50% thereafter; and (2) a minimum Debt Yield of at least 13.5%. After the 24th month, the Preferred Equity Investor may cause the Operating Partnership to begin redeeming the investment if certain covenants are not met, as defined in the underlying agreements. Should an event of default occur, or the investment remains outstanding on the 60th month, the Preferred Equity Investor will have the right to appoint a majority to the board of directors. In addition, the Preferred Equity Investor will have the right to convert any amount of the limited partnership units to preferred stock of the Company. The Company caused certain amended documents to be placed into escrow that could become effective upon an event of default or the investment remains outstanding on the 60th month, at the Preferred Equity Investor's discretion. The Company was in compliance with all of the covenants as of March 31, 2015.
Common Equity
As of March 31, 2015, the Company had received aggregate gross offering proceeds of approximately $1.3 billion from the sale of shares in the Private Offering, the Public Offerings, and the DRP Offering, as discussed in Note 1, Organization. There were 130,877,314 shares outstanding at March 31, 2015, including shares issued pursuant to the DRP, less shares redeemed pursuant to the share redemption plan discussed below.
Distribution Reinvestment Plan (DRP)
As of March 31, 2015 and December 31, 2014, $70.6 million and $57.7 million in shares, respectively, had been issued under the DRP, pursuant to the Private Offering, the Public Offerings, and the DRP Offering, of which $1.8 million and $1.2 million in redemptions payable subsequent to quarter end, respectively, were reclassified from redeemable common stock to accounts payable and accrued liabilities in the consolidated balance sheets. See Note 1, Organization.
Share Redemption Program
The Company has adopted a share redemption program ("SRP") that enables stockholders to sell their stock to the Company in limited circumstances. As long as the common stock is not listed on a national securities exchange or over-the-counter market, stockholders who have held their stock for at least one year may, under certain circumstances, be able to have all or any portion of their shares of stock redeemed by the Company. The Company may redeem, on a quarterly basis, the shares of stock presented for redemption for cash to the extent that there are sufficient funds available to fund such redemptions. In no event shall the Company redeem more than 5.0% of the weighted average shares outstanding during the prior calendar year, and the cash available for redemption will be limited to the proceeds from the sale of shares pursuant to the DRP. Effective March 17, 2013, the redemption price per share shall be as shown below, which is based upon the number of years the stock is held:

35
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

Period of Time Held
 
Redemption Price
At least one year
 
Lower of $9.25 or the price paid by the stockholder
At least two years
 
Lower of $9.50 or the price paid by the stockholder
At least three years
 
Lower of $9.75 or the price paid by the stockholder
At least four years
 
Lower of $10.28 or the price paid by the stockholder
As the use of the proceeds from the DRP for redemptions is outside the Company’s control, the net proceeds from the DRP are considered to be temporary equity and are presented as common stock subject to redemption on the accompanying consolidated balance sheets. The cumulative proceeds from the DRP, net of any redemptions, will be computed at each reporting date and will be classified as temporary equity on the Company’s consolidated balance sheets. As noted above, the redemption is limited to proceeds from new permanent equity from the sale of shares pursuant to the DRP.
Redemption requests will be honored on the last business day of the month following the end of each quarter. Requests for redemption must be received on or prior to the end of the quarter in order for the Company to repurchase the shares as of the end of the following month. Since inception through March 31, 2015, the Company had redeemed 481,655 shares of common stock for approximately $4.7 million at a weighted average price per share of $9.85 pursuant to the SRP. As of March 31, 2015, there were 182,682 shares totaling $1.8 million subject to redemption requests. On April 30, 2015, the Company satisfied all of the eligible redemption requests at a weighted average price per share of $9.76, with the exception of two redemption requests that will be satisfied on or about May 31, 2015. The Company’s board of directors may choose to amend, suspend or terminate the SRP upon 30 days' written notice at any time.
Noncontrolling Interests
Noncontrolling interests represent limited partnership interests in the Operating Partnership in which the Company is the general partner. General partnership units and limited partnership units of the Operating Partnership were issued as part of the initial capitalization of the Operating Partnership, and limited partnership units were issued in conjunction with management's contribution of certain assets, as discussed in Note 1, Organization. As of March 31, 2015, noncontrolling interests were approximately 3% of total shares outstanding and approximately 3% of weighted average shares outstanding (both measures assuming limited partnership units were converted to common stock). The Company has evaluated the terms of the limited partnership interests in the Operating Partnership and as a result, has classified limited partnership interests issued in the initial capitalization and in conjunction with the contributed assets as noncontrolling interests, which are presented as a component of permanent equity, except as discussed below.
The Company evaluates individual noncontrolling interests for the ability to recognize the noncontrolling interest as permanent equity on the consolidated balance sheets at the time such interests are issued and on a continual basis. Any noncontrolling interest that fails to qualify as permanent equity has been reclassified as temporary equity and adjusted to the greater of (a) the carrying amount, or (b) its redemption value as of the end of the period in which the determination is made.
The Operating Partnership issued 4.8 million limited partnership units to affiliated parties and unaffiliated third parties in exchange for certain properties and 0.2 million limited partnership units to unaffiliated third parties unrelated to property contributions. To the extent the contributors should elect to redeem all or a portion of their Operating Partnership units, pursuant to the terms of the respective contribution agreement, such redemption shall be at a per unit value equivalent to the price at which the contributor acquired its limited partnership units in the respective transaction.
Operating partnership units issued pursuant to the Will Partners REIT, LLC (Will Partners property) contribution are not included in permanent equity on the consolidated balance sheets. The partners holding these units can cause the general partner to redeem the units for the cash value, as defined in the operating partnership agreement. As the general partner does not control these redemptions these units are presented on the consolidated balance sheets as noncontrolling interest subject to redemption at their redeemable value. The net income (loss) and distributions attributed to these limited partners is allocated proportionately between common stockholders and other noncontrolling interests that are not considered redeemable.
The limited partners of the Operating Partnership will have the right to cause the general partner of the Operating Partnership, the Company, to redeem their limited partnership units for cash equal to the value of an equivalent number of shares, or, at the Company’s option, purchase their limited partnership units by issuing one share of the Company’s common stock for the original redemption value of each limited partnership unit redeemed. These rights may not be exercised under certain circumstances which could cause the Company to lose its REIT election. There were no redemption requests during the three months ended March 31, 2015 and the year ended December 31, 2014. 

36
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

Noncontrolling interests include Weeks Robinson's interest in the joint venture, the real estate developer engaged to develop and construct the Restoration Hardware property. See Note 3, Real Estate. The interest in the joint venture is deemed to be a variable interest in a VIE and based on an evaluation of the variable interest against the criteria for consolidation, the Company determined that it is the primary beneficiary of the investment. As such, the interest in the VIE is recorded using the consolidation method of accounting in the accompanying consolidated financial statements. Under the consolidation method, the company includes the assets, liabilities, noncontrolling interests, and results of activities of the VIE in its consolidated financial statements as shown in Note 4, Investments.
The following summarizes the activity for noncontrolling interests for the three months ended March 31, 2015 and the year ended December 31, 2014:
 
Three Months Ended
March 31, 2015
 
Year Ended December 31, 2014
Beginning balance
$
17,478

 
$
19,736

Contribution/issuance of noncontrolling interests
—

 
1,504

Distributions to noncontrolling interests
(758
)
 
(3,050
)
Allocated distributions to noncontrolling interests subject to redemption
(3
)
 
(14
)
Net income (loss)
210

 
(698
)
Ending balance
$
16,927

 
$
17,478


7.
Related Party Transactions
The following table summarizes the related party costs and fees incurred, paid and due to affiliates as of March 31, 2015 and December 31, 2014:
 
Year Ended December 31, 2014
 
Three Months Ended March 31, 2015
 
Payable
 
Incurred
 
Paid
 
Payable
Advisor and Property Manager fees
 
 
 
 
 
 
 
Acquisition fees and expenses
$
—

 
$
1,980

 
$
1,980

 
$
—

Operating expenses
202

 
151

 
202

 
151

Asset management fees
1,249

 
3,779

 
3,760

 
1,268

Property management fees
498

 
1,471

 
1,439

 
530

Disposition fees
—

 
133

 
133

 
—

Costs advanced by the Advisor
—

 
—

 
—

 
—

Dealer Manager fees
—

 
—

 
—

 
—

Total, net of real estate assets held for sale
$
1,949

 
$
7,514

 
$
7,514

 
$
1,949

Asset management fees related to real estate held for sale
5

 
8

 
13

 
—

Property management fees related to real estate held for sale
1

 
3

 
4

 
—

Total
$
1,955

 
$
7,525

 
$
7,531

 
$
1,949

Advisory and Dealer Manager Agreements
The Company does not currently expect to have any employees. The Advisor will be primarily responsible for managing the business affairs and carrying out the directives of the Company’s board of directors. The Company entered into an advisory agreement with the Advisor and a dealer manager agreement with the Dealer Manager for the Public Offerings. The dealer manager agreement was terminated in accordance with its terms upon the termination of the Follow-On Offering. The advisory agreement entitles the Advisor to specified fees and incentives upon the provision of certain services with regard to the Public Offerings and investment of funds in real estate properties, among other services, as well as reimbursement for organizational

37
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

and offering costs incurred by the Advisor on the Company’s behalf and reimbursement of certain costs and expenses incurred by the Advisor in providing services to the Company.
The advisory agreement requires, upon termination of the Public Offerings, that any organizational and offering costs, including sales commissions and dealer manager fees, incurred above 15% of gross equity raised in the Company’s Public Offerings and that any organizational and offering costs, not including sales commissions and dealer manager fees, incurred above 3.5% of gross equity raised in the Company’s Public Offerings shall be reimbursed to the Company. Upon termination of the Public Offerings, organizational and offering costs did not exceed the limitations for organizational and offering costs the Advisor is subject to, as discussed in Note 2, Basis of Presentation and Summary of Significant Accounting Policies — Organizational and Offering Costs.
Management Compensation
The following table summarizes the compensation and fees the Company has paid or may pay to the Advisor, the Property Manager, the Dealer Manager, the Sponsor and other affiliates, including amounts to reimburse costs for providing services.
Type of Compensation
(Recipient)
  
   Determination of
    Amount
Sales Commissions
(Participating Dealers)
  
During the Public Offerings, the Dealer Manager was entitled to receive a sales commission of up to 7% of gross proceeds from gross sales proceeds in the Primary Public Offerings. The Dealer Manager entered into participating dealer agreements with certain other broker-dealers to authorize them to sell shares of the Company in the Public Offerings. Upon sale of shares of the Company by such broker-dealers, the Dealer Manager re-allowed all of the sales commissions paid in connection with sales made by these broker-dealers, except that no sales commission was payable on shares sold under the Company's DRP. The sales commissions may vary for different categories of purchasers.
 
 
Dealer Manager Fee
(Dealer Manager)
  
During the Public Offerings, the Dealer Manager was entitled to receive a dealer manager fee of up to 3% of gross proceeds from sales in the Primary Public Offerings. The Dealer Manager entered into participating dealer agreements with certain other broker-dealers as noted above. The Dealer Manager re-allowed to these broker-dealers a portion of the 3% dealer manager fee as marketing fees, reimbursement of certain costs and expenses of attending training and education meetings sponsored by the Dealer Manager, payment of attendance fees required for employees of the Dealer Manager or other affiliates to attend retail seminars and public seminars sponsored by these broker-dealers, or to defray other distribution-related expenses. No dealer manager fee was payable on shares sold under the Company's DRP.
 
 
Reimbursement of
Organization and Offering Expenses
(Advisor)
  
The Company was required under the Advisory Agreement to reimburse the Advisor for organization and offering costs (as defined in the Advisory Agreement) up to 3.5% of gross proceeds from the Primary Public Offerings, excluding sales commissions and dealer manager fees. The Advisory Agreement also states that organization and offering expenses, including sales commissions and dealer manager fees, may not exceed 15% of gross offering proceeds of the Public Offerings. Upon termination of the Public Offerings, organization and offering expenses did not exceed these limits.
 
 
Acquisition Fees and Expenses
(Advisor)
  
Under the Advisory Agreement the Advisor receives acquisition fees equal to 2.5%, and reimbursement for actual acquisitions related expense incurred by the Advisor of up to 0.50% of the contract purchase price, as defined therein, of each property acquired by the Company, and reimbursement for actual acquisition expenses incurred on the Company's behalf, including certain payroll costs for acquisition-related efforts by the Advisor's personnel, as defined in the agreements. In addition, the Company pays acquisition expenses to unaffiliated third parties equal to approximately 0.60% of the purchase price of the Company's properties. The acquisition fee and acquisition expenses paid by the Company shall be reasonable and in no event exceed an amount equal to 6.0% of the contract purchase price, unless approved by a majority of the independent directors.
 
 
 

38
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

Type of Compensation
(Recipient)
  
   Determination of
    Amount
Disposition Fee
(Advisor)
 
In the event that the Company sells any or all of its properties (or a portion thereof), or all or substantially all of the business or securities of the Company are transferred or otherwise disposed of by way of a merger or other similar transaction, the Advisor will be entitled to receive a disposition fee if the Advisor or an affiliate provides a substantial amount of the services (as determined by a majority of the Company's directors, including a majority of the independent directors) in connection with such transaction. The disposition fee the Advisor or such affiliate shall be entitled to receive at closing will be equal to the lesser of: (1) 3% of the Contract Sales Price, as defined in the Advisory Agreement or (b) 50% of the Competitive Commission, as defined in the Advisory Agreement; provided, however, that in connection with certain types of transactions described further in the Advisory Agreement, the disposition fee shall be subordinated to Invested Capital (as defined in the operating partnership agreement). The disposition fee may be paid in addition to real estate commissions or other commissions paid to non-affiliates, provided that the total real estate commissions or other commissions (including the disposition fee) paid to all persons by the Company or the operating partnership shall not exceed an amount equal to the lesser of (i) 6% of the aggregate Contract Sales Price or (ii) the Competitive Commission.
 
 
 
Asset Management Fee
(Advisor)
  
The Advisor receives an annual asset management fee for managing the Company’s assets equal to 0.75% of the Average Invested Assets, defined as the aggregate carrying value of the assets invested before reserves for depreciation. The fee will be computed based on the average of these values at the end of each month. The asset management fees are earned monthly.
 
 
 
Operating Expenses
(Advisor)
  
The Advisor and its affiliates are entitled to reimbursement, at cost, for actual expenses incurred by them on behalf of the Company in connection with their provision of administrative services, including related personnel costs; provided, however, the Advisor must reimburse the Company for the amount, if any, by which total operating expenses (as defined), including advisory fees, paid during the previous 12 months then ended exceeded the greater of: (i) 2% of the Company’s average invested assets for that 12 months then ended; or (ii) 25% of the Company’s net income, before any additions to reserves for depreciation, bad debts or other expenses connected with the acquisition and disposition of real estate interests and before any gain from the sale of the Company’s assets, for that fiscal year, unless the Company’s board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors. For the three months ended March 31, 2015 and 2014 approximately $0.2 million, of operating expenses incurred by the Advisor were allocated to the Company in each period. Such costs are allocated using methodologies meant to fairly allocate such costs based upon the related activities and in accordance with the agreement.
 
 
 
Property Management Fees
(Property Manager)
  
The Property Manager is entitled to receive a fee for its services in managing the Company’s properties up to 3% of the gross monthly revenues from the properties plus reimbursement of the costs of managing the properties. The Property Manager, in its sole and absolute discretion, can waive all or a part of any fee earned. In the event that the Property Manager assists with the development or redevelopment of a property, the Company may pay a separate market-based fee for such services. In the event that the Company contracts directly with a non-affiliated third-party property manager with respect to a particular property, the Company will pay the Property Manager an oversight fee equal to 1% of the gross revenues of the property managed. In no event will the Company pay both a property management fee to the Property Manager and an oversight fee to the Property Manager with respect to a particular property.
 
In addition, the Company may pay the Property Manager or its designees a leasing fee in an amount equal to the fee customarily charged by others rendering similar services in the same geographic area. The Company may also pay the Property Manager or its designees a construction management fee for planning and coordinating the construction of any tenant directed improvements for which the Company is responsible to perform pursuant to lease concessions, including tenant-paid finish-out or improvements. The Property Manager shall also be entitled to a construction management fee of 5% of the cost of improvements.
 
 
 

39
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

Type of Compensation
(Recipient)
  
   Determination of
    Amount
Subordinated Share of Net Sale Proceeds (Advisor) (1)
  
Payable to the Advisor in cash upon the sale of a property after the Company's stockholders receive a return of capital plus a 6% cumulative, non-compounded return. The share of net proceeds from the sale of property is 5% if stockholders are paid a return of capital plus 6% to 8% annual cumulative non-compounding return, 10% if stockholders are paid a return of capital plus 8% to 10% annual cumulative non-compounding return, or 15% if stockholders are paid a return of capital plus 10% or more annual cumulative non-compounding return.
 
 
 
Subordinated Incentive Listing Distribution (Advisor) (1)
 
Payable to the Advisor no earlier than 7 months and no later than 19 months following a listing of the shares on a national securities exchange, based upon the market value of the Company's shares during a period of 30 trading days commencing after the first day of the 6th month, but no later than the last day of the 18th month following a listing, the commencement date of which shall be chosen by the Advisor in its sole discretion, and after the Company's stockholders receive a return of capital plus a 6% cumulative, non-compounded return. The distribution share is 5% if stockholders are paid a return of capital plus 6% to 8% annual cumulative non-compounding return, 10% if stockholders are paid a return of capital plus 8% to 10% annual cumulative non-compounding return, or 15% if stockholders are paid a return of capital plus 10% or more annual cumulative non-compounding return, and is payable in cash, shares of the Company's stock, units of limited partnership interest in the Operating Partnership, or a combination thereof.
 
 
 
Subordinated Distribution Due Upon Termination
(Advisor)
 
Payable to the Advisor (in cash, shares of the Company's stock, units of limited partnership interest in the Operating Partnership, or a combination thereof), 1/3rd within 30 days of the date of involuntary termination of the Advisory Agreement, 1/3rd upon the one year anniversary of such date, and 1/3rd upon the two year anniversary of such date. Calculated based upon appraised value of properties less the fair value of the underlying debt, and plus or minus net current assets or net current liabilities, respectively, and payable after the Company's stockholders receive a return of capital plus a 6% cumulative, non-compounded return. The distribution share is 5% if stockholders are paid a return of capital plus 6% to 8% annual cumulative non-compounding return, 10% if stockholders are paid a return of capital plus 8% to 10% annual cumulative non-compounding return, or 15% if stockholders are paid a return of capital plus 10% or more annual cumulative non-compounding return.

Upon a voluntary termination of the Advisory Agreement, the Advisor will not be entitled to receive the Subordinated Distribution Due Upon Termination but instead will be entitled to receive at the time of the applicable liquidity event a distribution equal to the applicable Subordinated Share of Net Sale Proceeds, Subordinated Incentive Listing Distribution, or Subordinated Distribution Due Upon Extraordinary Transaction.
Subordinated Distribution Due Upon Extraordinary Transaction
(Advisor) (1)
 
Payable to the Advisor upon the closing date of an Extraordinary Transaction (as defined in the Operating Partnership Agreement); payable in cash, shares of the Company's stock, units of limited partnership in the Operating Partnership, or a combination thereof after the Company's stockholders receive a return of capital plus a 6% cumulative, non-compounded return. The distribution share is 5% if stockholders are paid a return of capital plus 6% to 8% annual cumulative non-compounding return, 10% if stockholders are paid a return of capital plus 8% to 10% annual cumulative non-compounding return, or 15% if stockholders are paid a return of capital plus 10% or more annual cumulative non-compounding return.
 
 
 
Sponsor Break-Even Amount
(Sponsor)
 
In the event of a merger of the Advisor into the Company or one of its affiliates in anticipation of listing or a merger with an already-listed entity, any merger consideration paid to the Company's sponsor or its affiliates in excess of unreturned and unreimbursed capital invested by the Company's sponsor and its affiliates into the Company, the Advisor, the Company's dealer manager, or affiliates, relating in any way to the business organization of the Company, the Operating Partnership, or any offering of the Company, shall be subordinated to the return of stockholders' invested capital. Such excess merger consideration shall be paid in stock that may not be traded for one year from the date of receipt, and such stock shall be held in escrow pending the occurrence of certain conditions outlined further in the Operating Partnership Agreement.
(1)
The Advisor cannot earn more than one incentive distribution. Any receipt by the Advisor of subordinated share of net sale proceeds (for anything other than a sale of the entire portfolio) will reduce the amount of the subordinated distribution due upon termination, the subordinated incentive listing distribution and the subordinated distribution due upon extraordinary transaction.

40
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

Conflicts of Interest
The Sponsor, Advisor, Property Manager and their officers and certain of their key personnel and their respective affiliates currently serve as key personnel, advisors, managers and sponsors to some or all of 12 other real estate programs affiliated with the Sponsor, including Griffin-American Healthcare REIT III, Inc. ("GAHR III"), a publicly-registered, non-traded real estate investment trust. The Company's Sponsor is also the sponsor of Griffin Capital Essential Asset REIT II, Inc. ("GCEAR II"), another non-traded REIT that focuses on business essential office and industrial properties, Griffin-Benefit Street Partners BDC Corp. ("GB-BDC"), a non-traded business development company regulated under the 1940 Act, and Griffin Institutional Access Real Estate Fund ("GIREX"), a non-diversified, closed-end management investment company that is operated as an interval fund under the 1940 Act. Because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between the Company’s business and these other activities.
Some of the material conflicts that the Sponsor, Advisor, and Property Manager and their key personnel and their respective affiliates will face are (1) competing demand for time of the Advisor’s executive officers and other key personnel from the Sponsor and other affiliated entities; (2) determining if a certain investment opportunity should be recommended to the Company or another program of the Sponsor; and (3) influence of the fee structure under the Advisory Agreement and the distribution structure under the Operating Partnership Agreement that could result in actions not necessarily in the long-term best interest of the Company’s stockholders. The board of directors has adopted the Sponsor’s acquisition allocation policy, which is as follows:
In the event that an investment opportunity became available, the Sponsor was required to first present the opportunity to the Company, which had a right of first refusal on all single tenant net lease real estate assets that fit within the investment objectives of the Company until the earlier to occur of (a) the date that was six months after the completion of the Company's last offering of shares of its common stock or (b) the date on which the Company had invested all of its available investment equity and achieved a blended loan-to-value ratio of at least 40% across its portfolio of properties. This right of first refusal expired on October 29, 2014. Subsequent to that date, the Sponsor will allocate potential investment opportunities to the Company and GCEAR II based on the following factors:
•
the investment objectives of each program;
•
the amount of funds available to each program;
•
the financial impact of the acquisition on each program, including each program’s earnings and distribution ratios;
•
various strategic considerations that may impact the value of the investment to each program;
•
the effect of the acquisition on diversification of each program’s investments; and
•
the income tax effects of the purchase to each program.
If, after consideration of these factors, the investment opportunity is suitable for the Company and for GCEAR II, then:
•
the Company will have priority for investment opportunities of $75 million or greater; and
•
GCEAR II will have priority for investment opportunities of $35 million or less, until such time as GCEAR II reaches $500 million in aggregate assets (based on contract purchase price).
In the event all acquisition allocation factors have been exhausted and an investment opportunity remains equally suitable for the Company and GCEAR II, the Sponsor will offer the investment opportunity to the REIT that has had the longest period of time elapse since it was offered an investment opportunity.
If the Sponsor no longer sponsors the Company, then, in the event that an investment opportunity becomes available that is suitable, under all of the factors considered by the Advisor, for both GCEAR II and one or more other entities affiliated with the Sponsor, the Sponsor has agreed to present such investment opportunities to GCEAR II first, prior to presenting such opportunities to any other programs sponsored by or affiliated with the Sponsor. In determining whether or not an investment opportunity is suitable for more than one program, the Advisor, subject to approval by the board of directors, shall examine, among others, the following factors:
•
anticipated cash flow of the property to be acquired and the cash requirements of each program;
•
effect of the acquisition on diversification of each program’s investments;
•
policy of each program relating to leverage of properties;
•
income tax effects of the purchase to each program;

41
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

•
size of the investment; and
•
amount of funds available to each program and the length of time such funds have been available for investment.
Economic Dependency
The Company will be dependent on the Advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase and disposition of properties and other investments, management of the daily operations of the Company’s real estate portfolio, and other general and administrative responsibilities. In the event that the Advisor is unable to provide the services, the Company will be required to obtain such services from other resources.

8.
Commitments and Contingencies
Ground Lease Obligations
The Company acquired a property on January 16, 2014 that is subject to a ground lease with an expiration date of December 31, 2095. The Company incurred $0.1 million in rent expense related to the ground lease during the three months ended March 31, 2015 and March 31, 2014. As of March 31, 2015, the remaining required payments under the terms of the ground lease are as follows:
 
March 31, 2015
2015
$
135

2016
180

2017
198

2018
198

2019
198

Thereafter
34,246

Total
$
35,155

Litigation
From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. The Company is not a party to any material legal proceedings, nor is the Company aware of any pending or threatened litigation that would have a material adverse effect on the Company’s business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
Pending Merger of Signature Office REIT into the Company
On November 21, 2014, the Company entered into a merger agreement with Signature Office REIT ("SOR") in connection with a merger. Under the terms of the merger agreement, each share of common stock of SOR issued and outstanding will be converted into the right to receive 2.04 shares of the Company's common stock. As of March 31, 2015, SOR had 20,473,024 shares of common stock outstanding. The merger is subject to customary closing conditions, including the receipt of approval of SOR's stockholders, thus, there is no guarantee that the merger will be consummated.
On February 3, 2015, the Company filed a Registration Statement on Form S-4 with the SEC, which, as amended, was declared effective on May 1, 2015. SOR filed a definitive proxy statement on May 1, 2015 and commenced soliciting stockholder proxies thereafter. The SOR special stockholder meeting to vote on the merger is currently scheduled to be held on June 9, 2015.
9.
Declaration of Distributions
During the quarter ended March 31, 2015, the Company paid distributions in the amount of $0.001901096 per day per share on the outstanding shares of common stock payable to stockholders of record at the close of business on each day during the period from January 1, 2015 through March 31, 2015.  Such distributions were paid on a monthly basis, on or about the first day of the month, for the month then-ended.

42
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited; dollars in thousands unless otherwise noted)

On March 2, 2015, the Company’s board of directors declared distributions in the amount of $0.001901096 per day per share on the outstanding shares of common stock payable to stockholders of record at the close of business on each day during the period from April 1, 2015 through June 30, 2015. Such distributions payable to each stockholder of record during a month will be paid on such date of the following month as the Company’s Chief Executive Officer may determine.

10.    Subsequent Events
Offering Status
As of May 11, 2015, the Company had issued approximately 5,179,493 shares of the Company’s common stock pursuant to the DRP Offering for approximately $51.9 million.
Acquisition of Westgate III property
On April 1, 2015, the Company, through the Operating Partnership, acquired a five-story office building located in Houston, Texas (the "Westgate III property"). The Westgate III property is leased in its entirety pursuant to a triple net lease to Wood Group Mustang Inc. On the acquisition date, the remaining term of the lease was approximately 12 years.
The purchase price of the Westgate III property was $77.0 million, which, along with other closing fees and expenses, including acquisition fees and expense reimbursement paid to the Advisor, was funded with a $76.1 million draw from the Unsecured Revolver.
Pending Sale of Will Partners property
On April 13, 2015, the Company received an unsolicited offer to purchase the Will Partners property for $25.0 million and entered into a purchase and sale agreement. Effectively, the Company is under contract to sell the Will Partners property, though, there is no guarantee that the sale will be consummated.
Pending Redemption of Preferred Equity
On May 4, 2015, the Company notified the Preferred Equity Investor it would exercise its right to redeem 75% of the Preferred Units, pursuant to the terms of the purchase agreement. The Company intends to pay $191.6 million on May 14, 2015, which will consist of the Liquidation Preference and a redemption fee, both payable upon the redemption.



43

ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the Company’s consolidated financial statements and the notes thereto contained in Part I of this Quarterly Report on Form 10-Q, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations, Consolidated Financial Statements, and the notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. See also “Cautionary Note Regarding Forward Looking Statements” preceding Part I. As used herein, “we,” “us,” and “our” refer to Griffin Capital Essential Asset REIT, Inc.
Overview
We are a public, non-traded REIT that invests primarily in business essential properties significantly occupied by a single tenant, diversified by corporate credit, physical geography, product type and lease duration. As described in more detail in Item 1 of this report, we were formed on August 28, 2008 and commenced operations on May 6, 2009. We have no employees and are externally advised and managed by an affiliate, Griffin Capital Essential Asset Advisor, LLC, our Advisor.
Under our initial public offering, we offered a maximum of 82,500,000 shares of common stock to the public, consisting of 75,000,000 shares (the “Primary Public Offering”) and 7,500,000 shares for sale pursuant to our distribution reinvestment plan (together with the Primary Public Offering, the “Initial Public Offering”). We issued approximately 19,200,570 total shares of our common stock for gross proceeds of approximately $191.5 million in our Initial Public Offering, which terminated on April 25, 2013, of which 585,533 shares, or $5.6 million, were issued pursuant to the distribution reinvestment plan (“DRP”).
On April 26, 2013, we began to offer, in a follow-on offering, up to $1.0 billion in shares of common stock, consisting of approximately 97.2 million shares at $10.28 per share (the “Primary Follow-On Offering” and together with the Primary Public Offering, the “Primary Public Offerings”) and $100 million in shares of common stock, consisting of approximately 10.2 million shares, pursuant to the DRP (together with the Primary Follow-On Offering, the “Follow-On Offering” and, collectively with the Initial Public Offering, the “Public Offerings”). On April 22, 2014, we announced that we were no longer accepting subscriptions in the Follow-On Offering, as we expected to reach the maximum offering amount following our transfer agent's reconciliation of pending subscriptions. We issued 107,144,337 total shares of our common stock for gross proceeds of approximately $1.1 billion in our Follow-On Offering, including 1,774,208 shares, or $17.3 million, issued pursuant to the DRP.
On May 7, 2014, we filed a Registration Statement on Form S-3 with the SEC for the registration of $75.0 million in shares for sale pursuant to the DRP (the “DRP Offering”). On December 15, 2014, we announced a revised offering price for shares pursuant to the DRP Offering of $10.40 per share, effective December 27, 2014. The DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders. In connection with our DRP Offering, we had issued 4,766,084 shares of our common stock for gross proceeds of approximately $47.6 million through March 31, 2015. As of March 31, 2015, we redeemed 481,655 shares of common stock for approximately $4.7 million at a weighted average price per share of $9.85.
On November 21, 2014, we entered into a merger agreement with Signature Office REIT ("SOR") in connection with a merger. Under the terms of the merger agreement, each share of common stock of SOR issued and outstanding will be converted into the right to receive 2.04 shares of the Company's common stock. As of March 31, 2015, SOR had 20,473,024 shares of common stock outstanding. The merger is subject to customary closing conditions, including the receipt of approval of SOR's stockholders, thus, there is no guarantee that the merger will be consummated.
On February 3, 2015, the Company filed a Registration Statement on Form S-4 with the SEC, which, as amended, was declared effective on May 1, 2015. SOR filed a definitive proxy statement on May 1, 2015 and commenced soliciting stockholder proxies thereafter. The SOR special stockholder meeting to vote on the merger is currently scheduled to be held on June 9, 2015.

44

As of March 31, 2015, we owned a fee simple interest, except as discussed in footnote 6 below, in 56 properties, as shown in the table below, encompassing approximately 13.1 million rentable square feet (dollar amounts shown in thousands):
 
Property
 
Location
 
Tenant/Major Lessee
 
Acquisition
Date
 
Purchase Price
 
Square Feet
 
% Leased by Major Lessee (1)
 
% Leased
 
Property
Type
 
Year of Lease Expiration
(for Major Lessee)
 
2015 Annualized Net Rent (2)
Renfro
 
Clinton, SC
 
Renfro Corp
 
6/18/2009
 
$
21,700

 
566,500

 
100%
 
100%
 
Manufacturing/
Distribution
 
2021
 
$
2,078

Plainfield
 
Plainfield, IL
 
Chicago Bridge & Iron Company (Delaware)
 
6/18/2009
 
32,660

 
176,000

 
100%
 
100%
 
 Office/Laboratory
 
2022
 
2,587

Will Partners (3)
 
Monee, IL
 
Vacant
 
6/4/2010
 
26,305

 
700,200

 
57%
 
57%
 
Manufacturing/
Distribution
 
N/A
 
—

Emporia Partners
 
Emporia, KS
 
Hopkins Enterprises, Inc.
 
8/27/2010
 
8,360

 
320,800

 
100%
 
100%
 
Manufacturing/
Distribution
 
2020
 
899

ITT
 
Los Angeles, CA
 
ITT Educational Services, Inc.
 
9/23/2010
 
7,800

 
35,800

 
100%
 
100%
 
 Office
 
2016
 
762

Quad/Graphics
 
Loveland, CO
 
World Color (USA), LLC
 
12/30/2010
 
11,850

 
169,800

 
100%
 
100%
 
Printing Facility/
Office
 
2022
 
1,216

LTI
 
Carlsbad, CA
 
Life Technologies Corporation
 
5/13/2011
 
56,000

 
328,700

 
100%
 
100%
 
 Office/
Flex Facility
 
2022
 
4,410

AT&T
 
Redmond, WA
 
AT&T Services, Inc.
 
1/31/2012
 
40,000

 
155,800

 
100%
 
100%
 
 Office/
Data Center
 
2019
 
3,281

Westinghouse
 
Cranberry Township, PA
 
Westinghouse Electric Company, LLC
 
3/22/2012
 
36,200

 
118,000

 
100%
 
100%
 
 Engineering Facility
 
2025
 
2,916

TransDigm
 
Whippany, NJ
 
Whippany Actuation Systems, LLC
 
5/31/2012
 
13,000

 
114,300

 
100%
 
100%
 
 Assembly/
Manufacturing
 
2018
 
1,167

Travelers
 
Greenwood Village, CO
 
Travelers Indemnity
 
6/29/2012
 
16,100

 
131,000

 
100%
 
100%
 
 Office
 
2024
 
1,405

Zeller Plastik
 
Libertyville, IL
 
Zeller Plastik USA, Inc.
 
11/8/2012
 
15,600

 
193,700

 
100%
 
100%
 
 Manufacturing
 
2022
 
1,322

Northrop
 
Beavercreek (Dayton), OH
 
Northrop Grumman Systems Corp.
 
11/13/2012
 
17,000

 
99,200

 
100%
 
100%
 
 Office
 
2019
 
1,510

Health Net
 
Rancho Cordova, CA
 
Health Net of California, Inc.
 
12/18/2012
 
22,650

 
145,900

 
100%
 
100%
 
 Office
 
2022
 
2,214

Comcast
 
Greenwood Village, CO
 
Comcast Cable Holdings, LLC
 
1/11/2013
 
27,000

 
157,300

 
100%
 
100%
 
 Office
 
2021
 
2,356

Boeing
 
Renton, WA
 
The Boeing Company
 
2/15/2013
 
12,000

 
70,100

 
100%
 
100%
 
 Office
 
2017
 
1,020

Schlumberger
 
Houston, TX
 
Schlumberger Technology Corporation
 
5/1/2013
 
48,750

 
149,700

 
100%
 
100%
 
 Office
 
2024
 
3,091

UTC
 
Charlotte, NC
 
United Technologies Corporation ("UTC")
 
5/3/2013
 
39,188

 
198,900

 
100%
 
100%
 
 Office
 
2025
 
2,633


45

Property
 
Location
 
Tenant/Major Lessee
 
Acquisition
Date
 
Purchase Price
 
Square Feet
 
% Leased by Major Lessee (1)
 
% Leased
 
Property
Type
 
Year of Lease Expiration
(for Major Lessee)
 
2015 Annualized Net Rent (2)
Avnet
 
Chandler, AZ
 
Avnet, Inc.
 
5/29/2013
 
32,462

 
231,400

 
100%
 
100%
 
 Research & Development/Flex Facility
 
2018
 
2,758

Cigna
 
Phoenix, AZ
 
Connecticut General Life Insurance Company
 
6/20/2013
 
54,500

 
232,600

 
100%
 
100%
 
 Office
 
2023
 
3,726

Nokia
 
Arlington Heights, IL
 
Nokia Solutions & Networks
 
8/13/2013
 
29,540

 
214,200

 
100%
 
100%
 
 Office
 
2025
 
2,246

Verizon
 
Warren, NJ
 
Cellco Partnership d/b/a Verizon Wireless
 
10/3/2013
 
40,000

 
210,500

 
100%
 
100%
 
 Office
 
2020
 
3,465

Fox Head
 
Irvine, CA
 
Fox Head, Inc.
 
10/29/2013
 
27,250

 
81,600

 
100%
 
100%
 
 Office
 
2027
 
1,898

Coca-Cola Refreshments
 
Atlanta, GA
 
Coca-Cola Refreshments USA
 
11/5/2013
 
56,700

 
315,900

 
96%
 
100%
 
 Office
 
2018
 
4,891

Atlanta Wildwood
 
Atlanta, GA
 
Hyundai Capital USA/BlueLinx
 
11/5/2013
 
28,000

 
250,000

 
100%
 
100%/100%
 
 Office
 
2019
 
2,865

General Electric (4)
 
Atlanta, GA
 
General Electric Company
 
11/5/2013
 
61,000

 
265,100

 
100%
 
100%
 
 Office
 
2025
 
4,352

Community Insurance
 
Mason, OH
 
Community Insurance Company
 
11/5/2013
 
23,500

 
223,500

 
100%
 
100%
 
 Office
 
2019
 
2,419

Anthem
 
Mason, OH
 
Anthem Prescription Management
 
11/5/2013
 
9,500

 
78,200

 
100%
 
100%
 
 Office
 
2019
 
939

JPMorgan Chase
 
Westerville, OH
 
JPMorgan Chase
 
11/5/2013
 
44,500

 
388,700

 
100%
 
100%
 
 Office
 
2025
 
3,161

IBM
 
Dublin, OH
 
IBM
 
11/5/2013
 
37,300

 
322,700

 
88%
 
100%
 
 Office
 
2020
 
4,200

Aetna
 
Arlington, TX
 
Aetna Life Insurance Company
 
11/5/2013
 
16,000

 
139,400

 
87%
 
98%
 
 Office
 
2020
 
1,452

CHRISTUS Health
 
Irving, TX
 
CHRISTUS Health
 
11/5/2013
 
46,350

 
253,300

 
98%
 
100%
 
 Office
 
2024
 
3,386

Roush Industries
 
Allen Park, MI
 
Roush Industries
 
11/5/2013
 
12,250

 
169,200

 
100%
 
100%
 
 Office
 
2020
 
1,128

Wells Fargo
 
Milwaukee, WI
 
Wells Fargo Bank, N.A.
 
11/5/2013
 
26,000

 
229,600

 
100%
 
100%
 
 Office
 
2019
 
2,204

One Century Place
 
Nashville, TN
 
Willis North America
 
11/5/2013
 
70,000

 
538,800

 
33%
 
93%
 
 Office
 
2026
 
6,191

Shire Pharmaceuticals
 
Wayne, PA
 
Shire Pharmaceuticals, Inc.
 
11/5/2013
 
21,500

 
114,100

 
100%
 
100%
 
 Office
 
2017
 
2,323

Comcast (Northpointe Corporate Center I)
 
Lynnwood, WA
 
Comcast Corporation
 
11/5/2013
 
19,825

 
87,400

 
100%
 
100%
 
 Office
 
2017
 
1,805

Northpointe Corporate Center II
 
Lynnwood, WA
 
Intermec Technologies Corporation
 
11/5/2013
 
7,175

 
69,000

 
100%
 
100%
 
 Office
 
2024
 
746

United HealthCare
 
St. Louis, MO
 
United HealthCare Services
 
11/5/2013
 
28,000

 
188,500

 
100%
 
100%
 
 Office
 
2018
 
2,824

Farmers (4)
 
Kansas City, KS
 
Farmers Insurance Exchange
 
12/27/2013
 
19,100

 
102,000

 
100%
 
100%
 
 Office
 
2024
 
1,454

Caterpillar
 
Joliet, IL
 
Caterpillar, Inc.
 
1/7/2014
 
57,000

 
1,380,070

 
100%
 
100%
 
 Industrial
 
2018
 
6,055


46

Property
 
Location
 
Tenant/Major Lessee
 
Acquisition
Date
 
Purchase Price
 
Square Feet
 
% Leased by Major Lessee (1)
 
% Leased
 
Property
Type
 
Year of Lease Expiration
(for Major Lessee)
 
2015 Annualized Net Rent (2)
Digital Globe (5)
 
Westminster, CO
 
Digital Globe, Inc.
 
1/14/2014
 
92,000

 
430,000

 
100%
 
100%
 
 Office
 
2030
 
6,343

Waste Management (6)
 
Phoenix, AZ
 
Waste Management of AZ
 
1/16/2014
 
22,825

 
131,850

 
100%
 
100%
 
 Office
 
2023
 
1,962

BT Infonet
 
El Segundo, CA
 
Infonet Services Corporation
 
2/27/2014
 
52,669

 
157,000

 
100%
 
100%
 
 Office
 
2021
 
4,246

Wyndham Worldwide
 
Parsippany, NJ
 
Wyndham Worldwide Operations, Inc.
 
4/23/2014
 
96,600

 
249,400

 
100%
 
100%
 
 Office
 
2029
 
6,389

Ace Hardware
 
Oak Brook, IL
 
Ace Hardware Corporate HQ
 
4/24/2014
 
37,000

 
206,000

 
100%
 
100%
 
 Office
 
2024
 
2,833

Equifax I
 
St. Louis, MO
 
Equifax, Inc.
 
5/20/2014
 
14,200

 
94,000

 
100%
 
100%
 
 Office
 
2023
 
1,105

American Express
 
Phoenix, AZ
 
American Express Travel Related Services Co.
 
5/22/2014
 
51,000

 
337,400

 
100%
 
100%
 
 Office
 
2019
 
3,865

SoftBank
 
San Carlos, CA
 
SoftBank Regional HQ
 
5/28/2014
 
90,100

 
207,900

 
100%
 
100%
 
 Office
 
2020
 
6,006

Vanguard
 
Charlotte, NC
 
The Vanguard Group, Inc.
 
6/19/2014
 
33,200

 
224,600

 
100%
 
100%
 
 Office
 
2024
 
2,447

Parallon
 
Largo, FL
 
Parallon Business Performance Group
 
6/25/2014
 
17,235

 
83,200

 
100%
 
100%
 
 Office
 
2025
 
1,206

TW Telecom
 
Lone Tree, CO
 
tw telecom holdings inc.
 
8/1/2014
 
43,000

 
166,700

 
100%
 
100%
 
Office
 
2024
 
2,941

Equifax II
 
Earth City, MO
 
Equifax, Inc.
 
10/1/2014
 
13,916

 
99,300

 
100%
 
100%
 
Office
 
2024
 
1,073

Mason I
 
Mason, OH
 
Community Insurance Company
 
11/7/2014
 
22,500

 
213,000

 
100%
 
100%
 
Office
 
2026
 
1,573

Wells Fargo
 
Charlotte, NC
 
Wells Fargo Bank, N.A.
 
12/15/2014
 
41,486

 
155,600

 
100%
 
100%
 
Office
 
2025
 
2,686

GE Aviation
 
West Chester, OH
 
General Electric Company
 
2/19/2015
 
66,000

 
409,800

 
100%
 
100%
 
Office
 
2020
 
4,855

Total real estate portfolio
 
 
 
 
 
 
 
$
1,913,346

 
13,083,220

 

 
 
 
 
 
 
 
$
150,885

Investment in unconsolidated joint venture (7)
 
Ashburn, VA
 
A social media company and a financial services company
 
9/9/2014
 
148,400

 
132,000

 
100%
 
100%
 
Data Center
 
2024
 
13,934

Total
 
 
 
 
 
 
 
$
2,061,746

 
13,215,220

 
 
 
 
 
 
 
 
 
$
164,819

(1)    The portfolio is approximately 94% occupied and leased based on total square feet.
(2)
Net rent is based on (1) the contractual base rental payments assuming the lease requires the tenant to reimburse us for certain operating expenses; or (2) contractual rent payments less certain operating expenses that are our responsibility for the 12-month period subsequent to March 31, 2015 and includes assumptions that may not be indicative of the actual future performance of a property, including the assumption that the tenant will perform its obligations under its lease agreement during the next 12 months.
(3)
In June 2013, World Kitchen, LLC vacated the Will Partners property and on January 24, 2014, we executed a termination agreement with World Kitchen, LLC as discussed in Note 3, Real Estate to the consolidated financial statements. Though the lease was non-cancelable and did not expire until February 29, 2020, we felt it was necessary to assume control of the property to facilitate re-leasing efforts.
(4)
The DigitalGlobe property is leased entirely to the previous owner, Avaya, Inc., through June 2015, immediately after which a lease with DigitalGlobe, Inc. will commence.
(5)
In connection with the acquisition of the Farmers and General Electric properties, we were assigned and assumed a leasehold estate and the rights to a payment in lieu of taxes agreement (the “PILOT Program”) with the municipalities which own the underlying leased fee estate and subsequently leased the ground to us. The ground lease arrangements were put in place to provide real estate tax abatements, which is facilitated through the issuance of a municipal bond. Payments on the bonds, which are owned by us as lessee, are funded solely from the payments on the ground leases. The bonds can only be transferred to any successor to us, or any affiliate, as a lessee under the lease, including but not limited to any purchaser of our leasehold interest. Upon termination of the lease, we have the obligation to

47

purchase the land for a nominal amount. The bonds, ground lease obligations and purchase options were measured at fair value at acquisition in accordance with ASC 805 and, due to their inseparability, are presented as a component of land on the consolidated balance sheets.
(6)
The land associated with the property is subject to a ground lease with the State of Arizona expiring on December 31, 2095.
(7)
We acquired an 80% ownership interest in a joint venture with Digital Realty Trust for an initial investment of $68.4 million, for which the interest in the joint venture is recorded using the equity method of accounting. The table above reflects the impact of our 80% ownership interest in the acquisition value, and net rental revenue, on our portfolio. See Note 4, Investments, of the consolidated financial statements.


48

Acquisition Indebtedness
For a discussion of our acquisition indebtedness, see Note 3, Real Estate, and Note 5, Debt, to the consolidated financial statements.
Significant Accounting Policies and Estimates
We have established accounting policies which conform to generally accepted accounting principles (“GAAP”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”). The preparation of our consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different estimates would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may use different estimates and assumptions that may impact the comparability of our financial condition and results of operations to those companies.
We believe the accounting policies listed below are the most critical in the preparation of our consolidated financial statements. These policies are described in greater detail in Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to the consolidated financial statements:
•
Real Estate - Valuation and purchase price allocation, depreciation and amortization, assets held for sale (Discontinued Operations and Disposals of Components of an Entity), impairment of real estate and related intangible assets;
•
Revenue Recognition;
•
Investments - Consolidation;
•
Noncontrolling Interests in Consolidated Subsidiaries and Noncontrolling Interests Subject to Redemption;
•
Fair Value Measurements;
•
Income Taxes - Deferred tax assets and related valuation allowance, REIT qualification; and
•
Organizational and Offering Costs - Related party transactions.
Recently Issued Accounting Pronouncements
See Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to the consolidated financial statements.
Results of Operations
We are not aware of any material trends or uncertainties, other than national economic conditions affecting real estate in general, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition, management and operations of properties other than those listed in Part I, Item 1A. Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2014.
Same Store Analysis
Comparison of the Three Months Ended March 31, 2015 and 2014
For the quarter ended March 31, 2015, our "Same Store" portfolio consisted of 40 properties, encompassing approximately 8.5 million square feet and an acquisition value of $1.2 billion. Our "Same Store" portfolio includes properties which were held for a full period for all periods presented. The following table provides a comparative summary of the results of operations for the 40 properties for the three months ended March 31, 2015 and 2014 (dollars in thousands):

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Three Months Ended March 31,
 
Increase/(Decrease)
 
Percentage
Change
 
2015
 
2014
 
Rental income
$
29,095

 
$
28,837

 
$
258

 
1
 %
Property expense recoveries
7,921

 
7,939

 
(18
)
 
—
 %
Asset management fees to affiliates
2,172

 
2,176

 
(4
)
 
—
 %
Property management fees to affiliates
1,071

 
1,064

 
7

 
1
 %
Property operating expense
5,423

 
6,005

 
(582
)
 
(10
)%
Property tax expense
4,820

 
4,606

 
214

 
5
 %
Rental Income
The increase in rental income is due to (1) an increase of $0.2 million related to a lease commencement at the One Century Place property subsequent to March 31, 2014; and (2) an increase of $0.3 million related to a lease commencement at the Northpointe Corporate Center II property in the current period; less (3) $0.2 million in base rent not earned in the current period as a result of the World Kitchen, LLC lease termination, which was effective on January 24, 2014. For comparability purposes, the rental income for the three months ended March 31, 2014 excludes $7.125 million of termination income and write-offs of unamortized in-place lease valuation ($0.9 million) and deferred rent asset ($0.3 million) related to the World Kitchen, LLC lease termination, which are included in rental income on the consolidated statements of operations.
Property Operating Expense and Property Tax Expense
The decrease in property operating expense is due to decreases in property payroll, insurance, utilities, and property services primarily for the Will Partners, Schlumberger, Nokia, and Verizon properties, as well as seven of the Investment Grade Portfolio properties. The increase in property tax expense is due to property reassessments for the current taxable year for the Will Partners, Schlumberger, and Fox Head properties, as well as 10 of the Investment Grade Portfolio properties.
Portfolio Analysis
As of March 31, 2014, we owned 46 properties, and, as shown in the table above, as of March 31, 2015 we owned 56 properties. As of March 31, 2015, we have completed the offering stage of our life cycle, and continue to deploy capital raised in our Public Offerings to acquire assets that adhere to our investment criteria. Therefore, our results of operations for our entire portfolio for the three months ended March 31, 2015 are not directly comparable to those for the same period in the prior year as the variances are substantially the result of portfolio growth, specifically in rental income, operating expenses, acquisition fees and reimbursable expenses and depreciation and amortization expenses. See Same Store analysis above for properties held for the same period of time. We expect that rental income, operating expenses, depreciation, and amortization expenses will each increase in future periods as we acquire additional properties.
Comparison of the Three Months Ended March 31, 2015 and 2014
The following table provides summary information about our results of operations for the three months ended March 31, 2015 and 2014 (dollars in thousands):
 
Three Months Ended March 31,
 
Increase/(Decrease)
 
Percentage
Change
 
2015
 
2014
 
Rental income
$
44,715

 
$
39,469

 
$
5,246

 
13
 %
Property expense recoveries
10,498

 
8,523

 
1,975

 
23
 %
Asset management fees to affiliates
3,787

 
2,522

 
1,265

 
50
 %
Property management fees to affiliates
1,474

 
1,212

 
262

 
22
 %
Property operating expense
6,899

 
6,863

 
36

 
1
 %
Property tax expense
6,878

 
5,224

 
1,654

 
32
 %
Acquisition fees and expenses to non-affiliates
402

 
715

 
(313
)
 
(44
)%
Acquisition fees and expenses to affiliates
1,980

 
6,735

 
(4,755
)
 
(71
)%
General and administrative expenses
1,126

 
1,215

 
(89
)
 
(7
)%
Depreciation and amortization
19,465

 
15,207

 
4,258

 
28
 %
Interest expense
5,428

 
5,572

 
(144
)
 
3
 %


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Rental Income
Rental income for the three months ended March 31, 2015 is comprised of base rent of $40.9 million, adjustments to straight-line contractual rent of $3.2 million and in-place lease valuation amortization, net, of $0.6 million. Rental income for the three months ended March 31, 2015 increased by $5.2 million compared to the same period a year ago primarily as a result of (1) approximately $0.2 million of additional rental income due to a lease commencement at the One Century Place property subsequent to March 31, 2014; (2) approximately $0.3 million of additional rental income due to a lease commencement at the Northpointe Corporate Center II property in the current period; (3) $1.2 million of additional rental income related to the real estate acquired during the three months ended March 31, 2014, which includes a full quarter of activity for the three months ended March 31, 2015; (4) $9.3 million of additional rental income related to the real estate acquired subsequent to March 31, 2014; (5) $0.6 million of additional rental income related to the GE Aviation property, which was acquired in the current period; and (6) approximately $1.5 million in in-place lease valuation amortization; less (7) approximately $7.125 million in termination income related to the World Kitchen, LLC lease termination in the prior period; and (8) $0.8 million of decreased rental income due to the sale of the Eagle Rock and College Park properties, which were sold on December 17, 2014 and February 20, 2015, respectively.
Property Expense Recoveries
Also included as a component of revenue is the recovery of maintenance expenses and certain other recoverable operating and capital expenses, including property taxes and insurance (collectively "Recoverable Expenses"), which increased by $2.0 million compared to the same period in the prior year primarily as a result of (1) $0.4 million in property tax recoveries, as a result of increases in property tax expense for properties acquired during the year ended December 31, 2014 of $0.5 million offset by a decrease of $0.1 million for properties acquired during the year ended December 31, 2013; (2) $0.8 million in property tax recoveries recorded with each property tax expense accrual, which are primarily related to properties acquired during the year ended December 31, 2014; and (3) $0.8 million in recoverable property expense related to (A) $0.7 million for properties acquired during the year ended December 31, 2014; (B) $0.2 million for the property acquired during the current period; offset by (C) $0.1 million for the properties acquired during the year ended December 31, 2013.
Management Fees (Asset and Property)
Asset Management and Property Management fees for the three months ended March 31, 2015 and 2014 totaled $5.3 million and $3.7 million, respectively. The total increase of $1.6 million compared to the same period a year ago is a result of (1) $1.2 million in asset management fees and $0.3 million in property management fees related to the acquisitions made during the year ended December 31, 2014 and the investment in an unconsolidated joint venture discussed in Note 4, Investments; and (2) $0.1 million in asset management fees related to the property acquired during the three months ended March 31, 2015.
Property Operating Expense and Property Tax Expense
Property expenses for the three months ended March 31, 2015 and 2014 totaled $13.8 million and $12.1 million, respectively, consisting of property operating expenses and property taxes. Property operating expenses include insurance, repairs and maintenance, security, janitorial, landscaping and other administrative expenses incurred to operate our properties. The total increase of $1.7 million compared to the same period a year ago is primarily a result of $1.6 million in property taxes, which mainly related to real estate acquired during the year ended December 31, 2014.
Acquisition Fees and Expenses
Real estate acquisition fees and expenses to non-affiliates, which totaled $0.4 million for the three months ended March 31, 2015, decreased by $0.3 million compared to the three months ended March 31, 2014 due to decreased acquisition activity in the current period. Real estate acquisition fees and expenses to affiliates of $2.0 million represent the acquisition fees and expense reimbursement earned by our Advisor for the one property acquired in the current period with an acquisition value of $66.0 million. In comparison, real estate acquisition fees and expenses to affiliates in the prior year totaled $6.7 million, which was based on a total acquisition value of $224.5 million.
Depreciation and Amortization Expense
Depreciation and amortization expense for the three months ended March 31, 2015 consisted of depreciation of building and building improvements of our properties of $8.0 million and amortization of the contributed and acquired values allocated to tenant origination and absorption costs of $11.4 million. The increase of $4.3 million as compared to the three months ended March 31, 2014 is a result of additional depreciation and amortization of (1) $0.4 million related to the acquisition made during the three months ended March 31, 2015; and (2) $4.9 million related to the acquisitions made during the year ended December 31, 2014, which includes three full months of activity compared to partial months of activity during the three months ended March 31, 2014; less (3) $1.1 million in absorption costs consisting of (A) $0.5 million related to the sale of the Eagle

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Rock and College Park properties, which were sold on December 17, 2014 and February 20, 2015, respectively; and (B) $0.6 million related to two lease expirations at the One Century Place property.
Interest Expense
Interest expense for the three months ended March 31, 2015 decreased by $0.1 million compared to the same period in 2014 due to the following: (1) $1.3 million of interest expense related to the Unsecured Credit Facility, which was entered into on May 8, 2014; and (2) $0.7 million in mortgage interest expense related to the AIG Loan, Ace Hardware Mortgage Loan, which was assumed upon acquisition on April 24, 2014, and the TW Telecom Loan, which was entered into upon acquisition on August 1, 2014; less (3) $1.6 million in interest expense related to the KeyBank Credit Facility and KeyBank Term Loan, both of which were terminated on May 8, 2014; and (4) $0.5 million of capitalized interest related to the Restoration Hardware real estate development, which is expected to be completed in the first half of 2015.
Funds from Operations and Modified Funds from Operations
Our management believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient. Additionally, publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start-up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases.
In order to provide a more complete understanding of the operating performance of a REIT, the National Association of Real Estate Investment Trusts (“NAREIT”) promulgated a measure known as funds from operations (“FFO”). FFO is defined as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, adding back asset impairment write-downs, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships, joint ventures and preferred distributions. Because FFO calculations exclude such items as depreciation and amortization of real estate assets and gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. It should be noted, however, that other REITs may not define FFO in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently than we do, making comparisons less meaningful.
The Investment Program Association (“IPA”) issued Practice Guideline 2010-01 (the “IPA MFFO Guideline”) on November 2, 2010, which extended financial measures to include modified funds from operations (“MFFO”). In computing MFFO, FFO is adjusted for certain non-operating cash items such as acquisition fees and expenses and certain non-cash items such as straight-line rent, amortization of in-place lease valuations, amortization of discounts and premiums on debt investments, nonrecurring impairments of real estate-related investments, mark-to-market adjustments included in net income (loss), and nonrecurring gains or losses included in net income (loss) from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Management is responsible for managing interest rate, hedge and foreign exchange risk. To achieve our objectives, we may borrow at fixed rates or variable rates. In order to mitigate our interest rate risk on certain financial instruments, if any, we may enter into interest rate cap agreements or other hedge instruments and in order to mitigate our risk to foreign currency exposure, if any, we may enter into foreign currency hedges. We view fair value adjustments of derivatives, impairment charges and gains and losses from dispositions of assets as non-recurring items or items which are unrealized and may not ultimately be realized, and which are not reflective of on-going operations and are therefore typically adjusted for when assessing operating performance. Additionally, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations, assessments regarding general market conditions, and the specific performance of properties owned, which can change over time. No less frequently than annually, we evaluate events and changes in circumstances that could indicate that the carrying amounts of real estate and related intangible assets may not be recoverable. When indicators of potential impairment are present, we assess whether the carrying value of the assets will be recovered through the future undiscounted operating cash flows (including net rental and lease revenues, net proceeds on the sale of the

52

property, and any other ancillary cash flows at a property or group level under GAAP) expected from the use of the assets and the eventual disposition. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of MFFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges through operational net revenues or cash flows prior to any liquidity event.
We adopted the IPA MFFO Guideline as management believes that MFFO is a beneficial indicator of our on-going portfolio performance and ability to sustain our current distribution level. More specifically, MFFO isolates the financial results of the REIT’s operations. MFFO, however, is not considered an appropriate measure of historical earnings as it excludes certain significant costs that are otherwise included in reported earnings. Further, since the measure is based on historical financial information, MFFO for the period presented may not be indicative of future results or our future ability to pay our dividends. By providing FFO and MFFO, we present information that assists investors in aligning their analysis with management’s analysis of long-term operating activities. MFFO also allows for a comparison of the performance of our portfolio with other REITs that are not currently engaging in acquisitions, as well as a comparison of our performance with that of other non-traded REITs, as MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes. As explained below, management’s evaluation of our operating performance excludes items considered in the calculation of MFFO based on the following economic considerations:
•
Straight-line rent. Most of our leases provide for periodic minimum rent payment increases throughout the term of the lease. In accordance with GAAP, these periodic minimum rent payment increases during the term of a lease are recorded to rental revenue on a straight-line basis in order to reconcile the difference between accrual and cash basis accounting. As straight-line rent is a GAAP non-cash adjustment and is included in historical earnings, FFO is adjusted for the effect of straight-line rent to arrive at MFFO as a means of determining operating results of our portfolio.
•
Amortization of in-place lease valuation. Acquired in-place leases are valued as above-market or below-market as of the date of acquisition based on the present value of the difference between (a) the contractual amounts to be paid pursuant to the in-place leases and (b) management's estimate of fair market lease rates for the corresponding in-place leases over a period equal to the remaining non-cancelable term of the lease for above-market leases. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities and amortized as an adjustment to rental income over the remaining terms of the respective leases. As this item is a non-cash adjustment and is included in historical earnings, FFO is adjusted for the effect of the amortization of in-place lease valuation to arrive at MFFO as a means of determining operating results of our portfolio.
•
Acquisition-related costs. We were organized primarily with the purpose of acquiring or investing in income-producing real property in order to generate operational income and cash flow that will allow us to provide regular cash distributions to our stockholders. In the process, we incur non-reimbursable affiliated and non-affiliated acquisition-related costs, which in accordance with GAAP, are expensed as incurred and are included in the determination of income (loss) from operations and net income (loss). These costs have been and will continue to be funded with cash proceeds from our Primary Public Offerings or included as a component of the amount borrowed to acquire such real estate. If we acquire a property after all offering proceeds from our Public Offerings have been invested, there will not be any offering proceeds to pay the corresponding acquisition-related costs. Accordingly, unless our Advisor determines to waive the payment of any then-outstanding acquisition-related costs otherwise payable to our Advisor, such costs will be paid from additional debt, operational earnings or cash flow, net proceeds from the sale of properties, or ancillary cash flows. In evaluating the performance of our portfolio over time, management employs business models and analyses that differentiate the costs to acquire investments from the investments’ revenues and expenses. Acquisition-related costs may negatively affect our operating results, cash flows from operating activities and cash available to fund distributions during periods in which properties are acquired, as the proceeds to fund these costs would otherwise be invested in other real estate related assets. By excluding acquisition-related costs, MFFO may not provide an accurate indicator of our operating performance during periods in which acquisitions are made. However, it can provide an indication of our on-going ability to generate cash flow from operations and continue as a going concern after we cease to acquire properties on a frequent and regular basis, which can be compared to the MFFO of other non-listed REITs that have completed their acquisition activity and have similar operating characteristics to ours. Management believes that excluding these costs from MFFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management.

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•
Financed termination fee. We believe that a fee received from a tenant for terminating a lease is appropriately included as a component of rental revenue and therefore included in MFFO. If, however, the termination fee is to be paid over time, we believe the recognition of such termination fee into income should not be included in MFFO. Alternatively, we believe that the periodic amount paid by the tenant in subsequent periods to satisfy the termination fee obligation should be included in MFFO.
For all of these reasons, we believe the non-GAAP measures of FFO and MFFO, in addition to income (loss) from operations, net income (loss) and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful to investors in evaluating the performance of our real estate portfolio. However, a material limitation associated with FFO and MFFO is that they are not indicative of our cash available to fund distributions since other uses of cash, such as capital expenditures at our properties and principal payments of debt, are not deducted when calculating FFO and MFFO. Additionally, MFFO has limitations as a performance measure in an offering such as ours where the price of a share of common stock is a stated value. The use of MFFO as a measure of long-term operating performance on value is also limited if we do not continue to operate under our current business plan as noted above. MFFO is useful in assisting management and investors in assessing our on-going ability to generate cash flow from operations and continue as a going concern in future operating periods, and in particular, after the offering and acquisition stages are complete and NAV is disclosed. However, MFFO is not a useful measure in evaluating NAV because impairments are taken into account in determining NAV but not in determining MFFO. Therefore, FFO and MFFO should not be viewed as more prominent a measure of performance than income (loss) from operations, net income (loss) or to cash flows from operating activities and each should be reviewed in connection with GAAP measurements.
Neither the SEC, NAREIT, nor any other applicable regulatory body has opined on the acceptability of the adjustments contemplated to adjust FFO in order to calculate MFFO and its use as a non-GAAP performance measure. In the future, the SEC or NAREIT may decide to standardize the allowable exclusions across the REIT industry, and we may have to adjust the calculation and characterization of this non-GAAP measure.




















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Our calculation of FFO and MFFO is presented in the following table for the three months ended March 31, 2015 and 2014 (in thousands):
 
Three Months Ended March 31,
 
2015
 
2014
Net income
$
11,101

 
$
2,740

Adjustments:
 
 
 
Depreciation of building and improvements
8,017

 
5,651

Amortization of leasing costs and intangibles
11,441

 
9,550

Equity interest of depreciation of building and improvements - unconsolidated entities
613

 
14

Equity interest of amortization of intangible assets - unconsolidated entities
1,200

 
16

Gain from sale of depreciable operating property
(3,613
)
 
—

FFO
$
28,759

 
$
17,971

Distributions to redeemable preferred unit holders
(4,687
)
 
(4,687
)
Distributions to noncontrolling interests
(849
)
 
(825
)
FFO, adjusted for redeemable preferred and noncontrolling interest distributions
$
23,223

 
$
12,459

Reconciliation of FFO to MFFO:
 
 
 
Adjusted FFO
$
23,223

 
$
12,459

Adjustments:
 
 
 
Acquisition fees and expenses to non-affiliates
402

 
715

Acquisition fees and expenses to affiliates
1,980

 
6,735

Revenues in excess of cash received (straight-line rents)
(3,185
)
 
(2,186
)
Amortization of above/(below) market rent
(551
)
 
935

Amortization of ground leasehold interests (below market)
7

 
6

Revenues in excess of cash received (financed termination fee)
—

 
(7,125
)
Financed termination fee payments received
260

 
291

Equity interest of revenues in excess of cash received (straight-line rents) - unconsolidated entities
(346
)
 
(6
)
Equity interest of amortization of above/(below) market rent - unconsolidated entities
750

 
5

MFFO to common stockholders
$
22,540

 
$
11,829

Liquidity and Capital Resources
Long-Term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds will be for property acquisitions, either directly or through entity interests, for the payment of operating expenses and distributions, and for the payment of debt service on our outstanding indebtedness, including repayment of the Unsecured Term Loan and Unsecured Revolver, both of which are a component of the Unsecured Credit Facility and property secured mortgage loans discussed below, and other investments, including preferred equity distributions and redemptions pursuant to the purchase agreement with the Preferred Equity Investor as discussed in Note 6, Equity. Generally, cash needs for items, other than property acquisitions, will be met from operations. Proceeds raised in our Follow-On Offering have not been fully deployed towards the acquisition of additional properties which could result in a delay in the benefits to our stockholders, if any, of returns generated from our investments. Our Advisor will evaluate potential additional property acquisitions and engage in negotiations with sellers on our behalf. After a purchase contract is executed that contains specific terms, the property will not be purchased until the successful completion of due diligence, which includes review of the title insurance commitment, an appraisal and an environmental analysis. In some instances, the proposed acquisition will require the negotiation of final binding agreements, which may include financing documents. During this period, we may decide to repay debt as allowed under the loan agreements or temporarily invest any proceeds from our Follow-On Offering not deployed into certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions.


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Unsecured Credit Facility
On May 8, 2014, we, through our Operating Partnership, entered into a credit agreement (the “Unsecured Credit Agreement”) with KeyBank as administrative agent, Bank of America as syndication agent and a syndicate of lenders. Pursuant to the Unsecured Credit Agreement, we were provided with a $750.0 million senior unsecured credit facility (the "Unsecured Credit Facility"), consisting of a $450.0 million senior unsecured revolver (the "Unsecured Revolver") and a $300.0 million senior unsecured term loan (the "Unsecured Term Loan"). The Unsecured Credit Facility may be increased by up to $500.0 million for a maximum of $1.25 billion by increasing the Unsecured Revolver, the Unsecured Term Loan or a combination of both. The Unsecured Revolver has an initial term of four years, maturing on May 8, 2018 and may be extended for a one-year period if certain conditions are met. The Unsecured Term Loan has a term of five years, maturing on May 8, 2019. Availability under the Unsecured Credit Agreement is limited to the lesser of a (i) specified leverage ratio applied to a portfolio real estate pool value computed as adjusted net operating income divided by specified capitalization rate; or (ii) debt service coverage ratio ("DSCR") calculation, all as set forth in the Unsecured Credit Agreement.
The Unsecured Credit Facility has an interest rate based on the leverage ratio reported with quarterly compliance certificate, as discussed below, and calculated based on the LIBO Rate plus the applicable LIBO Rate margin, as provided in the Unsecured Credit Agreement, or Base Rate plus the applicable base rate margin, as provided in the Unsecured Credit Agreement. The Base Rate is calculated as the greater of (i) the KeyBank Prime rate or (ii) the Federal Funds rate plus 0.50%. Payments under the Unsecured Credit Facility are interest only and are due on the first day of each quarter.
AIG Loan
On January 24, 2014, we, through five SPEs wholly-owned by our Operating Partnership, entered into various loan agreements (the “AIG Loan Documents”) with National Union Fire Insurance Company and The Variable Annuity Life Insurance Company of Pittsburgh, Pa. (collectively, the “Lenders”), pursuant to which the Lenders provided such SPEs with a loan in the aggregate amount of $110.64 million (the “AIG Loan”). The funds were utilized to refinance five of the properties previously serving as security for the KeyBank Credit Facility. The AIG Loan is secured by cross-collateralized and cross-defaulted first mortgage liens or first lien deeds of trust and second mortgage liens or second lien deeds of trust on the Verizon, Avnet, Northrop, Schlumberger, and UTC properties. The AIG Loan has a term of 15 years, maturing on February 1, 2029. The AIG Loan bears interest at a fixed rate of 4.96% and requires monthly payments of interest only for the first three years and fixed monthly payments based on a 360-month amortization period of principal and interest thereafter.
Midland Mortgage Loan
On February 28, 2013, certain property-owning SPEs wholly-owned by our Operating Partnership, entered into a fixed-rate mortgage loan agreement with Midland National Life Insurance Company (the “Midland Mortgage Loan”), whereby certain properties, which previously served as security for the KeyBank Credit Facility, were refinanced in the amount of $105.6 million and now serve as collateral for the Midland Mortgage Loan. The Midland Mortgage Loan has a fixed interest rate of 3.94%, a term of 10 years and requires monthly interest-only payments for the first four years of the term, followed by principal and interest payments based on a 30-year amortization schedule with all remaining principal and unpaid interest due at maturity. The Midland Mortgage Loan is secured by a first lien on and individual security agreements with the Operating Partnership’s underlying interest in the SPEs owning certain properties, along with individual fixture filings, and assignments of leases, rents, income and profits related to each such property.
Preferred Equity
On November 5, 2013, in connection with the acquisition of the Investment Grade Portfolio, our Operating Partnership entered into a purchase agreement with an affiliate (the “Preferred Equity Investor”) of Starwood Property Trust (“Starwood”), pursuant to which Starwood provided a $250.0 million equity investment in our Operating Partnership in exchange for 24,319,066 Series A Cumulative Exchangeable Preferred Units of limited partnership interest (the “Preferred Units”) of our Operating Partnership. The Preferred Equity Investor is entitled to monthly distributions calculated as follows:
•
From November 5, 2013 through October 31, 2015, a rate of LIBO plus 7.25% per annum of the Liquidation Preference (defined below) per Preferred Unit;
•
From November 1, 2015 through October 31, 2016, a rate of LIBO plus 8.25% per annum of the Liquidation Preference per Preferred Unit;
•
From November 1, 2016 through October 31, 2017, a rate of LIBO plus 9.25% per annum of the Liquidation Preference per Preferred Unit;
•
From November 1, 2017 through October 31, 2018, a rate of LIBO plus 10.25% per annum of the Liquidation Preference per Preferred Unit.
At all times, LIBOR will be subject to a minimum floor of 0.25%.

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The Preferred Units may be redeemed by our Operating Partnership, in whole or in part, at any time. The redemption price for the Preferred Units will be equal to the sum of (i) $10.28 per Preferred Unit, plus all accumulated and unpaid distributions (the “Liquidation Preference”); (ii) 1.81% of the Liquidation Preference; (iii) all accumulated and unpaid distributions through the date of redemption, plus interest thereon. No redemptions had been made as of March 31, 2015. Our Operating Partnership may, however, redeem up to 75% of the Preferred Units after the units have been outstanding for 18 months and the remaining 25% of the outstanding Preferred Units on the 24th month.
Other Potential Future Sources of Capital
Other potential future sources of capital include proceeds from potential private or public offerings of our stock or limited partnership units of our Operating Partnership, proceeds from secured or unsecured financings from banks or other lenders, including debt assumed in a real estate acquisition transaction, proceeds from the sale of properties and undistributed funds from operations. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures. To the extent we are not able to secure additional financing in the form of a credit facility or other third party source of liquidity, we will be heavily dependent upon our current financing, our DRP Offering, income from operations, and, to a lesser extent, the remaining proceeds from our Follow-On Offering.
Short-Term Liquidity and Capital Resources
We expect to meet our short-term operating liquidity requirements with remaining proceeds raised in our Follow-On Offering and DRP Offering, and operating cash flows generated from our properties and other properties we acquire in the future. All advances from our Advisor will be repaid, without interest, as funds are available after meeting our current liquidity requirements, subject to the limitations on reimbursement.
Our cash and cash equivalent balances decreased by approximately $9.4 million during the three months ended March 31, 2015 and were used in or provided by the following:
Operating Activities. Cash flows provided by operating activities are primarily dependent on the occupancy level, the rental rates of our leases, the collectability of rent and recovery of operating expenses from our tenants, and the timing of acquisitions. Net cash provided by operating activities for the three months ended March 31, 2015 increased to $18.5 million, compared to $1.8 million for the three months ended March 31, 2014. Net cash provided by operating activities before changes in operating assets and liabilities for the three months ended March 31, 2015 increased by $13.3 million to $24.1 million, compared to $10.8 million for the three months ended March 31, 2014. The increase is primarily related to the acquisition of 16 properties from January 1, 2014 through March 31, 2015, partially offset by the sale of 2 non-strategic properties over the same period.
Changes in operating assets and liabilities increased by approximately $3.3 million from cash used of $8.9 million for the three months ended March 31, 2014 compared to cash used of $5.6 million for the three months ended March 31, 2015. The $3.3 million increase in changes in operating assets and liabilities is primarily related to the following:
•
a $7.7 million decrease in the change in other assets mainly due to (1) a $10.3 million decrease related to prior year equity sales, of which there were none in the current period; and (2) a decrease in deferred leasing costs related to a $1.0 million write-off as a result of the College Park property sale in the current period; partially offset by (3) an increase of $0.8 million related to a tenant improvement reimbursement for the IBM property, which was collected from the reserve account on April 10, 2014; (4) an increase of $1.9 million related to a tenant improvement reimbursement for the Atlanta Wildwood property, which was received from the tenant in the prior year; and (5) a $0.9 million increase in tenant receivables due to increased expense recoveries and a decrease in prepaid rent;
•
a $1.1 million increase related to rent collections received in a designated cash collateral account controlled by the lender, pursuant to the loan agreement, as well as the GE Aviation rent, which is to be held in a separate lockbox until the sale of the Will Partners property, to be treated as a tax-deferred exchange of real estate assets as permitted by Section 1031 of the Internal Revenue Code, is consummated;
•
a $1.1 million increase in the change in rent abatement and property tax reserves due to a decrease in rent earned during the period, as a result of fewer tenants with abatements compared to the prior year, and additions made in the current period for the TW Telecom property;
•
a $0.4 million decrease in the change in reserves for tenant improvements due to disbursements made in the current period;
•
a $3.3 million decrease in the change in accounts payable as a result of (a) a $1.3 million decrease in prepaid rent received in the current period; (b) an increase in property tax payments during the current period, which resulted in a greater decrease in the change in accrued property taxes; and (c) a $0.2 million decrease in the change in

57

interest expense payable; partially offset by (d) a $0.4 million increase related to dealer manager fees due as there were none in the current period; and (e) a $0.4 million over-collection of tenant reimbursement revenue in the prior year, which was determined by the tenant reimbursement reconciliations performed in the current period; and
•
a $0.8 million increase in the change in due to affiliates as a result of decreases in acquisition expense reimbursements and asset and property management fees and dealer manager fees as there was only one acquisition in the current period and no equity sales in the current period, respectively.
Investing Activities. During the three months ended March 31, 2015, we used $61.3 million in cash for investing activities, compared to $221.4 million used during the same period in 2014, which related to the following:
•
$66.0 million for the acquisition made during the three months ended March 31, 2015;
•
$18.2 million paid for construction-in-progress and tenant improvements;
•
$1.0 million in real estate acquisition deposits made in the current period; less
•
$10.1 million related to the proceeds received from the sale of the Eagle Rock property, as discussed in Note 3, Real Estate, to the consolidated financial statements, which were released to us upon completion of the 1031 exchange in the current period;
•
$1.9 million of distributions from the investment in unconsolidated entities; and
•
$11.8 million related to the sale of the College Park property.
Financing Activities. During the three months ended March 31, 2015, we generated $33.4 million in financing activities, compared to $444.2 million generated during the same period in 2014, a decrease in cash provided by financing activities of $410.8 million. The decrease in cash generated is the net result of a $453.4 million decrease in cash provided by financing activities compared to the prior year and a $42.6 million decrease in cash used in financing activities compared to the prior year. For the three months ended March 31, 2015, the $453.4 million decrease is comprised of the following:
•
a $148.9 million decrease in proceeds from borrowings on the KeyBank Credit Facility, as discussed in Note 5, Debt, to the consolidated financial statements, of which there were none during the three months ended March 31, 2015;
•
a $110.64 million decrease in proceeds from borrowings on the AIG Loan discussed above, of which there were none during the three months ended March 31, 2015;
•
$50.0 million in proceeds from borrowings on the Unsecured Revolver, which was drawn upon in connection with the acquisition made during the current period;
•
$193.4 million in prior year principal repayments on the KeyBank Credit Facility, which was fully paid as of March 31, 2014;
•
$55.0 million in prior year principal repayments on the KeyBank Term Loan from proceeds from borrowings on the Unsecured Term Loan discussed above;
•
$1.9 million in prior year deferred financing costs primarily related to the AIG Loan discussed above;
•
$1.9 million in financing-related deposits primarily related to deposits applied upon execution of the AIG Loan, which closed on January 24, 2014;
•
a $490.9 million decrease in the issuance of common stock, of which there was none during the three months ended March 31, 2015; and
•
a $1.4 million decrease in the issuance of limited partnership units, of which there was none during the three months ended March 31, 2015.
For the three months ended March 31, 2015, the $42.6 million decrease in cash used consists of the following:
•
a $48.8 million decrease in offering costs as a result of the termination of the Follow-On Offering in the prior year;
•
$1.0 million in common stock repurchases;
•
$5.1 million in distribution payments to common stockholders and noncontrolling interests due to an increase in shares issued; and
•
$0.1 million in principal amortization.


58

Distributions and Our Distribution Policy
Distributions will be paid to our stockholders as of the record date selected by our board of directors. We expect to continue to pay distributions monthly based on daily declaration and record dates. We expect to pay distributions regularly unless our results of operations, our general financial condition, general economic conditions, or other factors inhibit us from doing so. Distributions will be authorized at the discretion of our board of directors, which will be directed, in substantial part, by its obligation to cause us to comply with the REIT requirements of the Internal Revenue Code of 1986, as amended (the “Code”). The funds we receive from operations that are available for distribution may be affected by a number of factors, including the following:
•
the amount of time required for us to invest the funds received in our Follow-On Offering;
•
our operating and interest expenses;
•
the amount of distributions or dividends received by us from our indirect real estate investments;
•
our ability to keep our properties occupied;
•
our ability to maintain or increase rental rates;
•
tenant improvements, capital expenditures and reserves for such expenditures;
•
the issuance of additional shares; and
•
financings and refinancings.
We have funded distributions with operating cash flow from our properties and offering proceeds raised in our Public Offerings. To the extent that we do not have taxable income, distributions paid will be considered a return of capital to stockholders. The following table shows distributions paid during the three months ended March 31, 2015 (dollars in thousands, except share data):
 
 
 
 
 
 
Distributions Paid (3)
 
 
Period
 
Distributions Declared (1)
 
Distributions Declared Per Common Share (1)(2)
 
Cash
 
Reinvested
 
Total
 
Cash Flow from Operating Activities
First Quarter 2015
 
$
22,258

 
$
0.17

 
$
9,282

 
$
12,896

 
$
22,178

 
$
18,518

(1)
Distributions for the period from January 1, 2015 through March 31, 2015 were based on daily record dates and were calculated at a rate of $0.001901096 per share per day.
(2)
Assumes shares were issued and outstanding each day during the period presented.
(3)
Distributions are paid on a monthly basis. Distributions for all record dates of a given month are paid on or about the first business day of the following month.
For the three months ended March 31, 2015, we paid and declared distributions of approximately $22.3 million to common stockholders including shares issued pursuant to the DRP, and approximately $5.5 million to the limited partners of our Operating Partnership, including those distributions paid to the preferred unit holders, as compared to FFO, adjusted for redeemable preferred and noncontrolling interest distributions, and MFFO to common stockholders for the three months ended March 31, 2015 of $23.2 million and $22.5 million, respectively. The payment of distributions from sources other than FFO or MFFO may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds.
Contractual Commitments and Contingencies
The following is a summary of our contractual obligations as of March 31, 2015 (in thousands):
 
Payments Due During the Years Ending December 31,
 
Total
 
2015
 
2016-2017
 
2018-2019
 
Thereafter
Outstanding debt obligations (1)
$
673,350

 
$
1,444

 
$
62,943

 
$
379,019

 
$
229,944

Interest on outstanding debt obligations (2)
148,364

  
15,782

 
38,449

 
31,584

 
62,549

Ground lease obligations
35,155

 
135

 
378

 
396

 
34,246

Total
$
856,869

  
$
17,361

 
$
101,770

 
$
410,999

 
$
326,739

(1)
Amounts include principal payments only. As of March 31, 2015, the total Unsecured Revolver and Unsecured Term Loan balances were $50.0 million and $300.0 million, respectively. The Unsecured Revolver is due on May 8, 2019, assuming the one-year extension is exercised, and the Unsecured Term Loan is due on May 8, 2019. The payments on our mortgage debt do not include the premium of $1.8 million.
(2)
Projected interest payments are based on the outstanding principal amounts at March 31, 2015. Projected interest payments on the Unsecured Revolver and Unsecured Term Loan are based on the interest rate in effect at March 31, 2015.

59

Off-Balance Sheet Arrangements
As of March 31, 2015, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.
Subsequent Events
See Note 10, Subsequent Events, to the consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risks include risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market-sensitive instruments. We expect that the primary market risk to which we will be exposed is interest rate risk, including the risk of changes in the underlying rates on our variable rate debt.
As of March 31, 2015, our debt consisted of (1) mortgage loans of $325.1 million, of which $108.9 million relates to property-specific mortgages, which include $1.8 million in debt premiums; (2) the Unsecured Revolver of $50.0 million; and (3) the Unsecured Term Loan of $300.0 million. The KeyBank Credit Facility and KeyBank Term Loan were terminated on May 8, 2014 upon our entry into the Unsecured Credit Agreement discussed below.
In the future, we may be exposed to the effects of interest rate changes primarily as a result of borrowings used to maintain liquidity and fund acquisition, expansion, and financing of our real estate investment portfolio and operations. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve our objectives, we may borrow at fixed rates or variable rates that are lower than our current borrowing cost. In order to mitigate our interest rate risk on certain financial instruments, we may enter into interest rate hedge instruments, such as interest rate cap agreements, and in order to mitigate our risk to foreign currency exposure we may enter into foreign currency hedges. We will not enter into derivative or interest rate transactions for speculative purposes.
Unsecured Credit Facility
On May 8, 2014, we, through our Operating Partnership, entered into the Unsecured Credit Agreement, in which were provided with the $750.0 million Unsecured Credit Facility, consisting of the $450.0 million Unsecured Revolver and the $300.0 million Unsecured Term Loan.
The Unsecured Credit Facility has an interest rate based on the leverage ratio reported with quarterly compliance certificate, as discussed below, and calculated based on the LIBO Rate plus the applicable LIBO Rate margin, as provided in the Unsecured Credit Agreement, or Base Rate plus the applicable base rate margin, as provided in the Unsecured Credit Agreement. The Base Rate is calculated as the greater of (i) the KeyBank Prime rate or (ii) the Federal Funds rate plus 0.50%. Payments under the Unsecured Credit Facility are interest only and are due on the first day of each quarter. An increase in the LIBO Rate may have an impact on our future earnings or cash flows as the current interest rate on the Unsecured Credit Facility is tied to this index. If the LIBO Rate increased by 1.00%, the interest expense on the Unsecured Revolver and Unsecured Term Loan would have potentially increased by approximately $0.06 million and $0.7 million, respectively, for the three months ended March 31, 2015.
AIG Loan
In conjunction with the refinancing of certain properties that previously served as security for the KeyBank Credit Facility, certain property-owning SPEs wholly-owned by our Operating Partnership, entered into the AIG Loan for $110.64 million as discussed in Note 5, Debt. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.
Midland Mortgage Loan
In conjunction with the refinancing of certain properties that previously served as security for the KeyBank Credit Facility, certain property-owning SPEs wholly-owned by our Operating Partnership, entered into the Midland Mortgage Loan for $105.6 million as discussed in Note 5, Debt. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.
TW Telecom Mortgage Debt
In conjunction with the acquisition of the TW Telecom property, we, through a wholly-owned subsidiary of our Operating Partnership, entered into a credit agreement with Mutual of Omaha Bank. The TW Telecom Loan has an interest rate based on the LIBO Rate plus 2.45% adjusted on the first banking day of each month. An increase in the LIBO Rate may have an impact on our future earnings or cash flows as the current interest rate on the TW Telecom Loan is tied to this index. If the LIBO Rate

60

increased by 1.00%, the interest expense on the TW Telecom Loan would have potentially increased by approximately $0.05 million for the three months ended March 31, 2015.
Ace Hardware Mortgage Debt
In conjunction with the acquisition of the Ace Hardware property, we, through a wholly-owned subsidiary of our Operating Partnership, assumed $23.9 million in debt. See Note 5, Debt, to the consolidated financial statements for a detailed description of the assumed debt. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.
TransDigm Mortgage Debt
In conjunction with the acquisition of the TransDigm property, we, through a wholly-owned subsidiary of our Operating Partnership, assumed $6.9 million in debt. See Note 5, Debt, to the consolidated financial statements for a detailed description of the assumed debt. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.
LTI Mortgage Debt
In conjunction with the contribution of the LTI property, we, through a wholly-owned subsidiary of our Operating Partnership, assumed $34.4 million in debt. See Note 5, Debt, to the consolidated financial statements for a detailed description of the assumed debt. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.
Emporia Partners Mortgage Debt
In conjunction with the contribution of the Emporia Partners property, we, through a wholly-owned subsidiary of our Operating Partnership, assumed $5.4 million in debt. See Note 5, Debt, to the consolidated financial statements for a detailed description of the assumed debt. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.
Plainfield Mortgage Debt
In conjunction with the contribution of the Plainfield property, we, through a wholly-owned subsidiary of our Operating Partnership, assumed $21.2 million in debt. See Note 5, Debt, to the consolidated financial statements for a detailed description of the assumed debt. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.
Preferred Equity
In connection with the investment in the Preferred Units of our Operating Partnership, the Preferred Equity Investor is entitled to monthly distributions calculated as follows:
•
From November 5, 2013 through October 31, 2015, a rate of LIBO plus 7.25% per annum of the Liquidation Preference (defined in Note 6, Equity, to the consolidated financial statements) per Preferred Unit;
•
From November 1, 2015 through October 31, 2016, a rate of LIBO plus 8.25% per annum of the Liquidation Preference per Preferred Unit;
•
From November 1, 2016 through October 31, 2017, a rate of LIBO plus 9.25% per annum of the Liquidation Preference per Preferred Unit;
•
From November 1, 2017 through October 31, 2018, a rate of LIBO plus 10.25% per annum of the Liquidation Preference per Preferred Unit.
At all times, LIBOR will be subject to a minimum floor of 0.25%.
If the LIBO Rate increased by 1.00%, the distribution payments on the Preferred Units would potentially increase by approximately $0.6 million for the three months ended March 31, 2015.
 
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, management, with the participation of our principal executive and principal financial officers, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective as of the end

61


of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Securities and Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
None.
(b)
We registered 82.5 million shares of our common stock in our Initial Public Offering (SEC File No. 333-159167, effective November 6, 2009), of which we registered 75.0 million shares to be offered to the public in our primary offering at an offering price of $10.00 per share (later revised to $10.28 per share) and 7.5 million shares to be offered to investors pursuant to our DRP at $9.50 per share (later revised to approximately $9.77 per share). Our Initial Public Offering was terminated on April 25, 2013. On April 26, 2013, we registered and began to offer $1.0 billion in shares of our common stock in our Follow-On Offering (SEC File No. 333-183614) at $10.28 per share and the DRP reflected a price equal to 95% of the share offering price, or approximately $9.77 per share. On April 22, 2014, we announced that we were no longer accepting subscriptions in our Follow-On Offering, as we expected to reach the maximum offering amount following our transfer agent's reconciliation of pending subscriptions. On May 7, 2014, we filed a Registration Statement on Form S-3 (SEC File No. 333-195765) for the registration of $75.0 million in shares for sale pursuant to the DRP Offering. On December 15, 2014, we announced a revised offering price for shares pursuant to the DRP Offering of $10.40 per share, effective December 27, 2014. The DRP Offering may be terminated at any time upon 10 days' prior written notice to stockholders. Our equity raise pursuant to the Public Offerings and the DRP Offering as of March 31, 2015 resulted in the following (in thousands, except share amounts):
Common shares issued in our Initial Offering (including shares issued in our DRP)
19,200,570

Common shares issued in our Follow-On Offering (including shares issued in our DRP)
107,144,337

Common shares issued pursuant to our DRP Offering
4,766,084

Common shares redeemed pursuant to our SRP for our Initial and Follow-On Offerings
(481,655
)
Total common shares outstanding in our Initial, Follow-On and DRP Offerings
130,629,336

 
 
Gross proceeds from our Initial Offering (including our DRP)
$
191,523

Gross proceeds from our Follow-On Offering (including our DRP)
1,097,950

Gross proceeds from shares issued pursuant to our DRP Offering
47,615

Total gross proceeds from our Initial, Follow-On and DRP Offerings
1,337,088

Redemption of common shares pursuant to our SRP for the Initial and Follow-On Offerings
(4,746
)
Selling commissions and dealer manager fees paid
(123,638
)
Reimbursement to our Advisor of O&O costs paid
(5,369
)
Net proceeds from our Initial, Follow-On and DRP Offerings
$
1,203,335

The net offering proceeds raised in our Initial, Follow-On and DRP Offerings were used primarily to fund:
•
Repayment of mezzanine, bridge, term and credit facility debt of $427.7 million;

62

•
Acquisition of real property and investment in joint ventures of $681.5 million;
•
Acquisition fees paid to the Advisor of $57.0 million; and
•
Other company and business obligations, including, but not limited to, the payment of a portion of cash distributions to stockholders, of $37.1 million.
(c)
As noted in Note 6, Equity – Share Redemption Program, in the notes to the financial statements contained in this report, our board of directors adopted a share redemption program on February 20, 2009, which enables our stockholders to have their shares redeemed by us, subject to the significant conditions and limitations. Our share redemption program has no set termination date, but our ability to redeem shares under the program is limited as described in Note 6.
As of March 31, 2015 and December 31, 2014, $70.6 million and $57.7 million in shares of common stock, respectively, were eligible for redemption, of which $1.8 million and $1.2 million, respectively, were reclassified from redeemable common stock to accounts payable and accrued liabilities in the consolidated balance sheets as of March 31, 2015 and December 31, 2014. During the three months ended March 31, 2015, we redeemed 125,756 shares of common stock for approximately $1.2 million at a weighted average price per share of $9.86. Since inception through March 31, 2015, we redeemed 481,655 shares of common stock for approximately $4.7 million at a weighted average price per share of $9.85 pursuant to the SRP. As of March 31, 2015, there were 182,682 shares totaling $1.8 million subject to redemption requests. On April 30, 2015, we satisfied all of the eligible redemption requests at a weighted average price per share of $9.76, with the exception of two redemption requests that will be satisfied on or about May 31, 2015. Our board of directors may choose to amend, suspend or terminate our share redemption program upon 30 days’ written notice at any time.
During the quarter ended March 31, 2015, we redeemed shares as follows:
For the Month Ended
Total
Number of
Shares
Redeemed
 
Average
Price Paid
per Share
 
Total Number of
Shares Redeemed as
Part of Publicly
Announced Plans or
Programs
 
Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that
May Yet Be Purchased
Under the Plans or
Programs
January 31, 2015
125,756

 
$
9.86

 
125,756

 
(1
)
February 28, 2015
—

 
N/A

 
—

 
—

March 31, 2015
—

 
N/A

 
—

 
—

(1)
A description of the maximum number of shares that may be purchased under our share redemption program is included in Note 6, Equity, to the consolidated financial statements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
(a)
During the quarter ended March 31, 2015, there was no information required to be disclosed in a report on Form 8-K which was not disclosed in a report on Form 8-K.
(b)
During the quarter ended March 31, 2015, there were no material changes to the procedures by which security holders may recommend nominees to our board of directors.
ITEM 6. EXHIBITS
The exhibits required to be filed with this report are set forth on the Exhibit Index hereto and incorporated by reference herein.
EXHIBIT INDEX
The following exhibits are included in this Quarterly Report on Form 10-Q for the period ended March 31, 2015 (and are numbered in accordance with Item 601 of Regulation S-K).

63

Exhibit
No.
  
Description
3.1
  
Third Articles of Amendment and Restatement of Griffin Capital Essential Asset REIT, Inc., incorporated by reference to Exhibit 3.1 to Pre-Effective Amendment No. 3 to the Registrant’s Registration Statement on Form S-11, filed on October 29, 2009, Commission File No. 333-159167
3.2
  
Bylaws of Griffin Capital Essential Asset REIT, Inc., incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-11, filed on May 12, 2009, Commission File No. 333-159167
3.3
  
Articles of Amendment to Third Articles of Amendment and Restatement of Griffin Capital Essential Asset REIT, Inc., incorporated by reference to Exhibit 3.3 to Post-Effective Amendment No. 6 to the Registrant’s Registration Statement on Form S-11, filed on July 12, 2011, Commission File No. 333-159167
3.4
  
Second Articles of Amendment to the Third Articles of Amendment and Restatement of Griffin Capital Essential Asset REIT, Inc., incorporated by reference to Exhibit 3.1 to the Registrant’s current report on Form 8-K filed on February 25, 2013, Commission File No. 000-54377
3.5
  
Third Articles of Amendment to the Third Articles of Amendment and Restatement of Griffin Capital Essential Asset REIT, Inc., incorporated by reference to Exhibit 3.1 to the Registrant’s current report on Form 8-K filed on June 14, 2013, Commission File No. 000-54377
4.1
 
Enrollment form for Distribution Reinvestment Plan, incorporated by reference to Appendix A to the prospectus contained in the Registrant's Registration Statement on Form S-3D, filed on May 7, 2014, Commission File No. 333-195765
31.1*
  
Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
  
Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
  
Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
  
Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002
101*
  
The following Griffin Capital Essential Asset REIT, Inc. financial information for the period ended March 31, 2015 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Comprehensive loss (unaudited), (iii) Consolidated Statements of Equity (unaudited), (iv) Consolidated Statements of Cash Flows (unaudited) and (v) Notes to Consolidated Financial Statements (unaudited).

*
Filed herewith.

64

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
(Registrant)

Dated:
May 13, 2015
By:
 
/s/ Joseph E. Miller
 
 
 
 
Joseph E. Miller
 
 
 
 
On behalf of the Registrant and as Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

65

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