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EX-31.2 - EXHIBIT 31.2 - Griffin Capital Essential Asset REIT, Inc.gcear12312015exhibit312.htm
EX-32.1 - EXHIBIT 32.1 - Griffin Capital Essential Asset REIT, Inc.gcear12312015exhibit321.htm
EX-32.2 - EXHIBIT 32.2 - Griffin Capital Essential Asset REIT, Inc.gcear12312015exhibit322.htm
EX-23.1 - EXHIBIT 23.1 - Griffin Capital Essential Asset REIT, Inc.gcear12312015exhibit231eyc.htm
EX-31.1 - EXHIBIT 31.1 - Griffin Capital Essential Asset REIT, Inc.gcear12312015exhibit311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
¨
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 Avenue, El Segundo, California 90245
(Address of principal executive offices)
(310) 469-6100
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
None
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes  ¨    No  ý
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  ý    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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ý    No  ¨

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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment of this Form 10-K. x
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  ý
The aggregate market value of voting common stock held by non-affiliates was $1,806,641,574 assuming a market value of $10.40 per share, as of June 30, 2015, the last business day of the registrant’s most recently completed second fiscal quarter.
As of March 4, 2016, there were 175,381,269 outstanding shares of common stock of the registrant.
Documents Incorporated by Reference:
The Registrant incorporates by reference in Part III (Items 10, 11, 12, 13 and 14) of this Form 10-K portions of its Definitive Proxy Statement for the 2016 Annual Meeting of Stockholders.

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
TABLE OF CONTENTS
 
 
 
Page No.
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
ITEM 15.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-K 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 (the “SEC”). We cannot guarantee the accuracy of any such forward-looking statements contained in this Form 10-K, 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.
As used in this report, “we,” “us” and “our” refer to Griffin Capital Essential Asset REIT, Inc. All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of this Form 10-K.


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PART I
ITEM 1.
BUSINESS
Overview
We were formed as a corporation on August 28, 2008 under the Maryland General Corporation Law primarily with the purpose of acquiring single tenant properties that are essential to the tenant's business. We were taxed as a REIT for the taxable year ended December 31, 2010, and for each year thereafter, after satisfying both financial and non-financial requirements. Our year end is December 31.
We have no employees and are externally advised and managed by an affiliate, Griffin Capital Essential Asset Advisor, LLC, a Delaware limited liability company (the "Advisor"), which was formed on August 27, 2008. Griffin Capital Asset Management Company, LLC ("GAMCO," formerly known as Griffin Capital REIT Holdings, LLC) is the sole member of the Advisor, and Griffin Capital, LLC ("GC") is the sole member of GAMCO. We entered into an advisory agreement for the Public Offerings (as defined below) (as amended and restated, the "Advisory Agreement"), which states that the Advisor is responsible for managing our affairs on a day-to-day basis and identifying and making acquisitions and investments on our behalf. The officers of the Advisor are also officers of Griffin Capital Corporation, a California corporation (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 our board of directors.
On February 20, 2009, we commenced a private offering to accredited investors only pursuant to a confidential private placement memorandum. On May 6, 2009, we satisfied our minimum offering requirement and commenced operations. We declared our first distribution to stockholders in the second quarter of 2009, which was paid on June 15, 2009.
We terminated our private offering on November 6, 2009 and began our initial offering to the public of a maximum of 82,500,000 shares of common stock, consisting of 75,000,000 shares of common stock at an initial price of $10.00 per share (the "Primary Public Offering") and 7,500,000 shares at an initial price of $9.50 per share pursuant to our distribution reinvestment plan ("DRP") (together with the Primary Public Offering, our "Initial Public Offering"). On April 25, 2013, we terminated our Initial Public Offering, having issued approximately 19,200,570 total shares of our common stock for gross proceeds of approximately $191.5 million, including 585,533 shares, or $5.6 million, issued pursuant to the 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 97,200,000 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 $100.0 million in shares of common stock, consisting of approximately 10,200,000 shares pursuant to the DRP at a price equal to 95% of the share price, which was approximately $9.77 per share (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 amount of offering proceeds. 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 "2014 DRP Offering"). On September 22, 2015, we filed a Registration Statement on Form S-3 with the SEC for the registration of $100.0 million in shares for sale pursuant to the DRP (the "2015 DRP Offering" and together with the 2014 DRP Offering, the "DRP Offerings") and terminated the 2014 DRP Offering. In connection with our DRP Offerings, we had issued 8,579,699 shares of our common stock for gross proceeds of approximately $87.3 million through December 31, 2015. The 2015 DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders.
On November 21, 2014, we and one of our wholly-owned subsidiaries ("Merger Sub") entered into a merger agreement with Signature Office REIT, Inc. ("SOR"). In connection with the merger (the "SOR Merger"), (1) SOR merged into Merger Sub, and (2) each share of common stock of SOR issued and outstanding was converted into 2.04 shares ("Merger Consideration") of our common stock. On June 10, 2015, we issued approximately 41,800,000 shares of common stock upon the consummation of the SOR Merger. The assets and liabilities of SOR are included in our consolidated financial statements as of the closing date, June 10, 2015. See Note 3, Real Estate, to the consolidated financial statements for further discussion.
On October 22, 2015, our board of directors (the "Board"), at the recommendation of the Nominating and Corporate Governance Committee of the Board (the "Nominating and Corporate Governance Committee") comprised solely of independent directors, approved an estimated value per share of our common stock of $10.40 based on the estimated value of our assets less the estimated value of our liabilities, or net asset value, divided by the number of shares outstanding on a fully diluted basis (the "NAV"), calculated as of September 30, 2015. We are providing this estimated value per share to assist broker

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dealers in connection with their obligations under applicable Financial Industry Regulatory Authority rules with respect to customer account statements. This valuation was performed in accordance with the provisions of Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs, issued by the Investment Program Association ("IPA") in April 2013, in addition to guidance from the SEC. For a detailed description of how we determined the NAV, see Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Since our inception and through December 31, 2015, we had redeemed 1,753,700 shares of common stock for approximately $17.3 million at a weighted average price per share of $9.88 pursuant to our share redemption program ("SRP").
As of December 31, 2015, we owned 74 properties in 20 states, encompassing approximately 18.6 million rentable square feet, which include the properties acquired in connection with our merger with SOR. For information about acquisitions and revenue concentration by geographical location and industry, see Item 2, Properties.
Primary Investment Objectives
Our primary investment objectives are to invest in income-producing real property in a manner that allows us to qualify as a REIT for federal income tax purposes, provide regular cash distributions to our stockholders, preserve and protect stockholders' invested capital, and achieve appreciation in the value of our properties over the long term. We cannot assure our stockholders that we will attain these primary investment objectives.
Exchange Listing and Other Liquidity Events
Our board of directors will determine when, and if, to apply to have our shares of common stock listed for trading on a national securities exchange, subject to satisfying then-existing applicable listing requirements. Our board of directors has begun to consider the appropriate timing for a liquidity event and has begun to weigh various strategic considerations. Subject to market conditions and the sole discretion of our board of directors, we may seek one or more of the following liquidity events:
list our shares on a national securities exchange;
merge, reorganize or otherwise transfer the company or its assets to another entity with listed securities;
commence the sale of all of our properties and liquidate the company; or
otherwise create a liquidity event for our stockholders.
However, we cannot assure our stockholders that we will achieve one or more of the above-described liquidity events. Our board of directors has the sole discretion to forego a liquidity event and continue operations if it deems such continuation to be in the best interests of our stockholders. Even if we accomplish one or more of these liquidity events, we cannot guarantee that a public market will develop for the securities listed or that such securities will trade at a price higher than what stockholders paid for their shares.
Investment Strategy
We operate a portfolio of single tenant business essential properties throughout the United States diversified by corporate credit, physical geography, product type and lease duration. Although we have no current intention to do so, we may also invest in single tenant business essential properties outside the United States. We acquire assets consistent with our single tenant acquisition philosophy by focusing primarily on properties:
essential to the business operations of the tenant;
located in primary, secondary, and certain select tertiary markets;
leased to tenants with stable and/or improving credit quality; and
subject to long-term leases with defined rental rate increases or with short-term leases with high-probability renewal and potential for increasing rent.
Our investment objectives and policies may be amended or changed at any time by our board of directors. Although we have no plans at this time to change any of our investment objectives, our board of directors may change any and all such investment objectives, including our focus on single tenant business essential properties, if they believe such changes are in the best interests of our stockholders. In addition, we may invest in real estate properties other than single tenant business essential properties if the board of directors deems such investments to be in the best interests of our stockholders.

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Our sponsor has been acquiring single tenant business essential properties for two decades. Our sponsor’s positive acquisition and ownership experience with single tenant business essential properties of the type we intend to acquire stems from the following:
the credit quality of the lease payment is determinable and equivalent to the senior unsecured credit characteristics of the tenant;
the essential nature of the asset to the tenant’s business provides greater default protection relative to the tenant’s balance sheet debt;
the percentage recovery in the event of a tenant default is empirically greater than an unsecured lender; and
long-term leases provide a consistent and predictable income stream across market cycles while short-term leases offer income appreciation upon renewal and reset.
We will seek to provide stockholders the following benefits:
a cohesive management team experienced in all aspects of real estate investment with a track record of acquiring single tenant business essential assets;
a clear alignment of interests between management and investors, as certain affiliates of our sponsor invested over $26 million in our portfolio by contributing certain properties to us;
stable cash flow backed by a portfolio of single tenant business essential real estate assets;
minimal exposure to operating and maintenance expense increases as we attempt to structure or acquire leases where the tenant assumes the responsibility for these costs;
contractual lease rate increases enabling distribution growth and a hedge against inflation;
insulation from short-term economic cycles resulting from the long-term nature of underlying asset leases;
enhanced stability resulting from diversified credit characteristics of corporate credits; and
portfolio stability promoted through geographic and product type investment diversification.
We cannot assure our stockholders that any of the properties we acquire will result in the benefits discussed above.
General Acquisition and Investment Policies
We seek to make investments that satisfy the primary investment objective of providing regular cash distributions to our stockholders. However, because a significant factor in the valuation of income-producing real property is its potential for future appreciation, we anticipate that some properties we acquire may have the potential both for growth in value and for providing regular cash distributions to our stockholders.
Our Advisor has substantial discretion with respect to the selection of specific properties. However, each acquisition will be approved by our board of directors. In selecting a potential property for acquisition, we and our Advisor consider a number of factors, including, but not limited to, the following:
tenant creditworthiness;
essentialness of the property to the business operations of the tenant;
lease terms, including length of lease term, scope of landlord responsibilities, presence and frequency of contractual rental increases, renewal option provisions, exclusive and permitted use provisions, co-tenancy requirements and termination options;
projected demand in the area;
a property’s geographic location and type;
proposed purchase price, terms and conditions;
tenant's and property's historical financial performance;
projected net cash flow yield and internal rates of return;
a property’s physical location, visibility, curb appeal and access;
construction quality and condition;
potential for capital appreciation;

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demographics of the area, neighborhood growth patterns, economic conditions, and local market conditions;
potential capital and tenant improvements and reserves required to maintain the property;
prospects for liquidity through sale, financing or refinancing of the property;
the potential for the construction of new properties in the area;
treatment under applicable federal, state and local tax and other laws and regulations;
evaluation of title and obtaining of satisfactory title insurance; and
evaluation of any reasonable ascertainable risks such as environmental contamination.
There is no limitation on the number, size, or type of properties that we may acquire. The number and mix of properties will depend upon real estate market conditions and other circumstances existing at the time of acquisition and the funds available to us for the purchase of real estate. In determining whether to purchase a particular property, we may obtain an option on such property. The amount paid for an option, if any, is normally surrendered if the property is not purchased and may or may not be credited against the purchase price if the property is ultimately purchased.
Description of Leases
We, in most instances, have acquired single tenant properties with existing net leases. When spaces in a property become vacant, existing leases expire, or we acquire properties under development or requiring substantial refurbishment or renovation, we anticipate entering into “net” leases. “Net” leases mean leases that typically require tenants to pay all or a majority of the operating expenses, including real estate taxes, special assessments and sales and use taxes, utilities, insurance, common area maintenance charges, property services and building repairs related to the property, in addition to the lease payments. Under most commercial leases, tenants are obligated to pay a predetermined annual base rent. Some of the leases also will contain provisions that increase the amount of base rent payable at points during the lease term and/or that require the tenant to pay rent based upon a percentage of the tenant’s revenues. Percentage rent can be calculated based upon a number of factors. There are various forms of net leases, typically classified as triple-net or absolute triple-net. Triple-net leases typically require the tenant to pay all costs associated with a property in addition to the base rent and percentage rent, if any. However, often times in triple-net leases certain capital expenditure costs are not paid for by the tenants (such as roof and structure costs). Absolute triple-net leases are those that require tenants to pay for all the costs in a triple-net lease as well as all the capital costs associated with a property.
To the extent we acquire multi-tenant properties, we have, and expect to have, a variety of lease arrangements with the tenants of these properties. Since each lease is an individually negotiated contract between two or more parties, each lease will have different obligations of both the landlord and tenant, and we cannot predict at this time the exact terms of any future leases into which we will enter. We weigh many factors when negotiating specific lease terms, including, but not limited to, the rental rate, creditworthiness of the tenant, location of the property, and type of property. Many large national tenants have standard lease forms that generally do not vary from property to property. We will have limited ability to revise the terms of leases with those tenants. Some of these limited negotiable terms include lease duration and special provisions on the recovery of operating expenses. In certain instances, we may be responsible for normal operating expenses up to a certain amount, which may reduce the amount of operating cash flow available for future investments.
Typically, our tenants will have lease terms of seven to 15 years at the time of the property acquisition. We may acquire properties under which the lease term has partially expired. We also may acquire properties with shorter lease terms if the property is located in a desirable location, is difficult to replace, or has other significant favorable real estate attributes. Generally, the leases require each tenant to procure, at its own expense, commercial general liability insurance, as well as property insurance covering the building for the full replacement value and naming the ownership entity and the lender, if applicable, as the additional insured on the policy.
Our Borrowing Strategy and Policies
We may incur our indebtedness in the form of bank borrowings, purchase money obligations to the sellers of properties, and publicly- or privately-placed debt instruments or financing from institutional investors or other lenders. We may obtain a credit facility or separate loans for each acquisition. Our indebtedness may be unsecured or may be secured by mortgages or other interests in our properties or underlying owner entities. We may use borrowing proceeds to finance acquisitions of new properties, to pay for capital improvements, repairs or buildouts, to refinance existing indebtedness, to pay distributions, to fund redemptions of our shares, or to provide working capital.

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There is no limitation on the amount we can borrow for the purchase of any property. Our aggregate borrowings, secured and unsecured, must be reasonable in relation to our net assets and must be reviewed by our board of directors at least quarterly. At this time, we intend to maintain a leverage ratio of less than 50% to real estate net book value. However, our charter limits our borrowing to 300% of our net assets (equivalent to 75% of the cost of our assets) unless any excess borrowing is approved by a majority of our independent directors and is disclosed to our stockholders in our next quarterly report, along with the justification for such excess. As of December 31, 2015, our leverage ratio (which we define as our debt as a percentage of the net book value of our real estate) was approximately 54%.
We may borrow amounts from our Advisor or its affiliates only if such loan is approved by a majority of our directors, including a majority of our independent directors, not otherwise interested in the transaction, as fair, competitive, commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties under the circumstances.
Except as set forth in our charter regarding debt limits, we may re-evaluate and change our debt strategy and policies in the future without a stockholder vote. Factors that we could consider when re-evaluating or changing our debt strategy and policies include then-current economic and market conditions, the relative cost of debt and equity capital, any acquisition opportunities, the ability of our properties to generate sufficient cash flow to cover debt service requirements and other similar factors. Further, we may increase or decrease our ratio of debt to equity in connection with any change of our borrowing policies.
Acquisition Structure
Although we are not limited as to the form our investments may take, our investments in real estate will generally constitute acquiring fee title or interests in joint ventures or similar entities that own and operate real estate.
We will make acquisitions of our real estate investments directly through our Operating Partnership or indirectly through limited liability companies or limited partnerships, or through investments in joint ventures, partnerships, co-tenancies or other co-ownership arrangements with other owners of properties, affiliates of our Advisor, or other persons.

Insurance on Properties
Generally, the leases require each tenant to procure, at its own expense, commercial general liability insurance, as well as property insurance covering the building for the full replacement value and naming the ownership entity and the lender, if applicable, as the additional insured on the policy. As a precautionary measure, we may obtain, to the extent available, contingent liability and property insurance, as well as loss of rents insurance that covers one or more years of annual rent in the event of a rental loss. In addition, we maintain a pollution insurance policy for all of our properties to insure against the risk of environmental contaminants. However, we may decide not to obtain any or adequate earthquake or similar catastrophic insurance coverage because the premiums are too high, even in instances where it may otherwise be available.
Tenants will be required to provide proof of insurance by furnishing a certificate of insurance to our Advisor on an annual basis. The insurance certificates will be tracked and reviewed for compliance by our property managers.
Conditions to Closing Acquisitions
We intend to obtain at least a Phase I environmental assessment and history for each property we acquire. In addition, we will generally condition our obligation to close the purchase of any investment on the delivery and verification of certain documents from the seller or other independent professionals, including, but not limited to, where appropriate:
property surveys and site audits;
appraisal reports;
building plans and specifications, if available;
soil reports, seismic studies, flood zone studies, if available;
licenses, permits, maps and governmental approvals;
tenant estoppel certificates;
tenant financial statements and information, as permitted;
historical financial statements and tax statement summaries of the properties;
proof of marketable title, subject to such liens and encumbrances as are acceptable to us; and
liability and title insurance policies.

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Joint Venture Investments
We may acquire properties in joint ventures, some of which may be entered into with affiliates of our Advisor. We may also enter into joint ventures, general partnerships, co-tenancies and other participations, such as Delaware Statutory Trusts (DSTs), with real estate developers, owners and others for the purpose of owning and leasing real properties. Among other reasons, we may want to acquire properties through a joint venture with third parties or affiliates in order to diversify our portfolio of properties in terms of geographic region or property type. Joint ventures may also allow us to acquire an interest in a property without requiring that we fund the entire purchase price. In addition, certain properties may be available to us only through joint ventures. In determining whether to recommend a particular joint venture, our Advisor will evaluate the real property which such joint venture owns or is being formed to own under the same criteria that the Advisor uses to evaluate other real estate investments.
We may enter into joint ventures with affiliates of our Advisor for the acquisition of properties, but only provided that:
a majority of our directors, including a majority of our independent directors, not otherwise interested in the transaction, approve the transaction as being fair and reasonable to us; and
the investment by us and such affiliate are on substantially the same terms and conditions.
To the extent possible and if approved by our board of directors, including a majority of our independent directors, we will attempt to obtain a right of first refusal or option to buy the property held by the joint venture and allow such venture partners to exchange their interest for our Operating Partnership's units or to sell their interest to us in its entirety. In the event that the venture partner were to elect to sell property held in any such joint venture, however, we may not have sufficient funds to exercise our right of first refusal to buy the venture partner’s interest in the property held by the joint venture. Entering into joint ventures with affiliates of our Advisor will result in certain conflicts of interest.
Construction and Development Activities
From time to time, we may construct and develop real estate assets or render services in connection with these activities. We may be able to reduce overall purchase costs by constructing and developing a property versus purchasing a completed property. Developing and constructing properties would, however, expose us to risks such as cost overruns, carrying costs of projects under construction or development, availability and costs of materials and labor, weather conditions, and government regulation. To comply with the applicable requirements under federal income tax law, we intend to limit our construction and development activities to performing oversight and review functions, including reviewing the construction design proposals, negotiating and contracting for feasibility studies and supervising compliance with local, state or federal laws and regulations, negotiating contracts, overseeing construction, and obtaining financing. In addition, we may use taxable REIT subsidiaries or certain independent contractors to carry out these oversight and review functions. We will retain independent contractors to perform the actual construction work.
Government Regulations
The properties we acquire likely will be subject to various federal, state and local regulatory requirements, including the Americans with Disabilities Act, environmental regulations, and other laws, such as zoning and state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. We intend to acquire properties that are in material compliance with all such regulatory requirements. However, we cannot assure stockholders that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by us and could have an adverse effect on our financial condition and results of operations.
Disposition Policies
We generally intend to hold each property we acquire for an extended period. However, we may sell a property at any time if, in our judgment, the sale of the property is in the best interests of our stockholders.
The determination of whether a particular property should be sold or otherwise disposed of will generally be made after consideration of relevant factors, including prevailing economic conditions, other investment opportunities and considerations specific to the condition, value and financial performance of the property. In connection with our sales of properties, we may lend the purchaser all or a portion of the purchase price. In these instances, our taxable income may exceed the cash received in the sale.

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We may sell assets to third parties or to affiliates of our Advisor. Our nominating and corporate governance committee of our board of directors, which is comprised solely of independent directors, must review and approve all transactions between us and our Advisor and its affiliates.
Investment Limitations in Our Charter
Our charter places numerous limitations on us with respect to the manner in which we may invest our funds, most of which are those typically required by various provisions of the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association (NASAA REIT Guidelines). So long as our shares are not listed on a national securities exchange, the NASAA REIT Guidelines apply to us, and we will not:
Invest in equity securities unless a majority of our directors, including a majority of our independent directors, not otherwise interested in the transaction approve such investment as being fair, competitive and commercially reasonable.
Invest in commodities or commodity futures contracts, except for future contracts when used solely for the purpose of hedging in connection with our ordinary business of investing in real estate assets and mortgages.
Invest in real estate contracts of sale, otherwise known as land sale contracts, unless the contract is in recordable form and is appropriately recorded in the chain of title.
Make or invest in mortgage loans unless an appraisal is obtained concerning the underlying property, except for those mortgage loans insured or guaranteed by a government or government agency. In cases where our independent directors determine, and in all cases in which the transaction is with any of our directors or our Advisor and its affiliates, we will obtain an appraisal from an independent appraiser. We will maintain such appraisal in our records for at least five years and it will be available to our stockholders for inspection and duplication. We will also obtain a mortgagee’s or owner’s title insurance policy as to the priority of the mortgage or condition of the title.
Make or invest in mortgage loans, including construction loans, on any one property if the aggregate amount of all mortgage loans on such property would exceed an amount equal to 85% of the appraised value of such property, as determined by an appraisal, unless substantial justification exists for exceeding such limit because of the presence of other loan underwriting criteria.
Make or invest in mortgage loans that are subordinate to any mortgage or equity interest of any of our directors, our Advisor or their respective affiliates.
Make investments in unimproved property or indebtedness secured by a deed of trust or mortgage loans on unimproved property in excess of 10% of our total assets.
Issue equity securities on a deferred payment basis or other similar arrangement.
Issue debt securities in the absence of adequate cash flow to cover debt service.
Issue equity securities that are assessable after we have received the consideration for which our board of directors authorized their issuance.
Issue “redeemable securities” redeemable solely at the option of the holder, which restriction has no effect on our ability to implement our share redemption program.
When applicable, grant warrants or options to purchase shares to our Advisor or its affiliates or to officers or directors affiliated with our Advisor except on the same terms as options or warrants that are sold to the general public. Further, the amount of the options or warrants cannot exceed an amount equal to 10% of outstanding shares on the date of grant of the warrants and options.
Lend money to our directors, or to our Advisor or its affiliates, except for certain mortgage loans described above.
Changes in Investment Policies and Limitations
Our charter requires that our independent directors review our investment policies at least annually to determine that the policies we are following are in the best interests of our stockholders. Each determination and the basis therefor are required to be set forth in the applicable meeting minutes. The methods of implementing our investment policies may also vary as new investment techniques are developed. The methods of implementing our investment objectives and policies, except as otherwise provided in our charter, may be altered by a majority of our directors, including a majority of our independent directors, without the approval of our stockholders. The determination by our board of directors that it is no longer in our best interests to continue to be qualified as a REIT shall require the concurrence of two-thirds of the board of directors. Investment

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policies and limitations specifically set forth in our charter, however, may only be amended by a vote of the stockholders holding a majority of our outstanding shares.
Investments in Mortgages
While we intend to emphasize on equity real estate investments and, hence, operate as what is generally referred to as an “equity REIT,” as opposed to a “mortgage REIT,” we may invest in first or second mortgage loans, mezzanine loans secured by an interest in the entity owning the real estate or other similar real estate loans consistent with our REIT status. We may make such loans to developers in connection with construction and redevelopment of real estate properties. Such mortgages may or may not be insured or guaranteed by the Federal Housing Administration, the Veterans Benefits Administration or another third party. We may also invest in participating or convertible mortgages if our directors conclude that we and our stockholders may benefit from the cash flow or any appreciation in the value of the subject property. Such mortgages are similar to equity participation.
Affiliate Transaction Policy
Our board of directors has established a nominating and corporate governance committee, which will review and approve all matters the board believes may involve a conflict of interest. This committee is composed solely of independent directors. This committee of our board of directors will approve all transactions between us and our Advisor and its affiliates.
We own a 10% interest in one affiliated DST property. See Note 4, Investments, to the consolidated financial statements. On June 24, 2013, our board of directors determined that we would not acquire any new properties in which our sponsor, or its executive officers, owns an economic interest in excess of 10% of the contract purchase price. To the extent management and the board of directors determine to acquire a property in which our sponsor owns an economic interest of 10% or less, the board of directors adopted certain procedures that they intend to apply consistently.
Tenant-in-common properties in which our sponsor owns a 10% economic interest or less. For these situations, we will require our sponsor to engage an independent third party real estate broker to market the property for sale. If we determine the price offered through such marketing efforts is a price at which we would have an interest in acquiring the property, we may submit a bid to acquire the same upon substantially the same terms and conditions otherwise dictated by the market. Should the tenant-in-common owners elect to proceed with a transaction with us and our board approves the acquisition of the property upon such terms and conditions, we will obtain an independent third party appraisal. If the appraised value of the property is equal to or greater than the proposed purchase price, we may acquire the property. Investors in the seller of such property will have the option to either (a) elect to receive their pro-rata share of the net cash proceeds from such disposition, or (b) exchange their equity for limited partnership units in our operating partnership which amounts will be grossed-up by 10% since the exchange will not include sales commissions or a dealer manager fee.
Properties owned through a DST format where our sponsor, or its executive officers, owns a 10% economic interest or less. For these situations, we typically will have the option to acquire the balance of the interests in the DST from the other investors after one year from the initial sale to one of the DST investors. If our board determines to acquire those interests, we will obtain an independent third party appraisal on the property. We intend to acquire the interests in the DST based on such appraisal. The DST investors will have the option to either (a) elect to receive their pro-rata share of the net cash proceeds from such disposition, (b) exchange their DST interests for limited partnership units in our operating partnership, or (c) elect to retain their interest in the DST interests. In certain circumstances, the DST investors may only have options (a) and (b) available depending upon the nature and structure of the underlying transaction and the financing related thereto.
Investment Company Act and Certain Other Policies
We intend to operate in such a manner that we will not be subject to regulation under the Investment Company Act of 1940 (1940 Act). Our Advisor will continually review our investment activity to attempt to ensure that we do not come within the application of the 1940 Act. Among other things, our Advisor will attempt to monitor the proportion of our portfolio that is placed in various investments so that we do not come within the definition of an “investment company” under the 1940 Act. If at any time the character of our investments could cause us to be deemed as an investment company for purposes of the 1940 Act, we will take all necessary actions to attempt to ensure that we are not deemed to be an “investment company.” In addition, we do not intend to underwrite securities of other issuers or actively trade in loans or other investments.
Subject to the restrictions we must follow in order to qualify to be taxed as a REIT, we may make investments other than as previously described, although we do not currently intend to do so. We have authority to purchase or otherwise reacquire our shares of common stock or any of our other securities. We have no present intention of repurchasing any of our shares of common stock except pursuant to our share redemption program, and we would only take such action in conformity with applicable federal and state laws and the requirements for qualifying as a REIT under the Code.

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Employees
We have no employees. The employees of our Advisor and its affiliates provide management, acquisition, advisory and certain administrative services for us.
Competition
As we purchase properties for our portfolio, we are in competition with other potential buyers for the same properties, and may have to pay more to purchase the property than if there were no other potential acquirers or we may have to locate another property that meets our investment criteria. Although we intend to acquire properties subject to existing leases, the leasing of real estate is highly competitive in the current market, and we may experience competition for tenants from owners and managers of competing projects. As a result, we may have to provide free rent, incur charges for tenant improvements, or offer other inducements, or we might not be able to timely lease the space, all of which may have an adverse impact on our results of operations. At the time we elect to dispose of our properties, we will also be in competition with sellers of similar properties to locate suitable purchasers for its properties.
Industry Segments
We internally evaluate all of our properties and interests therein as one reportable segment. 
ITEM 1A.
RISK FACTORS
Below are risks and uncertainties that could adversely affect our operations that we believe are material to stockholders. Other risks and uncertainties may exist that we do not consider material based on the information currently available to us at this time.
Risks Related to an Investment in Griffin Capital Essential Asset REIT, Inc.
We have incurred operating losses to date and have an accumulated deficit.
We have incurred operating losses in the past and have an accumulated deficit, and may incur operating losses in the future. We had net income of $15.6 million and $0.01 million for the fiscal years ended December 31, 2015 and 2014, respectively. We incurred a net loss of $24.5 million for the fiscal year ended December 31, 2013. Our accumulated deficit was approximately $55.0 million, $51.3 million, and $32.6 million as of December 31, 2015, 2014, and 2013, respectively.
We have paid a portion of our distributions from sources other than cash flow from operations; therefore, we will have fewer funds available for the acquisition of properties, and our stockholders’ overall return may be reduced.
In the event we do not have enough cash from operations to fund our distributions, we may borrow, issue additional securities or sell assets in order to fund the distributions. We are not prohibited from undertaking such activities by our charter, bylaws or investment policies, and we may use an unlimited amount from any source to pay our distributions. Through December 31, 2015, we funded 90% of our distributions using cash flows from operations as shown on the statement of cash flows and 10% of our distributions using offering proceeds. See Management's Discussion and Analysis of Financial Condition and Results of Operations - Distributions and Our Distribution Policy, below. If we continue to pay distributions from sources other than cash flow from operations, we will have fewer funds available for acquiring properties, which may reduce our stockholders’ overall returns. Additionally, to the extent distributions exceed cash flow from operations, a stockholder’s basis in our stock may be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder may recognize a capital gain.
We may be unable to pay or maintain cash distributions or increase distributions over time.
There are many factors that can affect the availability and timing of cash distributions to stockholders. Distributions will be based principally on distribution expectations of our potential investors and cash available from our operations. The amount of cash available for distribution will be affected by many factors, such as our ability to secure properties with leases or originate leases that generate rents to exceed our operating expense levels, as well as many other variables. Actual cash available for distribution may vary substantially from estimates. With limited prior operating history, we cannot assure our stockholders that we will be able to pay or maintain distributions or that distributions will increase over time, nor can we give any assurance that rents from the properties will increase, or that future acquisitions of real properties will increase our cash available for distribution to stockholders. Our actual results may differ significantly from the assumptions used by our board of directors in establishing the distribution rate to stockholders.
There is currently no public trading market for our shares and there may never be one; therefore, it will be difficult for our stockholders to sell their shares including under our share redemption program.

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There is currently no public market for our shares and there may never be one. Our stockholders may not sell their shares unless the buyer meets applicable suitability and minimum purchase standards, which includes owning the stock for at least one year. Our charter also prohibits the ownership of more than 9.8% of our stock, unless waived by our board of directors, which may inhibit large investors from desiring to purchase our stockholders’ shares. Moreover, our share redemption program includes numerous restrictions that would limit our stockholders’ ability to sell their shares to us. Redemption of shares, when requested, will generally be made quarterly. During any calendar year, we will not redeem in excess of 5% of the weighted average number of shares outstanding during the prior calendar year and redemptions will be funded solely from proceeds from our distribution reinvestment plan. Our board of directors could choose to amend, suspend or terminate our share redemption program upon 30 days’ notice. Therefore, it may be difficult for our stockholders to sell their shares promptly or at all. If our stockholders are able to sell their shares, they will likely have to sell them at a substantial discount to the price they paid for the shares. It also is likely that their shares would not be accepted as the primary collateral for a loan. Our stockholders should purchase the shares only as a long-term investment because of the illiquid nature of the shares.
In determining net asset value, or NAV, per share, we relied upon a valuation of our properties as of September 30, 2015. Valuations and appraisals of our properties are estimates of fair value and may not necessarily correspond to realizable value upon the sale of such properties, therefore our new asset value per share may not reflect the amount that would be realized upon a sale of each of our properties.
For the purposes of calculating our NAV per share, an independent third-party appraiser valued our properties as of September 30, 2015. The valuation methodologies used to value our properties involved certain subjective judgments. Ultimate realization of the value of an asset depends to a great extent on economic and other conditions beyond our control and the control of our Advisor and independent appraiser. Further, valuations do not necessarily represent the price at which an asset would sell, since market prices of assets can only be determined by negotiation between a willing buyer and seller. Therefore, the valuations of our properties and our investments in real estate related assets may not correspond to the timely realizable value upon a sale of those assets.
Our NAV per share is somewhat based upon subjective judgments, assumptions and opinions, which may or may not turn out to be correct. Therefore, our NAV per share may not reflect the precise amount that might be paid to stockholders for their shares in a market transaction.
Our net asset value per share was based on an estimate of the value of our properties - consisting principally of illiquid commercial real estate - as of September 30, 2015. The valuation methodologies used by the independent appraiser retained by our board of directors to estimate the value of our properties as of September 30, 2015 involved subjective judgments, assumptions and opinions, which may or may not turn out to be correct. As a result, our net asset value per share may not reflect the precise amount that might be paid to stockholders for their shares in a market transaction.
If our Advisor loses or is unable to obtain key personnel, our ability to implement our investment objectives could be delayed or hindered, which could adversely affect our ability to make distributions and the value of our stockholders’ investment.
Our success depends to a significant degree upon the contributions of certain of our executive officers and other key personnel of our Advisor and sponsor, including Kevin A. Shields, Michael J. Escalante, Joseph E. Miller, David C. Rupert, Mary P. Higgins, Howard S. Hirsch, Don G. Pescara, and Julie A. Treinen, each of whom would be difficult to replace. Our Advisor does not have an employment agreement with any of these key personnel and we cannot guarantee that all, or any particular one, will remain affiliated with us and/or our Advisor. If any of our key personnel were to cease their affiliation with our Advisor, our operating results could suffer. Further, although our sponsor has obtained key person life insurance on some of these individuals, we do not intend to separately maintain key person life insurance on any of these individuals. We believe that our future success depends, in large part, upon our Advisor's ability to hire and retain highly skilled managerial, operational and marketing personnel. Competition for such personnel is intense, and we cannot assure stockholders that our Advisor will be successful in attracting and retaining such skilled personnel. If our Advisor loses or is unable to obtain the services of key personnel or does not establish or maintain appropriate strategic relationships, our ability to implement our investment strategies could be delayed or hindered, and the value of a stockholder's investment may decline.
Our ability to operate profitably will depend upon the ability of our Advisor to efficiently manage our day-to-day operations.
We will rely on our Advisor to manage our business and assets. Our Advisor will make all decisions with respect to our day-to-day operations. Thus, the success of our business will depend in large part on the ability of our Advisor to manage our operations. Any adversity experienced by our Advisor or problems in our relationship with our Advisor could adversely impact the operation of our properties and, consequently, our cash flow and ability to make distributions to our stockholders.
Risks Related to Conflicts of Interest

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Our sponsor, Advisor, property manager and their officers and certain of their key personnel will face competing demands relating to their time, which may cause our operating results to suffer.
Our 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 or co-sponsors to some or all of 11 other real estate programs affiliated with our sponsor, including Griffin Capital Essential Asset REIT II, Inc. (“GCEAR II”) and Griffin-American Healthcare REIT III, Inc. (“GAHR III”), both of which are publicly-registered, non-traded real estate investment trusts, Griffin-American Healthcare REIT IV, Inc. (“GAHR IV”), a non-traded real estate investment trust in registration as of December 31, 2015, 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 our business and these other activities. During times of intense activity in other programs and ventures, they may devote less time and fewer resources to our business than is necessary or appropriate. If this occurs, the returns on our stockholders’ investment may suffer.
Our officers and one of our directors face conflicts of interest related to the positions they hold with affiliated entities, which could hinder our ability to successfully implement our investment objectives and to generate returns to our stockholders.
Our executive officers and one of our directors are also officers of our sponsor, our Advisor, our property manager, and other affiliated entities. As a result, these individuals owe fiduciary duties to these other entities and their owners, which fiduciary duties may conflict with the duties that they owe to our stockholders and us. Their loyalties to these other entities could result in actions or inactions that are detrimental to our business, which could harm the implementation of our investment objectives. Conflicts with our business and interests are most likely to arise from involvement in activities related to (1) allocation of new investments and management time and services between us and the other entities, (2) our purchase of properties from, or sale of properties to, affiliated entities, (3) the timing and terms of the investment in or sale of an asset, (4) development of our properties by affiliates, (5) investments with affiliates of our Advisor, (6) compensation to our Advisor, and (7) our relationship with our property manager. If we do not successfully implement our investment objectives, we may be unable to generate cash needed to make distributions to our stockholders and to maintain or increase the value of our assets.
Our Advisor will face conflicts of interest relating to the purchase of properties, and such conflicts may not be resolved in our favor, which could adversely affect our investment opportunities.
We may be buying properties at the same time as one or more of the other programs currently managed by officers and key personnel of our Advisor. Our sponsor, Advisor and its affiliates are actively involved in 11 other affiliated real estate programs, including GCEAR II, GAHR III, and GAHR IV, tenant in common programs and other real estate programs and partnerships that may compete with us or otherwise have similar business interests. Our Advisor and our property manager will have conflicts of interest in allocating potential properties, acquisition expenses, management time, services and other functions between various existing enterprises or future enterprises with which they may be or become involved. There is a risk that our Advisor will choose a property that provides lower returns to us than a property purchased by another program sponsored by our sponsor. We cannot be sure that officers and key personnel acting on behalf of our Advisor and on behalf of these other programs will act in our best interests when deciding whether to allocate any particular property to us. Such conflicts that are not resolved in our favor could result in a reduced level of distributions we may be able to pay to our stockholders and a reduction in the value of our stockholders’ investment. If our Advisor or its affiliates breach their legal or other obligations or duties to us, or do not resolve conflicts of interest, we may not meet our investment objectives, which could reduce our expected cash available for distribution to our stockholders and the value of our stockholders’ investment.
We may face a conflict of interest when purchasing properties from affiliates of our Advisor.
As of December 31, 2015, we have acquired seven of our properties from certain affiliates of our sponsor, including our Chief Executive Officer and Chairman, Kevin A. Shields, our Executive Vice President, David C. Rupert and our Vice President - Acquisitions, Don Pescara, along with several third party investors. We may purchase properties from one or more affiliates of our Advisor in the future. A conflict of interest may exist in such an acquisition and affiliates of our Advisor may be entitled to fees on both sides of such a related party transaction. The business interests of our Advisor and its affiliates may be adverse to, or to the detriment of, our interests. Additionally, the prices we pay to affiliates of our Advisor for our properties may be equal to, or in excess of, the prices paid by them, plus the costs incurred by them relating to the acquisition and financing of the properties. These prices will not be the subject of arm’s-length negotiations, which could mean that the acquisitions may be on terms less favorable to us than those negotiated in an arm’s-length transaction. Even though we will use an independent third party appraiser to determine fair market value when acquiring properties from our Advisor and its affiliates, we may pay more for particular properties than we would have in an arm’s-length transaction, which would reduce our cash available for investment in other properties or distribution to our stockholders. Furthermore, because any agreement that we enter into with affiliates of our Advisor will not be negotiated in an arm’s-length transaction, and as a result of the affiliation between our Advisor and its affiliates, our Advisor may be reluctant to enforce the agreements against such entities.

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Our nominating and corporate governance committee of our board of directors will approve all transactions between us and our Advisor and its affiliates. See Part I, Item 1, Business - Affiliate Transaction Policy.
We may face conflicts of interest when disposing of certain of our properties, which may cause us to make payments to the affiliated contributors of such properties pursuant to tax protection agreements.
In connection with the contribution of seven of our properties from certain affiliates of our sponsor and several other third party investors, we have entered into tax protection agreements with the contributors. These agreements obligate our Operating Partnership to reimburse the contributors for tax liabilities resulting from their recognition of income or gain if we cause our Operating Partnership to take certain actions with respect to the various properties, the result of which causes income or gain to the contributors for a period subsequent to the contribution of such property as specified in the tax protection agreement. As a result, we may face conflicts of interest if affiliates of our Advisor and sponsor recommend that we sell one of these properties, the result of which could cause our Operating Partnership to provide reimbursements under the tax protection agreements if we do not reinvest the proceeds of the sale pursuant to Section 1031 of the Code or any other tax deferred investment.
Our Advisor will face conflicts of interest relating to the incentive distribution structure under our operating partnership agreement, which could result in actions that are not necessarily in the long-term best interests of our stockholders.
Our Advisor and its affiliates will perform services for us in connection with the selection, acquisition and management of our properties pursuant to our advisory agreement. In addition, our Advisor will be entitled to fees and distributions that are structured in a manner intended to provide incentives to our Advisor to perform in our best interests and in the best interests of our stockholders. The amount of such compensation has not been determined as a result of arm’s-length negotiations, and such amounts may be greater than otherwise would be payable to independent third parties. While certain affiliates of our sponsor, including our Chief Executive Officer and Chairman, our Executive Vice President and our Vice President - Acquisitions, have an equity interest in our Operating Partnership through the contribution of certain of our properties, our Advisor is entitled to receive substantial minimum compensation regardless of performance. Therefore, our Advisor’s interests may not be wholly aligned with those of our stockholders. In that regard, our Advisor could be motivated to recommend riskier or more speculative investments in order for us to generate the specified levels of performance or sales proceeds that would entitle our Advisor to greater fees. In addition, our Advisor’s entitlement to fees upon the sale of our assets and to participate in sale proceeds could result in our Advisor recommending sales of our investments at the earliest possible time at which sales of investments would produce the level of return that would entitle our Advisor to compensation relating to such sales, even if continued ownership of those investments might be in our best long-term interest.
Our operating partnership agreement will require us to pay a performance-based termination distribution to our Advisor in the event that we terminate our Advisor prior to the listing of our shares for trading on an exchange or, absent such listing, in respect of its participation in net sale proceeds. To avoid paying this distribution, our independent directors may decide against terminating the advisory agreement prior to our listing of our shares or disposition of our investments even if, but for the termination distribution, termination of the advisory agreement would be in our best interest. In addition, the requirement to pay the distribution to our Advisor at termination could cause us to make different investment or disposition decisions than we would otherwise make in order to satisfy our obligation to pay the distribution to the terminated Advisor.
At the time it becomes necessary for our board of directors to determine which liquidity event, if any, is in the best interests of us and our stockholders, our Advisor may not agree with the decision of our board as to which liquidity event, if any, we should pursue if there is a substantial difference in the amount of subordinated distributions the Advisor may receive for each liquidity event. Our Advisor may prefer a liquidity event with higher subordinated distributions. If our board of directors decides to list our shares for trading on an exchange, our board may also decide to merge us with our Advisor in anticipation of the listing process. Such merger may result in substantial compensation to the Advisor which may create certain conflicts of interest.
Our Advisor will face conflicts of interest relating to joint ventures that we may form with affiliates of our Advisor, which conflicts could result in a disproportionate benefit to other joint venture partners at our expense.
We may enter into joint ventures with other programs sponsored by our sponsor, including other REITs, for the acquisition, development or improvement of properties. Our Advisor may have conflicts of interest in determining which program sponsored by our sponsor should enter into any particular joint venture agreement. The co-venturer may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. In addition, our Advisor may face a conflict in structuring the terms of the relationship between our interests and the interest of the affiliated co-venturer and in managing the joint venture. Since our Advisor and its affiliates will control both the affiliated co-venturer, and, to a certain extent, us, agreements and transactions between the co-venturers with respect to any such joint venture will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers, which may result in the co-venturer receiving benefits greater than the benefits that we receive. In addition, we may assume liabilities related to

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the joint venture that exceed the percentage of our investment in the joint venture, and this could reduce the returns on our stockholders investment.
There is no separate counsel for us and our affiliates, which could result in conflicts of interest.
Nelson Mullins Riley & Scarborough LLP ("Nelson Mullins") acts as legal counsel to us and also represents our sponsor, our Advisor, and some of their affiliates. There is a possibility in the future that the interests of the various parties may become adverse and, under the code of professional responsibility of the legal profession, Nelson Mullins may be precluded from representing any one or all of such parties. If any situation arises in which our interests appear to be in conflict with those of our Advisor or its affiliates, additional counsel may be retained by one or more of the parties to assure that their interests are adequately protected. Moreover, should a conflict of interest not be readily apparent, Nelson Mullins may inadvertently act in derogation of the interest of the parties which could affect our ability to meet our investment objectives.
Risks Related to Our Corporate Structure
The limit on the number of shares a person may own may discourage a takeover that could otherwise result in a premium price to our stockholders.
In order for us to qualify as a REIT, no more than 50% of our outstanding stock may be beneficially owned, directly or indirectly, by five or fewer individuals (including certain types of entities) at any time during the last half of each taxable year. To ensure that we do not fail to qualify as a REIT under this test, our charter restricts ownership by one person or entity to no more than 9.8% in value or number, whichever is more restrictive, of any class of our outstanding stock. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock.
Our charter permits our board of directors to issue stock with terms that may subordinate the rights of common stockholders or discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.
Our charter permits our board of directors to issue up to 900,000,000 shares of capital stock. In addition, our board of directors, without any action by our stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series of stock that we have authority to issue. Our board of directors may classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms or conditions of redemption of any such stock. Thus, our board of directors could authorize the issuance of preferred stock with terms and conditions that could have a priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might otherwise provide a premium price for holders of our common stock. In addition, our board can authorize the issuance of preferred units under our Operating Partnership which may have similar preferential rights as preferred stock. There is no limit on the amount of preferred units our Operating Partnership could issue.
We are not afforded the protection of Maryland law relating to business combinations.
Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
any person who beneficially owns 10% or more of the voting power of the corporation’s shares; or
an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.
These prohibitions are intended to prevent a change of control by interested stockholders who do not have the support of our board of directors. Since our charter contains limitations on ownership of 9.8% or more of our common stock, we opted out of the business combinations statute in our charter. Therefore, we will not be afforded the protections of this statute and, accordingly, there is no guarantee that the ownership limitations in our charter would provide the same measure of protection as the business combinations statute and prevent an undesired change of control by an interested stockholder.
Our stockholders’ investment return may be reduced if we are required to register as an investment company under the Investment Company Act of 1940. If we become an unregistered investment company, we will not be able to continue our business.

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We do not intend to register as an investment company under the 1940 Act. As of December 31, 2015, we owned 74 properties, and our intended investments in real estate will represent the substantial majority of our total asset mix, which would not subject us to registration under the 1940 Act. In order to maintain an exemption from regulation under the 1940 Act, we must engage primarily in the business of buying real estate. If we are unable to remain fully invested in real estate holdings, we may avoid being required to register as an investment company by temporarily investing any unused proceeds in government securities with low returns, which would reduce the cash available for distribution to investors and possibly lower our stockholders’ returns.
To maintain compliance with our 1940 Act exemption, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may be required to acquire additional income- or loss-generating assets that we might not otherwise acquire or forgo opportunities to acquire interests in companies that we would otherwise want to acquire. If we are required to register as an investment company but fail to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
Our stockholders are bound by the majority vote on matters on which our stockholders are entitled to vote and, therefore, a stockholder’s vote on a particular matter may be superseded by the vote of other stockholders.
Stockholders may vote on certain matters at any annual or special meeting of stockholders, including the election of directors. However, stockholders will be bound by the majority vote on matters requiring approval of a majority of the stockholders even if they do not vote with the majority on any such matter.
If stockholders do not agree with the decisions of our board of directors, they only have limited control over changes in our policies and operations and may not be able to change such policies and operations, except as provided for in our charter and under applicable law.
Our board of directors determines our major policies, including our policies regarding investments, operations, capitalization, financing, growth, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of our stockholders. Under the Maryland General Corporation Law and our charter, our stockholders have a right to vote only on the following:
the election or removal of directors;
any amendment of our charter, except that our board of directors may amend our charter without stockholder approval to increase or decrease the aggregate number of our shares, to increase or decrease the number of our shares of any class or series that we have the authority to issue, or to classify or reclassify any unissued shares by setting or changing the preferences, conversion or other rights, restrictions, limitations as to distributions, qualifications or terms and conditions of redemption of such shares, provided however, that any such amendment does not adversely affect the rights, preferences and privileges of the stockholders;
our liquidation or dissolution; and
any merger, consolidation or sale or other disposition of substantially all of our assets.
All other matters are subject to the discretion of our board of directors. Therefore, our stockholders are limited in their ability to change our policies and operations.
Our rights and the rights of our stockholders to recover claims against our officers, directors and our Advisor are limited, which could reduce our stockholders’ and our recovery against them if they cause us to incur losses.
Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the corporation’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter, in the case of our directors, officers, employees and agents, and the advisory agreement, in the case of our Advisor, requires us to indemnify our directors, officers, employees and agents and our Advisor and its affiliates for actions taken by them in good faith and without negligence or misconduct. Additionally, our charter limits the liability of our directors and officers for monetary damages to the maximum extent permitted under Maryland law. As a result, we and our stockholders may have more limited rights against our directors, officers, employees and agents, and our Advisor and its affiliates, than might otherwise exist under common law, which could reduce our stockholders’ and our recovery against them. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents of our Advisor in some cases which would decrease the cash otherwise available for distribution to our stockholders.
Our stockholders’ interest in us will be diluted as we issue additional shares.
Our stockholders will not have preemptive rights to any shares issued by us in the future. Subject to any limitations set forth under Maryland law, our board of directors may increase the number of authorized shares of stock (currently 900,000,000

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shares), increase or decrease the number of shares of any class or series of stock designated, or reclassify any unissued shares without the necessity of obtaining stockholder approval. All of such shares may be issued in the discretion of our board of directors. Therefore, as we (1) sell additional shares in the future, including those issued pursuant to our DRP Offering, (2) sell securities that are convertible into shares of our common stock, (3) issue shares of our common stock in a private offering of securities to institutional investors, (4) issue shares of restricted common stock or stock options to our independent directors, (5) issue shares to our Advisor, its successors or assigns, in payment of an outstanding payment obligation as set forth under our operating partnership agreement, (6) issue shares of our common stock to sellers of properties acquired by us in connection with an exchange of limited partnership interests of our Operating Partnership, or (7) issue preferred units, existing stockholders and investors purchasing shares in our DRP Offering will experience dilution of their equity investment in us. Because the limited partnership interests of our Operating Partnership may, in the discretion of our board of directors, be exchanged for shares of our common stock, any merger, exchange or conversion between our Operating Partnership and another entity ultimately could result in the issuance of a substantial number of shares of our common stock, thereby diluting the percentage ownership interest of other stockholders. As of December 31, 2015, we had 175,184,519 shares of common stock issued and outstanding, and we owned approximately 97% of the limited partnership units of the Operating Partnership. Our sponsor and certain of its affiliates owned approximately 1% of the limited partnership units of the Operating Partnership, and the remaining approximately 2% of the limited partnership units were owned by third parties. Because of these and other reasons described in this “Risk Factors” section, stockholders should not expect to be able to own a significant percentage of our shares.
In addition, the net book value per share of our common stock was approximately $7.86 as of December 31, 2015 as compared to our offering price per share pursuant to our DRP Offering of $10.40. Therefore, upon a purchase of our shares in the DRP Offering, stockholders will be immediately diluted based on the net book value. Net book value takes into account a deduction of commissions and/or expenses paid by us, and is calculated to include depreciated tangible assets, deferred financing costs, and amortized intangible assets, which include in-place market leases. Net book value is not an estimate of net asset value, or of the market value or other value of our common stock.
Payment of substantial fees and expenses to our Advisor and its affiliates will reduce cash available for investment and distribution.
Our Advisor and its affiliates will perform services for us in connection with the selection and acquisition of our investments, and the management of our properties. They will be paid substantial fees for these services, which will reduce the amount of cash available for investment in properties or distribution to stockholders.
We are uncertain of our sources of debt or equity for funding our future capital needs. If we cannot obtain funding on acceptable terms, our ability to make necessary capital improvements to our properties may be impaired or delayed.
To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our taxable income each year, excluding capital gains. Because of this distribution requirement, it is not likely that we will be able to fund a significant portion of our future capital needs from retained earnings. We have not identified all sources of debt or equity for future funding, and such sources of funding may not be available to us on favorable terms or at all. If, however, we do not have access to sufficient funding in the future, we may not be able to make necessary capital improvements to our properties, pay other expenses or expand our business.
Risks Related to Investments in Single Tenant Real Estate
Many of our properties will depend upon a single tenant for all or a majority of their rental income, and our financial condition and ability to make distributions may be adversely affected by the bankruptcy or insolvency, a downturn in the business, or a lease termination of a single tenant, including those caused by the current economic downturn.
We expect that many of our properties will be occupied by only one tenant or will derive a majority of their rental income from one tenant and, therefore, the success of those properties will be materially dependent on the financial stability of such tenants. A tenant at one or more of our properties may be negatively affected by an economic slowdown. Lease payment defaults by tenants, including those caused by an economic downturn, could cause us to reduce the amount of distributions we pay. A default of a tenant on its lease payments to us and the potential resulting vacancy would cause us to lose the revenue from the property and force us to find an alternative source of revenue to meet any mortgage payment and prevent a foreclosure if the property is subject to a mortgage. In the event of a default, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-letting the property. If a lease is terminated or an existing tenant elects not to renew a lease upon its expiration, there is no assurance that we will be able to lease the property for the rent previously received or sell the property without incurring a loss. A default by a tenant, the failure of a guarantor to fulfill its obligations or other premature termination of a lease, or a tenant’s election not to extend a lease upon its expiration, could have an adverse effect on our financial condition and our ability to pay distributions.
A significant portion of our leases are due to expire around the same period of time, which may (i) cause a loss in the value of our stockholders’ investment until the affected properties are re-leased, (ii) increase our exposure to downturns in

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the real estate market during the time that we are trying to re-lease such space and (iii) increase our capital expenditure requirements during the releasing period.
Our tenant leases are set to expire as shown below (dollars in thousands):
Year of Lease Expiration
Annualized
Net Rent
(unaudited)(1)
 
Number of
Lessees
 
Square Feet
 
Percentage of
Annualized
Net Rent
2016
$
903

 
3

 
91,700

 
0.4
%
2017
9,642

 
6

 
560,900

 
4.2
%
2018
24,017

 
11

 
2,507,800

 
10.4
%
2019
27,187

 
9

 
1,556,900

 
11.8
%
2020
19,503

 
10

 
1,668,000

 
8.5
%
2021
11,196

 
7

 
1,106,500

 
4.9
%
2022
15,513

 
9

 
1,315,300

 
6.8
%
2023
17,641

 
7

 
1,278,200

 
7.7
%
2024
27,022

 
12

 
2,980,700

 
11.8
%
2025
20,313

 
8

 
1,479,700

 
8.8
%
2026
14,299

 
5

 
851,000

 
6.2
%
2027
7,565

 
3

 
359,800

 
3.3
%
2028
2,376

 
1

 
231,400

 
1.0
%
2029
6,472

 
1

 
249,400

 
2.8
%
2030
12,858

 
2

 
1,931,400

 
5.6
%
2035
13,335

 
1

 
459,800

 
5.8
%
Total
$
229,842

 
95

 
18,628,500

 
100.0
%

(1)
Net rent is based on (a) the contractual base rental payments assuming the lease requires the tenant to reimburse us for certain operating expenses or the property is self-managed by the tenant and the tenant is responsible for all, or substantially all, of the operating expenses; or (b) contractual rent payments less certain operating expenses that are our responsibility for the 12-month period subsequent to December 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.
We may experience similar concentrations of lease expiration dates in the future. As the expiration date of a lease for a single-tenant building approaches, the value of the property generally declines because of the risk that the building may not be re-leased upon expiration of the existing lease or may be re-leased on terms less favorable than those of the expiring leases. Therefore, if we were to list or liquidate our portfolio prior to the favorable re-leasing of the space, our stockholders may suffer a loss on their investment. Our stockholders may also suffer a loss (and a reduction in distributions) after the expiration of the lease terms if we are not able to re-lease such space on terms similar to or more favorable than the terms of the expiring lease. These expiring leases, therefore, increase our risk to real estate downturns during and approaching these periods of concentrated lease expirations. In addition, we may have to spend significant capital in order to ready the space for new tenants. To meet our need for cash at this time, we may have to increase borrowings or reduce our distributions, or both.
If a tenant declares bankruptcy, we may be unable to collect balances due under relevant leases.
Any of our tenants, or any guarantor of a tenant’s lease obligations, could be subject to a bankruptcy proceeding pursuant to Title 11 of the bankruptcy laws of the United States. Such a bankruptcy filing would bar all efforts by us to collect pre-bankruptcy debts from these entities or their properties, unless we receive an enabling order from the bankruptcy court. Post-bankruptcy debts would be paid currently. If a lease is assumed, all pre-bankruptcy balances owing under it must be paid in full. If a lease is rejected by a tenant in bankruptcy, we would have a general unsecured claim for damages. If a lease is rejected, it is unlikely we would receive any payments from the tenant because our claim is capped at the rent reserved under the lease, without acceleration, for the greater of one year or 15% of the remaining term of the lease, but not greater than three years, plus rent already due but unpaid. This claim could be paid only in the event funds were available, and then only in the same percentage as that realized on other unsecured claims.
A tenant or lease guarantor bankruptcy could delay efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. Such an event could cause a decrease or cessation of rental payments that would mean a reduction in our cash flow and the amount available for distributions to our stockholders. In the event of a bankruptcy, we cannot assure our stockholders that the tenant or its trustee will assume our lease. If a given lease, or guaranty of a lease, is not assumed, our cash flow and the amounts available for distributions to our stockholders may be adversely affected.

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Net leases may not result in fair market lease rates over time.
We expect a large portion of our rental income to come from net leases. Net leases are typically characterized by (1) longer lease terms; (2) fixed rental rate increases during the primary term of the lease; and (3) fixed rental rates for initial renewal options, and, thus, there is an increased risk that these contractual lease terms will fail to result in fair market rental rates. As a result, our income and distributions to our stockholders could be lower than they would otherwise be if we did not engage in net leases.
Our real estate investments may include special-use single tenant properties that may be difficult to sell or re-lease upon tenant defaults or early lease terminations.
We have investments in commercial and industrial properties, which may include manufacturing facilities and special-use single tenant properties. These types of properties are relatively illiquid compared to other types of real estate and financial assets. This illiquidity will limit our ability to quickly change our portfolio in response to changes in economic or other conditions. With these properties, if the current lease is terminated or not renewed or, in the case of a mortgage loan, if we take such property in foreclosure, we may be required to renovate the property or to make rent concessions in order to lease the property to another tenant or sell the property. In addition, in the event we are forced to sell the property, we may have difficulty selling it to a party other than the tenant or borrower due to the special purpose for which the property may have been designed. These and other limitations may affect our ability to sell or re-lease properties and adversely affect returns to our stockholders.
A high concentration of our properties in a particular geographic area, or that have tenants in a similar industry, would magnify the effects of downturns in that geographic area or industry.
In the event that we have a concentration of properties in any particular geographic area, any adverse situation that disproportionately affects that geographic area would have a magnified adverse effect on our portfolio. Similarly, if our tenants are concentrated in a certain industry or industries, any adverse effect to that industry generally would have a disproportionately adverse effect on our portfolio. As of December 31, 2015, approximately 15.5% and 13.7% of our total rental income, based on the 12-month period subsequent to December 31, 2015, was concentrated in the states of California and Texas, respectively. Additionally, as of December 31, 2015, approximately 26.7%, 23.1%, and 19.6% of our total rental income, based on the 12-month period subsequent to December 31, 2015, was concentrated in the manufacturing, finance and insurance, and information industries, respectively.
If a sale-leaseback transaction is recharacterized in a tenant’s bankruptcy proceeding, our financial condition could be adversely affected.
We may enter into sale-leaseback transactions, whereby we would purchase a property and then lease the same property back to the person from whom we purchased it. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback may be recharacterized as either a financing or a joint venture, either of which outcomes could adversely affect our business. If the sale-leaseback were recharacterized as a financing, we might not be considered the owner of the property, and as a result would have the status of a creditor in relation to the tenant. In that event, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease, with the claim arguably secured by the property. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If confirmed by the bankruptcy court, we could be bound by the new terms, and prevented from foreclosing our lien on the property. If the sale-leaseback were recharacterized as a joint venture, our lessee and we could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the lessee relating to the property. Either of these outcomes could adversely affect our cash flow and the amount available for distributions to our stockholders.
General Risks Related to Investments in Real Estate
Our operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and we cannot assure our stockholders that we will be profitable or that we will realize growth in the value of our real estate properties.
Our operating results will be subject to risks generally incident to the ownership of real estate, including:
changes in general economic or local conditions;
changes in supply of or demand for similar or competing properties in an area;
changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive;
changes in tax, real estate, environmental and zoning laws;
changes in property tax assessments and insurance costs; and

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increases in interest rates and tight debt and equity supply.
These and other reasons may prevent us from being profitable or from realizing growth or maintaining the value of our real estate properties.
We may obtain only limited warranties when we purchase a property.
The seller of a property will often sell such property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. Also, certain sellers of real estate are single purpose entities without significant other assets. The purchase of properties with limited warranties or from undercapitalized sellers increases the risk that we may lose some or all of our invested capital in the property as well as the loss of rental income from that property.
Our inability to sell a property when we desire to do so could adversely impact our ability to pay cash distributions to our stockholders.
The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Real estate generally cannot be sold quickly. Also, the tax laws applicable to REITs require that we hold our properties for investment, rather than for sale in the ordinary course of business, which may cause us to forgo or defer sales of properties that otherwise would be in our best interest. Therefore, we may not be able to dispose of properties promptly, or on favorable terms, in response to economic or other market conditions, and this may adversely impact our ability to make distributions to our stockholders.
In addition, we may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure our stockholders that we will have funds available to correct such defects or to make such improvements.
In acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These provisions would also restrict our ability to sell a property.
We may not be able to sell our properties at a price equal to, or greater than, the price for which we purchased such properties, which may lead to a decrease in the value of our assets.
We may be purchasing our properties at a time when cap rates are at historically low levels and purchase prices are high. Therefore, the value of our properties may not increase over time, which may restrict our ability to sell our properties, or in the event we are able to sell such property, may lead to a sale price less than the price that we paid to purchase the properties.
We may acquire or finance properties with lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.
Lock-out provisions are provisions that generally prohibit repayment of a loan balance for a certain number of years following the origination date of a loan. Such provisions are typically provided for by the Code or the terms of the agreement underlying a loan. Lock-out provisions could materially restrict us from selling or otherwise disposing of or refinancing properties. These provisions would affect our ability to turn our investments into cash and thus affect cash available for distribution to our stockholders. Lock-out provisions may prohibit us from reducing the outstanding indebtedness with respect to any properties, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties.
Lock-out provisions could impair our ability to take actions during the lock-out period that would otherwise be in our stockholders’ best interests and, therefore, may have an adverse impact on the value of the shares, relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in our stockholders’ best interests.
Adverse economic conditions may negatively affect our returns and profitability.
The following market and economic challenges may adversely affect our operating results:
poor economic times may result in customer defaults under leases or bankruptcy;
re-leasing may require reduced rental rates under the new leases; and
increased insurance premiums, resulting in part from the increased risk of terrorism and natural disasters, may reduce funds available for distribution.

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We are susceptible to the effects of adverse macro-economic events that can result in higher unemployment, shrinking demand for products, large-scale business failures and tight credit markets. Because our portfolio consists of single-tenant commercial and industrial properties, we are subject to risks inherent in investments in a single tenant properties in which we rely on the payment of rent from an individual tenant, and our results of operations are sensitive to changes in overall economic conditions that impact the tenant's business and on-going cash flow that can cause the tenant to cease making rental payments. A continuation of, or slow recovery from, ongoing adverse domestic and foreign economic conditions, such as employment levels, business conditions, interest rates, tax rates, fuel and energy costs, could continue to negatively impact a tenant's business resulting in insufficient cash flow to continue as a going-concern and ultimately the vacating of the occupied property. Such circumstances will have a direct impact on our cash flow from operations and cause us to incur costs, such as on-going maintenance during vacancy and leasing costs, that could have an impact to continue the payment of distributions to our shareholders.
Since we cannot predict when real estate markets may recover, the value of the properties we acquire may decline if market conditions persist or worsen. Further, the results of operations for a property in any one period may not be indicative of results in future periods, and the long-term performance of such property generally may not be comparable to, and cash flows may not be as predictable as, other properties owned by third parties in the same or similar industry.
If we suffer losses that are not covered by insurance or that are in excess of insurance coverage, we could lose invested capital and anticipated profits.
Material losses may occur in excess of insurance proceeds with respect to any property, as insurance may not be sufficient to fund the losses. However, there are types of losses, generally of a catastrophic nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, which are either uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. In addition, we may decide not to obtain any or adequate earthquake or similar catastrophic insurance coverage because the premiums are too high even in instances where it may otherwise be available. Insurance risks associated with potential terrorism acts could sharply increase the premiums we pay for coverage against property and casualty claims. Additionally, mortgage lenders in some cases have begun to insist that commercial property owners purchase specific coverage against terrorism as a condition for providing mortgage loans. It is uncertain whether such insurance policies will be available, or available at reasonable cost, which could inhibit our ability to finance or refinance our potential properties. In these instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We cannot assure our stockholders that will have adequate coverage for such losses. The Terrorism Risk Insurance Act of 2002 is designed for a sharing of terrorism losses between insurance companies and the federal government. We cannot be certain how this act will impact us or what additional cost to us, if any, could result. If such an event damaged or destroyed one or more of our properties, we could lose both our invested capital and anticipated profits from such property.
Delays in the acquisition, development and construction of properties may have adverse effects on our results of operations and returns to our stockholders.
Delays we encounter in the selection, acquisition and development of real properties could adversely affect our stockholders’ returns. Investments in unimproved real property, properties that are in need of redevelopment, or properties that are under development or construction will be subject to the uncertainties associated with the development and construction of real property, including those related to re-zoning land for development, environmental concerns of governmental entities and/or community groups and our builders’ ability to build in conformity with plans, specifications, budgets and timetables. If a builder fails to perform, we may resort to legal action to rescind the purchase or the construction contract or to compel performance. A builder’s performance may also be affected or delayed by conditions beyond the builder’s control.
Where properties are acquired prior to the start of construction or during the early stages of construction, it will typically take several months to complete construction and lease available space. Therefore, our stockholders could suffer delays in the receipt of cash distributions attributable to those particular real properties. We may incur additional risks when we make periodic progress payments or other advances to builders before they complete construction. These and other factors can result in increased costs of a project or loss of our investment. We also must rely on rental income and expense projections and estimates of the fair market value of a property upon completion of construction when agreeing upon a purchase price at the time we acquire the property. If our projections are inaccurate, we may pay too much for a property, and the return on our investment could suffer.
Costs of complying with governmental laws and regulations, including those relating to environmental matters, may adversely affect our income and the cash available for distribution.
All real property we acquire, and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health, safety and fire. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination

23


associated with disposals. Some of these laws and regulations may impose joint and several liability on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. This liability could be substantial. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such property as collateral for future borrowings.
Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures. Future laws, ordinances or regulations may impose material environmental liability. Additionally, our tenants’ operations, the existing condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect our properties. Any material expenditures, fines, or damages we must pay will reduce our ability to make distributions to our stockholders and may reduce the value of our stockholders’ investment.
Further, we may not obtain an independent third party environmental assessment for every property we acquire. In addition, we cannot assure our stockholders that any such assessment that we do obtain will reveal all environmental liabilities or that a prior owner of a property did not create a material environmental condition not known to us. We cannot predict what other environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted, or what environmental conditions may be found to exist in the future. We cannot assure our stockholders that our business, assets, results of operations, liquidity or financial condition will not be adversely affected by these laws, which may adversely affect cash available for distribution, and the amount of distributions to our stockholders.
Our costs associated with complying with the Americans with Disabilities Act may affect cash available for distribution.
Our properties will be subject to the Americans with Disabilities Act of 1990, or ADA. Under the ADA, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services, including restaurants and retail stores, be made accessible and available to people with disabilities. The ADA’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties, or, in some cases, an award of damages. We will attempt to acquire properties that comply with the ADA or place the burden on the seller or other third party to ensure compliance with the ADA. However, we cannot assure our stockholders that we will be able to acquire properties or allocate responsibilities in this manner. If we cannot, our funds used for ADA compliance may affect cash available for distribution and the amount of distributions to our stockholders.
If we sell properties by providing financing to purchasers, defaults by the purchasers would adversely affect our cash flows.
In some instances we may sell our properties by providing financing to purchasers. When we provide financing to purchasers, we will bear the risk that the purchaser may default, which could negatively impact our cash distributions to stockholders. Even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon the sale are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years.
We will be subject to risks associated with the co-owners in our co-ownership arrangements that otherwise may not be present in other real estate investments.
We may enter into joint ventures or other co-ownership arrangements with respect to a portion of the properties we acquire. Ownership of co-ownership interests involves risks generally not otherwise present with an investment in real estate such as the following:
the risk that a co-owner may at any time have economic or business interests or goals that are or become inconsistent with our business interests or goals;
the risk that a co-owner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives;
the possibility that an individual co-owner might become insolvent or bankrupt, or otherwise default under the applicable mortgage loan financing documents, which may constitute an event of default under all of the applicable mortgage loan financing documents or allow the bankruptcy court to reject the tenants-in-common agreement or management agreement entered into by the co-owner owning interests in the property;
the possibility that a co-owner might not have adequate liquid assets to make cash advances that may be required in order to fund operations, maintenance and other expenses related to the property, which could result in the loss

24


of current or prospective tenants and may otherwise adversely affect the operation and maintenance of the property, and could cause a default under the mortgage loan financing documents applicable to the property and may result in late charges, penalties and interest, and may lead to the exercise of foreclosure and other remedies by the lender;
the risk that a co-owner could breach agreements related to the property, which may cause a default under, or result in personal liability for, the applicable mortgage loan financing documents, violate applicable securities laws and otherwise adversely affect the property and the co-ownership arrangement; or
the risk that a default by any co-owner would constitute a default under the applicable mortgage loan financing documents that could result in a foreclosure and the loss of all or a substantial portion of the investment made by the co-owner.
Any of the above might subject a property to liabilities in excess of those contemplated and thus reduce the amount available for distribution to our stockholders.
In the event that our interests become adverse to those of the other co-owners, we may not have the contractual right to purchase the co-ownership interests from the other co-owners. Even if we are given the opportunity to purchase such co-ownership interests in the future, we cannot guarantee that we will have sufficient funds available at the time to purchase co-ownership interests from the co-owners.
We might want to sell our co-ownership interests in a given property at a time when the other co-owners in such property do not desire to sell their interests. Therefore, we may not be able to sell our interest in a property at the time we would like to sell. In addition, we anticipate that it will be much more difficult to find a willing buyer for our co-ownership interests in a property than it would be to find a buyer for a property we owned outright.
Risks Associated with Debt Financing
If we breach covenants under our unsecured credit agreement with KeyBank, National Association ("KeyBank") and other syndication partners, or our loan agreements with certain other lenders, we could be held in default under such loans, which could accelerate our repayment date and materially adversely affect the value of our stockholders’ investment in us.
We entered into an unsecured credit facility with KeyBank and a syndicate of lenders partners under which we were provided with a $1.14 billion senior unsecured credit facility consisting of a $500.0 million senior unsecured revolver and a $640.0 million senior unsecured term loan.
The credit facility requires that we must maintain a pool of real properties, which is subject to the following requirements: (i) no less than 30 unencumbered asset pool properties at all times; (ii) no greater than 15% of the unencumbered asset pool value may be contributed by any single unencumbered asset pool property; (iii) no greater than 15% of the aggregate unencumbered asset pool value may be contributed by unencumbered asset pool properties subject to ground leases; (iv) no greater than 15% of the aggregate unencumbered asset pool value may be contributed by unencumbered asset pool properties that are under development; (v) a minimum weighted average occupancy of all unencumbered asset pool properties be no less than 90%; (vi) minimum weighted average remaining lease term for all unencumbered properties shall be no less than five years; and (vii) other limitations as determined by KeyBank upon further diligence of the unencumbered asset pool properties. Upon the occurrence of certain events described further in the KeyBank credit facility agreement, KeyBank may require the borrower to grant a first perfected mortgage/deed of trust lien on each of the unencumbered asset pool properties.
The credit facility includes a number of financial covenant requirements, including, but not limited to, a maximum consolidated leverage ratio (60% or, for a maximum of two consecutive quarters following a material acquisition, 65%), a minimum fixed charge ratio (1.5 to 1), a maximum secured debt ratio (40%), a maximum secured recourse debt ratio (5%), a maximum unhedged variable rate debt (30%), and minimum tangible net worth of at least approximately $1.2 billion plus 75% of the net proceeds of any common or preferred share issuance after the effective date and 75% of the amount of units of limited partnership interest in our Operating Partnership issued in connection with the contribution of properties, a maximum payout ratio of 95% of distribution to core funds from operations, minimum unsecured interest coverage ratio (2 to 1).
If we were to default under the KeyBank credit facility agreement, the lenders could accelerate the date for our repayment of the loan, and could sue to enforce the terms of the loan. In addition, upon the occurrence of certain events described further in the KeyBank credit facility agreement, the lenders may have the ability to place a first mortgage on certain of the properties in the unencumbered asset pool, and could ultimately foreclose on such properties. Such foreclosure could result in a material loss for us and would adversely affect the value of our stockholders’ investment in us.
We have broad authority to incur debt, and high debt levels could hinder our ability to make distributions and could decrease the value of our stockholders’ investment.
Although, technically, our board may approve unlimited levels of debt, our charter generally limits us to incurring debt no greater than 300% of our net assets before deducting depreciation or other non-cash reserves (equivalent to 75% leverage),

25


unless any excess borrowing is approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report, along with a justification for such excess borrowing. High debt levels would cause us to incur higher interest charges, would result in higher debt service payments, and could be accompanied by restrictive covenants. These factors could limit the amount of cash we have available to distribute and could result in a decline in the value of our stockholders’ investment.
We have incurred, and intend to continue to incur, mortgage indebtedness and other borrowings, which may increase our business risks.
We have placed, and intend to continue to place, permanent financing on our properties or obtain a credit facility or other similar financing arrangement in order to acquire properties. We may also decide to later further leverage our properties. We may incur mortgage debt and pledge all or some of our real properties as security for that debt to obtain funds to acquire real properties. We may borrow if we need funds to pay a desired distribution rate to our stockholders. We may also borrow if we deem it necessary or advisable to assure that we maintain our qualification as a REIT for federal income tax purposes. If there is a shortfall between the cash flow from our properties and the cash flow needed to service mortgage debt, then the amount available for distribution to our stockholders may be reduced.
If we are unable to make our debt payments when required, a lender could foreclose on the property or properties securing such debt, which could reduce the amount of distributions we pay to our stockholders and decrease the value of our stockholders’ investment.
We may have a significant amount of acquisition indebtedness secured by first priority mortgages on our properties. In addition, some of our properties contain, and any future acquisitions we make may contain, mortgage financing. If we are unable to make our debt payments when required, a lender could foreclose on the property or properties securing such debt. In any such event, we could lose some or all of our investment in these properties, which would reduce the amount of distributions we pay to our stockholders and decrease the value of our stockholders’ investment.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
When providing financing, a lender could impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property, discontinue insurance coverage or replace our Advisor. These or other limitations may adversely affect our flexibility and limit our ability to make distributions to our stockholders.
Increases in interest rates would increase the amount of our debt payments and adversely affect our ability to make distributions to you.
We currently have outstanding debt payments which are indexed to variable interest rates. We may also incur additional debt or preferred equity in the future which rely on variable interest rates. Increases in these variable interest rates in the future would increase our interest costs, which would likely reduce our cash flows and our ability to make distributions to you. In addition, if we need to make payments on instruments which contain variable interest during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times that may not permit realization of the maximum return on such investments.
Disruptions in the credit markets and real estate markets could have a material adverse effect on our results of operations, financial condition, and ability to pay distributions to our stockholders.
Future disruptions in domestic and international financial markets may severely impact the amount of credit available to us and may contribute to rising costs associated with obtaining or maintaining such credit. In such an instance, we may not be able to obtain new debt financing, or maintain our existing debt financing, on terms and conditions we find to be ideal. If disruptions in the credit markets occur and are ongoing, our ability to borrow monies to finance the purchase of, or other activities related to, real estate assets may be negatively impacted. In addition, if we pay fees to lock in a favorable interest rate, falling interest rates or other factors could require us to forfeit these fees. All of these events could have a material adverse effect on our results of operations, financial condition and ability to pay distributions.
In addition to volatility in the credit markets, the real estate market is subject to fluctuation and can be impacted by factors such as general economic conditions, supply and demand, availability of financing and interest rates. To the extent we purchase real estate in an unstable market, we are subject to the risk that if the real estate market ceases to attract the same level of capital investment in the future that it attracts at the time of our purchases, or the number of companies seeking to acquire properties decreases, the value of our investments may not appreciate or may decrease significantly below the amount we pay for these investments.
Federal Income Tax Risks

26


Failure to qualify as a REIT would adversely affect our operations and our ability to make distributions, as we would incur additional tax liabilities.
We believe we operate in a manner that allows us to qualify as a REIT for U.S. federal income tax purposes under the Code. Qualification as a REIT involves highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. Our qualification as a REIT will depend upon our ability to meet, through investments, actual operating results, distributions and satisfaction of specific stockholder rules, the various tests imposed by the Code.
If we fail to qualify as a REIT for any taxable year, we will be subject to federal income tax and any applicable alternative minimum tax on our taxable income at regular corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the distributions paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
To qualify as a REIT, and to avoid the payment of federal income and excise taxes and maintain our REIT status, we may be forced to borrow funds, use proceeds from the issuance of securities, or sell assets to pay distributions, which may result in our distributing amounts that may otherwise be used for our operations.
To obtain the favorable tax treatment accorded to REITs, we normally will be required each year to distribute to our stockholders at least 90% of our real estate investment trust taxable income, determined without regard to the deduction for distributions paid and by excluding net capital gains. We will be subject to federal income tax on our undistributed taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income, and (3) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on acquisitions of properties and it is possible that we might be required to borrow funds, use proceeds from the issuance of securities or sell assets in order to distribute enough of our taxable income to maintain our REIT status and to avoid the payment of federal income and excise taxes. These methods of obtaining funding could affect future distributions by increasing operating costs and decreasing available cash. In addition, such distributions may constitute a return of capital.
If our Operating Partnership fails to maintain its status as a partnership for federal income tax purposes, its income would be subject to taxation and our REIT status would be terminated.
If the IRS were to successfully challenge the status of our Operating Partnership as a partnership, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that our Operating Partnership could make to us. This would also result in our losing REIT status and becoming subject to a corporate level tax on our own income. This would substantially reduce our cash available to pay distributions and the return on our stockholders’ investment. In addition, if any of the entities through which our Operating Partnership owns its properties, in whole or in part, loses its characterization as a partnership for federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to our Operating Partnership. Such a recharacterization of our Operating Partnership or an underlying property owner could also threaten our ability to maintain REIT status.
Our stockholders may have tax liability on distributions they elect to reinvest in our common stock.
If stockholders participate in our distribution reinvestment plan, they will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested in common stock to the extent the amount reinvested was not a tax-free return of capital. As a result, unless stockholders are a tax-exempt entity, they may have to use funds from other sources to pay their tax liability on the value of the common stock received.
In certain circumstances, we may be subject to federal and state income taxes as a REIT, which would reduce our cash available for distribution to our stockholders.
Even if we qualify and maintain our status as a REIT, we may be subject to federal income taxes or state taxes. For example, net income from a “prohibited transaction” will be subject to a 100% tax. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our property and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability. We may also be subject to state and local taxes on our income or property, either directly or at the level of the Operating Partnership or at the level of the other companies through which we indirectly own our assets. Any federal or state taxes we pay will reduce our cash available for distribution to our stockholders.
We may be required to pay some taxes due to actions of our taxable REIT subsidiary which would reduce our cash available for distribution to our stockholders.

27


Any net taxable income earned directly by our taxable REIT subsidiaries, or through entities that are disregarded for federal income tax purposes, which are wholly-owned by our taxable REIT subsidiaries, will be subject to federal and possibly state corporate income tax. We filed an election to treat Griffin Capital Essential Asset TRS, Inc. as a taxable REIT subsidiary, and we may elect to treat other subsidiaries as taxable REIT subsidiaries in the future. In this regard, several provisions of the laws applicable to REITs and their subsidiaries ensure that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation. For example, a taxable REIT subsidiary is limited in its ability to deduct certain interest payments made to an affiliated REIT. In addition, the REIT has to pay a 100% penalty tax on some payments that it receives or on some deductions taken by a taxable REIT subsidiary if the economic arrangements between the REIT, the REIT’s customers, and the taxable REIT subsidiary are not comparable to similar arrangements between unrelated parties. Finally, some state and local jurisdictions may tax some of our income even though as a REIT we are not subject to federal income tax on that income because not all states and localities follow the federal income tax treatment of REITs. To the extent that we and our affiliates are required to pay federal, state and local taxes, we will have less cash available for distributions to our stockholders.
Distributions to tax-exempt investors may be classified as unrelated business taxable income.
Neither ordinary nor capital gain distributions with respect to our common stock nor gain from the sale of common stock should generally constitute unrelated business taxable income (UBTI) to a tax-exempt investor. However, there are certain exceptions to this rule. In particular:
part of the income and gain recognized by certain qualified employee pension trusts with respect to our common stock may be treated as UBTI if shares of our common stock are predominately held by qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the REIT share ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as UBTI;
part of the income and gain recognized by a tax exempt investor with respect to our common stock would constitute UBTI if the investor incurs debt in order to acquire the common stock; and
part or all of the income or gain recognized with respect to our common stock by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans which are exempt from federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) or (c)(20) of the Code may be treated as UBTI.
Complying with the REIT requirements may cause us to forgo otherwise attractive opportunities.
To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of shares of our common stock. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution, or we may be required to liquidate otherwise attractive investments in order to comply with the REIT tests. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
Legislative or regulatory action could adversely affect investors.
On January 3, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, extending the existing 15% qualified dividend rate for 2013 and subsequent taxable years for those individuals with incomes below certain thresholds. For those with income above such thresholds, the qualified dividend rate is 20%. These tax rates are generally not applicable to distributions paid by a REIT, unless such distributions represent earnings on which the REIT itself has been taxed. As a result, distributions (other than capital gain distributions) we pay to individual investors generally will be subject to the tax rates that are otherwise applicable to ordinary income for federal income tax purposes, which currently are as high as 39.6%. This disparity in tax treatment may make an investment in our shares comparatively less attractive to individual investors than an investment in the shares of non-REIT corporations, and could have an adverse effect on the value of our common stock. Stockholders are urged to consult with their own tax advisor with respect to the impact of recent legislation on their investment in our common stock and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our common stock.
Foreign purchasers of our common stock may be subject to the Foreign Investment in Real Property Tax Act (“FIRPTA”) upon the sale of their shares.
A foreign person disposing of a U.S. real property interest, including shares of a U.S. corporation whose assets consist principally of U.S. real property interests, is generally subject to a tax, known as FIRPTA tax, on the gain recognized on the disposition. Such FIRPTA tax does not apply, however, to the disposition of stock in a REIT if the REIT is “domestically controlled.” A REIT is “domestically controlled” if less than 50% of the REIT’s stock, by value, has been owned directly or indirectly by persons who are not qualifying U.S. persons during a continuous five-year period ending on the date of disposition or, if shorter, during the entire period of the REIT’s existence.

28


We cannot assure our stockholders that we will qualify as a “domestically controlled” REIT. If we were to fail to so qualify, gain realized by foreign investors on a sale of our shares would be subject to FIRPTA tax, unless our shares were traded on an established securities market and the foreign investor did not at any time during a specified testing period directly or indirectly own more than 5% of the value of our outstanding common stock.
Employee Retirement Income Security Act of 1974 (“ERISA”) Risks
There are special considerations that apply to employee benefit plans, IRAs or other tax-favored benefit accounts investing in our shares which could cause an investment in our shares to be a prohibited transaction which could result in additional tax consequences.
ERISA and the Code impose certain restrictions on (i) employee benefit plans (as defined in Section 3(3) of ERISA), (ii) plans described in Code Section 4975(e)(1), including IRAs and Keogh plans, (iii) any entities whose underlying assets include plan assets by reason of a plan’s investment in such entities, and (iv) persons who have certain specified relationships to such plans, i.e., parties-in-interest under ERISA and disqualified persons under the Code. If stockholders are investing the assets of such a plan or account in our common stock, they should satisfy themselves that, among other things:
their investment is consistent with their fiduciary obligations under ERISA, the Code, or other applicable law;
their investment is made in accordance with the documents and instruments governing their IRA, plan or other account, including any applicable investment policy;
their investment satisfies the prudence and diversification requirements of ERISA or other applicable law;
their investment will not impair the liquidity of the IRA, plan or other account;
their investment will not produce UBTI for the IRA, plan or other account;
they will be able to value the assets of the plan annually in accordance with the requirements of ERISA or other applicable law, to the extent applicable; and
their investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Code or constitute a violation of analogous provisions under other applicable law, to the extent applicable.
Persons investing the assets of employee benefit plans, IRAs, and other tax-favored benefit accounts should consider ERISA and related risks of investing in our shares.
ERISA and Code Section 4975 prohibit certain transactions that involve a “party-in-interest” (under ERISA) or a “disqualified person” (under the Code) and any of the following: (i) employee benefit plans (as defined in Section 3(3) of ERISA), (ii) plans described in Code Section 4975(e)(1), including individual retirement accounts and Keogh plans, (iii) any entities whose underlying assets include plan assets by reason of a plan’s investment in such entities, and (iv) persons who have certain specified relationships to such plans, i.e., parties-in-interest under ERISA and disqualified persons under the Code. For example, based on the reasoning of the U.S. Supreme Court in John Hancock Life Ins. Co. v. Harris Trust and Savings Bank, 510 U.S. 86 (1993), an insurance company’s general account may be deemed to include assets of plans investing in the general account (e.g., through the purchase of an annuity contract), and the insurance company might be treated as a party-in-interest or disqualified person with respect to a plan by virtue of such investment. Consequently, the fiduciary of a plan or trustee or custodian of an account contemplating an investment in our shares should consider whether we, any other person associated with the issuance of the shares, or any of their affiliates is or might become a “party-in-interest” or “disqualified person” with respect to the IRA, plan or other account and, if so, whether an exception from such prohibited transaction rules is applicable.
In addition, the Department of Labor (DOL) plan asset regulations as modified by ERISA Section 3(42) provide that, subject to certain exceptions, the assets of an entity in which an IRA, plan or other account holds an equity interest may be treated as assets of an investing IRA, plan or other account, in which event the underlying assets of such entity (and transactions involving such assets) would be subject to the prohibited transaction provisions. Furthermore, if an employee benefit plan invests in our shares and we have significant participation by benefit plan investors (as defined in the DOL plan asset regulations), the standards of prudence and other provisions of ERISA could extend to us with respect to our investments and the trustee or other fiduciary of such plan may be deemed to have improperly delegated fiduciary responsibilities to us in violation of ERISA. We intend to take such steps as may be necessary to qualify us for one or more of the exceptions available, and thereby prevent our assets from being treated as assets of any investing IRA, plan or other account.

ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not Applicable.

29


ITEM 2.
PROPERTIES
As of December 31, 2015, we owned a fee simple interest in 74 properties, as shown in the table below, encompassing approximately 18.6 million rentable square feet (dollar amounts shown in thousands) and an 80% interest in an unconsolidated joint venture, as discussed in footnote 6 below:
Property
 
Location
 
Tenant/Major Lessee
 
Acquisition
Date
 
Purchase
Price
 
Approx.
Square
Feet
 
% Leased by Major Lessee(1)
 
% Leased
 
Property Type
 
Year of
Lease
Expiration (for Major Lessee)
 

Annualized
Net Rent (2) (Unaudited)
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
 
2,681

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

 
320,800

 
100%
 
100%
 
Manufacturing/
Distribution
 
2020
 
949

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

 
35,800

 
100%
 
100%
 
 Office
 
2022
 
573

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

 
169,800

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

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

 
155,800

 
100%
 
100%
 
 Office/
Data Center
 
2019
 
3,311

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

 
118,000

 
100%
 
100%
 
 Engineering Facility
 
2025
 
3,005

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

 
114,300

 
100%
 
100%
 
 Assembly/
Manufacturing
 
2018
 
1,189

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

 
131,000

 
100%
 
100%
 
 Office
 
2024
 
1,428

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

 
193,700

 
100%
 
100%
 
 Manufacturing
 
2022
 
1,339

Northrop Grumman
 
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
 
2,219

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

 
157,300

 
100%
 
100%
 
 Office
 
2021
 
2,416

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

 
70,100

 
100%
 
100%
 
 Office
 
2017
 
1,046

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

 
149,700

 
100%
 
100%
 
 Office
 
2024
 
3,163

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

 
198,900

 
100%
 
100%
 
 Office
 
2025
 
2,677

Avnet
 
Chandler, AZ
 
Avnet, Inc.
 
5/29/2013
 
32,462

 
231,400

 
100%
 
100%
 
 Research & Development/Flex Facility
 
2028
 
2,376


30


Property
 
Location
 
Tenant/Major Lessee
 
Acquisition
Date
 
Purchase
Price
 
Approx.
Square
Feet
 
% Leased by Major Lessee(1)
 
% Leased
 
Property Type
 
Year of
Lease
Expiration (for Major Lessee)
 

Annualized
Net Rent (2) (Unaudited)
Cigna
 
Phoenix, AZ
 
Connecticut General Life Insurance Company
 
6/20/2013
 
54,500

 
232,600

 
100%
 
100%
 
 Office
 
2023
 
3,788

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

 
214,200

 
100%
 
100%
 
 Office
 
2025
 
2,292

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

 
210,500

 
100%
 
100%
 
 Office
 
2020
 
3,544

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

 
98%
 
100%
 
 Office
 
2018
 
4,996

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

 
250,000

 
60%
 
100%
 
 Office
 
2019
 
3,306

General Electric (3)
 
Atlanta, GA
 
General Electric Company
 
11/5/2013
 
61,000

 
265,100

 
100%
 
100%
 
 Office
 
2025
 
4,434

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

 
223,500

 
100%
 
100%
 
 Office
 
2019
 
2,523

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
 
3,209

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

 
322,700

 
88%
 
100%
 
 Office
 
2020
 
4,263

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

 
139,400

 
87%
 
98%
 
 Office
 
2020
 
1,501

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

 
253,300

 
98%
 
100%
 
 Office
 
2024
 
3,470

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

 
169,200

 
100%
 
100%
 
 Office
 
2020
 
1,377

Wells Fargo
 
Milwaukee, WI
 
Molina Healthcare of Wisconsin, Inc.
 
11/5/2013
 
26,000

 
229,600

 
54%
 
67%
 
 Office
 
2022
 
438

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

 
538,800

 
33%
 
99%
 
 Office
 
2026
 
6,730

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

 
114,100

 
100%
 
100%
 
 Office
 
2017
 
2,366

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

 
87,400

 
100%
 
100%
 
 Office
 
2017
 
1,838

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

 
70,400

 
100%
 
100%
 
 Office
 
2024
 
1,136

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

 
188,500

 
100%
 
100%
 
 Office
 
2018
 
2,866


31


Property
 
Location
 
Tenant/Major Lessee
 
Acquisition
Date
 
Purchase
Price
 
Approx.
Square
Feet
 
% Leased by Major Lessee(1)
 
% Leased
 
Property Type
 
Year of
Lease
Expiration (for Major Lessee)
 

Annualized
Net Rent (2) (Unaudited)
Farmers (3)
 
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

 
1,380,100

 
100%
 
100%
 
Industrial
 
2018
 
6,119

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

 
430,000

 
100%
 
100%
 
 Office
 
2030
 
6,420

Waste Management (4)
 
Phoenix, AZ
 
Waste Management of AZ
 
1/16/2014
 
22,825

 
131,800

 
100%
 
100%
 
 Office
 
2023
 
1,829

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

 
157,000

 
100%
 
100%
 
 Office
 
2021
 
4,275

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

 
249,400

 
100%
 
100%
 
 Office
 
2029
 
6,472

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
 
1,175

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

 
50%
 
100%
 
 Office
 
2020
 
6,869

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

 
224,600

 
100%
 
100%
 
 Office
 
2024
 
2,483

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

 
83,200

 
100%
 
100%
 
 Office
 
2025
 
1,216

Level 3 (5)
 
Lone Tree, CO
 
Level 3 Communications, Inc.
 
8/1/2014
 
43,000

 
166,700

 
100%
 
100%
 
 Office
 
2024
 
2,985

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

 
99,300

 
100%
 
100%
 
 Office
 
2024
 
1,110

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
 
2,703

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

 
409,800

 
100%
 
100%
 
 Office
 
2020
 
4,928

Westgate III
 
Houston, TX
 
Wood Group Mustang, Inc.
 
4/1/2015
 
77,000

 
225,500

 
100%
 
100%
 
 Office
 
2026
 
4,912

Lisle
 
Lisle, IL
 
McCain Foods USA, Inc.
 
6/10/2015
 
19,500

 
94,400

 
100%
 
100%
 
 Office
 
2021
 
1,481

Bloomingdale
 
Bloomingdale, IL
 
BFS Retail & Commercial Operations, LLC
 
6/10/2015
 
7,450

 
71,100

 
98%
 
98%
 
 Office
 
2018
 
1,296

Columbia
 
Columbia, MD
 
Leidos Holdings, Inc.
 
6/10/2015
 
58,130

 
200,600

 
84%
 
85%
 
 Office
 
2019
 
4,413


32


Property
 
Location
 
Tenant/Major Lessee
 
Acquisition
Date
 
Purchase
Price
 
Approx.
Square
Feet
 
% Leased by Major Lessee(1)
 
% Leased
 
Property Type
 
Year of
Lease
Expiration (for Major Lessee)
 

Annualized
Net Rent (2) (Unaudited)
Denver
 
Denver, CO
 
Jackson National Life Insurance Company
 
6/10/2015
 
35,000

 
182,900

 
97%
 
97%
 
 Office
 
2027
 
3,861

Columbus
 
Dublin, OH
 
Qwest Communications Company, LLC
 
6/10/2015
 
27,600

 
164,600

 
100%
 
100%
 
 Office
 
2022
 
2,288

Miramar
 
Miramar, FL
 
Humana Medical Plan, Inc.
 
6/10/2015
 
24,600

 
96,400

 
100%
 
100%
 
 Office
 
2023
 
1,878

Irving Carpenter
 
Irving, TX
 
NEC Corporation of America
 
6/10/2015
 
23,500

 
119,600

 
100%
 
100%
 
 Office
 
2026
 
1,293

Frisco
 
Frisco, TX
 
T-Mobile West Corporation
 
6/10/2015
 
59,250

 
284,200

 
90%
 
97%
 
 Office
 
2017
 
4,314

Houston Westway II
 
Houston, TX
 
VetcoGray, Inc. (GE Oil & Gas, Inc.)
 
6/10/2015
 
82,500

 
242,400

 
77%
 
100%
 
 Office
 
2022
 
5,663

Houston Westway I
 
Houston, TX
 
Cameron Solutions, Inc.
 
6/10/2015
 
37,700

 
144,000

 
89%
 
100%
 
 Office
 
2018
 
2,781

Atlanta Perimeter
 
Atlanta, GA
 
State Farm Mutual Automobile Insurance Company
 
6/10/2015
 
101,670

 
584,800

 
86%
 
90%
 
 Office
 
2023
 
7,137

Herndon
 
Herndon, VA
 
Time Warner Cable, Inc.
 
6/10/2015
 
87,300

 
268,200

 
100%
 
100%
 
 Office
 
2019
 
7,028

Deerfield
 
Deerfield, IL
 
CF Industries Holdings, Inc.
 
6/10/2015
 
42,900

 
171,900

 
55%
 
100%
 
 Office
 
2027
 
2,771

DreamWorks
 
Glendale, CA
 
DreamWorks Animation SKG, Inc.
 
7/21/2015
 
215,000

 
459,800

 
100%
 
100%
 
 Office
 
2035
 
13,335

Restoration Hardware
 
Patterson, CA
 
Restoration Hardware, Inc.
 
8/15/2015
 
99,850

 
1,501,400

 
100%
 
100%
 
Industrial
 
2030
 
6,438

Highway 94
 
Jefferson City, MO
 
ABB, Inc.
 
11/6/2015
 
31,940

 
660,000

 
100%
 
100%
 
Industrial
 
2024
 
2,310

DynCorp
 
Fort Worth, TX
 
DynCorp International, LLC
 
12/11/2015
 
16,650

 
119,000

 
100%
 
100%
 
Office
 
2018
 
1,526

Mercedes-Benz
 
Fort Worth, TX
 
Mercedes-Benz Financial Services USA LLC
 
12/11/2015
 
29,000

 
164,300

 
100%
 
100%
 
Office
 
2018
 
2,902

Samsonite
 
Jacksonville, FL
 
Samsonite, LLC
 
12/11/2015
 
48,000

 
817,700

 
100%
 
100%
 
Industrial
 
2024
 
3,816

Total real estate portfolio
 
 
 
 
 
 
 
$
2,955,581

 
18,628,500

 
 
 
 
 
 
 
 
 
$
229,842

Investment in unconsolidated joint
venture (6)
 
Ashburn, VA
 
A social media company and a financial services company
 
9/9/2014
 
148,400

 
132,300

 
73%
 
100%
 
Data Center
 
2020
 
14,242

Total
 
 
 
 
 
 
 
$
3,103,981

 
18,760,800

 
 
 
 
 
 
 
 
 
$
244,084


(1)
The portfolio is approximately 99.5% occupied and leased.

33


(2)
Net rent is based on (a) the contractual base rental payments assuming the lease requires the tenant to reimburse us for certain operating expenses or the property is self-managed by the tenant and the tenant is responsible for all, or substantially all, of the operating expenses; or (b) contractual rent payments less certain operating expenses that are our responsibility for the 12-month period subsequent to December 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 connection with the acquisition of the General Electric and Farmers 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 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.
(4)
The land associated with the property is subject to a ground lease with the State of Arizona expiring on December 31, 2095.
(5)
In October 2014, Level 3 Communications, Inc. announced its acquisition of tw telecom holdings, inc. The property name has been updated to represent the surviving company, Level 3, as noted above.
(6)
We acquired an 80% ownership interest in a joint venture with affiliates of Digital Realty Trust, L.P. for an initial investment of $68.4 million. 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, to the consolidated financial statements.

Revenue Concentration
No lessee or property, based on annualized net rent for the 12-month period subsequent to December 31, 2015, pursuant to the respective in-place leases, was greater than 6% as of December 31, 2015.
The percentage of annualized net rent for the 12-month period subsequent to December 31, 2015, by state, based on the respective in-place leases, is as follows (dollars in thousands):  
State
 
Annualized
Net Rent
(unaudited)
 
Number of
Properties
 
Percentage of
Annualized
Net Rent
California
 
$
35,608

 
7

 
15.5
%
Texas
 
31,524

 
10

 
13.7
%
Ohio
 
21,232

 
8

 
9.2
%
Illinois
 
20,811

 
8

 
9.1
%
Georgia
 
19,875

 
4

 
8.6
%
Colorado
 
18,326

 
6

 
8.0
%
Arizona
 
11,858

 
4

 
5.2
%
All others (1)
 
70,608

 
27

 
30.7
%
Total
 
$
229,842

 
74

 
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 December 31, 2015, by industry, based on the respective in-place leases, is as follows (dollars in thousands):

34


Industry (1)
 
Annualized
Net Rent
(unaudited)
 
Number of
Lessees
 
Percentage of
Annualized
Net Rent
Manufacturing
 
$
61,344

 
26

 
26.7
%
Finance & Insurance
 
53,155

 
27

 
23.1
%
Information (2)
 
45,162

 
11

 
19.6
%
Professional, Scientific and Technical Services (3)
 
26,455

 
8

 
11.5
%
Retail Trade
 
12,636

 
5

 
5.5
%
All others (4)
 
31,090

 
18

 
13.6
%
Total
 
$
229,842

 
95

 
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 accounts for less than 5% of total annualized net rent on an individual basis.
The tenant lease expirations, by year, based on annualized net rent for the 12-month period subsequent to December 31, 2015 are as follows (dollars in thousands):
Year of Lease Expiration
 
Annualized
Net Rent
(unaudited)
 
Number of
Lessees
 
Approx. Square Feet
 
Percentage of
Annualized
Net Rent
2016
 
$
903

 
3

 
91,700

 
0.4
%
2017
 
9,642

 
6

 
560,900

 
4.2
%
2018
 
24,017

 
11

 
2,507,800

 
10.4
%
2019
 
27,187

 
9

 
1,556,900

 
11.8
%
2020
 
19,503

 
10

 
1,668,000

 
8.5
%
2021
 
11,196

 
7

 
1,106,500

 
4.9
%
2022
 
15,513

 
9

 
1,315,300

 
6.8
%
2023
 
17,641

 
7

 
1,278,200

 
7.7
%
2024
 
27,022

 
12

 
2,980,700

 
11.8
%
2025
 
20,313

 
8

 
1,479,700

 
8.8
%
2026
 
14,299

 
5

 
851,000

 
6.2
%
2027
 
7,565

 
3

 
359,800

 
3.3
%
2028
 
2,376

 
1

 
231,400

 
1.0
%
2029
 
6,472

 
1

 
249,400

 
2.8
%
2030
 
12,858

 
2

 
1,931,400

 
5.6
%
2035
 
13,335

 
1

 
459,800

 
5.8
%
Total
 
$
229,842

 
95

 
18,628,500

 
100.0
%

Acquisition Indebtedness
For a discussion of our acquisitions and indebtedness, see Note 3, Real Estate, and Note 5, Debt, to the consolidated financial statements.

35


ITEM 3.
LEGAL PROCEEDINGS
(a)
From time to time, we may become subject to legal proceedings, claims and litigation arising in the ordinary course of our business. We are not a party to any material legal proceedings, nor are we aware of any pending or threatened litigation that would have a material adverse effect on our business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
(b)
None.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
As of March 4, 2016, we had approximately $1.4 billion in shares of common stock outstanding, including $118.9 million in shares issued pursuant to our distribution reinvestment plan, held by a total of 39,947 stockholders of record. There is no established trading market for our common stock. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder, or at all. Pursuant to the terms of our charter, certain restrictions are imposed on the ownership and transfer of shares.
Unless and until our shares are listed on a national securities exchange, it is not expected that a public market for our shares will develop. To assist fiduciaries of Plans (as defined below) subject to the annual reporting requirements of ERISA and Account (as defined below) trustees or custodians to prepare reports relating to an investment in our shares, we intend to provide reports in annual determinations of the current value of our net assets per outstanding share to those fiduciaries (including Account trustees and custodians) who identify themselves to us and request the reports.
For purposes of the preceding paragraphs, “Plans” include tax-qualified pension, stock bonus or profit-sharing plans, employee benefit plans described in Section 3(3) of ERISA, and annuities described in Section 403(a) or (b) of the Code, and “Accounts” include an individual retirement account or annuity described in Sections 408 or 408A of the Code (also known as IRAs), an Archer MSA described in Section 220(d) of the Code, a health savings account described in Section 223(d) of the Code, and a Coverdell education savings account described in Section 530 of the Code. We are currently selling shares of our common stock to the public pursuant to the DRP Offerings at a price of $10.40 per share. Our board of directors established this share price following its receipt of a third-party report from an advisor to the board of directors that contained a range of potential values of our common stock, which report was received in conjunction with determining the NAV as of September 30, 2015.
In accordance with applicable FINRA rules, we are required to provide the estimated value of our shares in our annual report each year. On October 22, 2015, our board of directors approved an estimated value per share of our common stock of $10.40 per share, based on the estimated value of our assets less the estimated value of our liabilities, or net asset value, divided by the number of shares outstanding on a fully diluted basis (the "NAV"), calculated as of September 30, 2015. The current share price does not represent a liquidation value of our assets and liabilities or the amount at which our shares of common stock would trade on a national securities exchange.

Determination of Estimated Value Per Share
On October 22, 2015, our board of directors, at the recommendation of our nominating and corporate governance committee of our board comprised solely of independent directors, approved an estimated value per share of our common stock of $10.40 based on the estimated value of our assets less the estimated value of our liabilities, or net asset value, divided by the number of shares outstanding on a fully diluted basis (the "NAV"), calculated as of September 30, 2015. We are providing this estimated value per share to assist broker dealers in connection with their obligations under applicable Financial Industry Regulatory Authority ("FINRA") rules with respect to customer account statements. This valuation was performed in accordance with the provisions of Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs, issued by the IPA in April 2013 ("IPA Valuation Guidelines"), in addition to guidance from the SEC. 
Our nominating and corporate governance committee is responsible for the oversight of the valuation process, including the review and approval of the valuation process and methodology used to determine our estimated value per share, the consistency of the valuation and appraisal methodologies with real estate industry standards and practices, and the reasonableness of the assumptions used in the valuations and appraisals. The estimated value per share was determined after consultation with the Advisor and Robert A. Stanger & Co, Inc. ("Stanger"), an independent third-party valuation firm. The

36


engagement of Stanger was approved by our nominating and corporate governance committee. Stanger prepared an appraisal report (the "Appraisal Report"), summarizing key inputs and assumptions, on 68 of the 70 properties in our portfolio (including an ownership interest in a joint venture which owns a data center facility in Ashburn, Virginia), in addition to one joint venture development in Patterson, California that is scheduled to be wholly acquired upon construction completion, and an office asset in Nashville, Tennessee, which we own a partial interest through a membership interest in a Delaware Statutory Trust (the "Appraised Properties"), as of June 30, 2015. Stanger also prepared a net asset value report (the "NAV Report") which estimates the net asset value per share of our common stock as of September 30, 2015. The NAV Report relied upon the Appraisal Report for the Appraised Properties, the acquisition price on three additional properties located in Westchester, Ohio; Houston, Texas; and Glendale, California which were all acquired within nine months of January 1, 2015, Stanger's estimated value of our mortgage loans and other debt, Stanger's value opinion with respect to our unconsolidated entity interests, Stanger's estimate of the Advisor's subordinated share of net proceeds due upon liquidation of our portfolio, and the Advisor's estimate of the value of our other assets and liabilities, to calculate an estimated net asset value per share of our common stock.
Upon our board of directors receipt and review of the Appraisal Report and the NAV Report (the "Reports"), the recommendation of the nominating and corporate governance committee, and the recommendation of the Advisor, our board of directors approved $10.40 as the estimated value per share of our common stock as of September 30, 2015, which determinations are ultimately and solely the responsibility of our board of directors.
The table below sets forth the calculation of our estimated value per share as of September 30, 2015. Certain amounts are reflected net of non-controlling interests, as applicable (dollars in thousands, except share and per share data):
 
Estimated Value Per Share as of September 30, 2015
 
Gross
 
Per Share
ASSETS:
 
 
 
Rental Properties, net
$
3,193,895

 
$
17.77

Cash and Cash Equivalents
28,223

 
0.16

Restricted Cash
41,476

 
0.23

Investment in Unconsolidated Entities
72,982

 
0.41

Other Assets
16,135

 
0.09

Total Assets
3,352,711

 
18.66

LIABILITIES:
 
 
 
Mortgage Payable
$
(328,487
)
 
$
(1.83
)
Line of Credit
(640,000
)
 
(3.56
)
KeyBank Term Loan
(353,225
)
 
(1.97
)
Total Debt
(1,321,712
)
 
(7.36
)
Restricted Reserves
(10,568
)
 
(0.06
)
Due to Affiliates
(2,951
)
 
(0.02
)
Distributions Payable
(6,275
)
 
(0.03
)
Accounts payable and Other Liabilities
(76,558
)
 
(0.43
)
Total Liabilities
(1,418,064
)
 
(7.89
)
 
 
 
 
Preferred Equity Subject to Redemption
(63,631
)
 
(0.35
)
Stockholders' Equity
1,871,016

 
10.41

Less: Promote
(2,527
)
 
(0.01
)
Stockholders' Equity, Net of Promote
$
1,868,489

 
$
10.40

 
 
 
 
Fully Diluted Shares Outstanding (1)
179,690,000

 
179,690,000

(1)
Approximate number of shares outstanding on a fully diluted basis.
The table below sets forth the calculation of our prior estimated value per share as of December 31, 2012, as conducted by another independent third-party valuation firm. Stanger is not responsible for the determination of the estimated value per share as of December 31, 2012 (dollars in thousands, except share and per share data):

37


 
 
Prior Estimated Value Per Share as of December 31, 2012
Gross Real Estate Asset Value
 

$362,800

Current Assets, net
 
3,031

Mortgage Debt
 
(199,809)

Net Asset Value
 
166,022

Fully Diluted Shares Outstanding as of 12/31/2012
 
17,358,507

Net Asset Value Per Share Approved by our board of directors (1)
 

$9.56

(1)
The estimated value range of our real estate assets and range of estimated value per share included a low end, mid-point, and high end. Our board of directors utilized the low end of the estimated value per share range to finalize their conclusion of the primary offering price. For more information related to the December 31, 2012 estimated value per share and the assumptions and methodologies used, see our Current Report on Form 8-K filed with the SEC on February 15, 2013.
Methodology and Key Assumptions
In determining an estimated value per share, our board of directors considered the Reports provided by Stanger and information provided by the Advisor. Our goal in calculating an estimated value per share is to arrive at a value that is reasonable and supportable using what our board of directors deems to be appropriate valuation methodologies and assumptions. 
FINRA's current rules provide no guidance on the methodology an issuer must use to determine its estimated value per share. As with any valuation methodology, the methodologies used are based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated value per share, and these differences could be significant. The estimated value per share is not audited and does not represent the fair value of our assets less our liabilities according to GAAP, nor does it represent a liquidation value of our assets and liabilities or the amount our shares of common stock would trade at on a national securities exchange. The estimated value per share does not reflect a discount for the fact that we are externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. The estimated value per share also does not take into account estimated disposition costs and fees for real estate properties that are not held for sale.
Independent Valuation Firm
Stanger was selected by the nominating and corporate governance committee to appraise the 68 Appraised Properties (including an ownership interest in a joint venture which owns a data center facility in Ashburn, Virginia), in addition to one joint venture development in Patterson, California that is scheduled to be wholly acquired upon construction completion and an office asset in Nashville, Tennessee which we own a partial interest through a membership interest in a Delaware Statutory Trust. Stanger is engaged in the business of appraising commercial real estate properties and is not affiliated with us or our Advisor. The compensation we paid to Stanger was based on the scope of work and not on the appraised values of our real estate properties. The appraisals were performed in accordance with the Code of Ethics and the Uniform Standards of Professional Appraisal Practice, or USPAP, the real estate appraisal industry standards created by The Appraisal Foundation. The Appraisal Report was reviewed, approved, and signed by an individual with the professional designation of MAI licensed in the state where each real property is located. The use of the reports is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. In preparing its Reports, Stanger did not, and was not requested to, solicit third-party indications of interest for our common stock in connection with possible purchases thereof or the acquisition of all or any part of our business.
Stanger collected reasonably available material information that it deemed relevant in appraising our real estate properties. Stanger relied in part on property-level information provided by the Advisor, including (i) property historical and projected operating revenues and expenses; (ii) property lease agreements and/or lease abstracts; and (iii) information regarding recent or planned capital expenditures.
In conducting their investigation and analyses, Stanger took into account customary and accepted financial and commercial procedures and considerations as they deemed relevant. Although Stanger reviewed information supplied or otherwise made available by us or our Advisor for reasonableness, they assumed and relied upon the accuracy and completeness of all such information and of all information supplied or otherwise made available to them by any other party and did not independently verify any such information. Stanger has assumed that any operating or financial forecasts and other information and data provided to or otherwise reviewed by or discussed with Stanger were reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of our management, the Board, and/or the Advisor. Stanger relied on us to advise them promptly if any information previously provided became inaccurate or was required to be updated during the period of their review. 

38


In performing its analyses, Stanger made numerous other assumptions as of various points in time with respect to industry performance, general business, economic, and regulatory conditions, and other matters, many of which are beyond their control and our control. Stanger also made assumptions with respect to certain factual matters. For example, unless specifically informed to the contrary, Stanger assumed that we had clear and marketable title to each real estate property appraised, that no title defects exist, that any improvements were made in accordance with law, that no hazardous materials are present or were present previously, that no significant deed restrictions exist, and that no changes to zoning ordinances or regulations governing use, density, or shape are pending or being considered. Furthermore, Stanger's analyses, opinions, and conclusions were necessarily based upon market, economic, financial, and other circumstances and conditions existing as of or prior to the date of the Appraisal Report, and any material change in such circumstances and conditions may affect Stanger's analyses and conclusions. Stanger's Appraisal Report contains other assumptions, qualifications, and limitations that qualify the analyses, opinions, and conclusions set forth therein. Furthermore, the prices at which our real estate properties may actually be sold could differ from Stanger's analyses.
Stanger is actively engaged in the business of appraising commercial real estate properties similar to those owned by us in connection with public security offerings, private placements, business combinations, and similar transactions. We do not believe that there are any material conflicts of interest between Stanger, on the one hand, and us, our Advisor, and our affiliates, on the other hand. The nominating and corporate governance committee elected to engage Stanger to deliver their Reports to assist in the net asset value calculation due to its extensive knowledge of our portfolio. Stanger received usual and customary compensation for its efforts to deliver their Reports to us. In addition, we agreed to indemnify Stanger against certain liabilities arising out of this engagement. In the two years prior to the date of this filing, Stanger (i) was engaged by us to provide a fairness opinion in connection with our merger with SOR and the corresponding exchange ratio; and (ii) performed a valuation involving one of our prospective acquisitions. Stanger received usual and customary fees in connection with those services. Stanger may from time to time in the future perform other services us, so long as such other services do not adversely affect the independence of Stanger as certified in the applicable Appraisal Report.
Although Stanger considered any comments received from us or the Advisor relating to their Reports, the final appraised values of our real estate properties were determined by Stanger. The Reports are addressed solely to the nominating and corporate governance committee to assist it in calculating and recommending to our board of directors an estimated value per share of our common stock. The Reports are not addressed to the public, may not be relied upon by any other person to establish an estimated value per share of our common stock, and do not constitute a recommendation to any person to purchase or sell any shares of the our common stock.
The foregoing is a summary of the standard assumptions, qualifications, and limitations that generally apply to the Reports. The Reports, including the analysis, opinions, and conclusions set forth in such reports, are qualified by the assumptions, qualifications, and limitations set forth in the respective reports.
Real Estate Valuation 
As described above, we engaged Stanger to provide an appraisal of the Appraised Properties consisting of 68 of the 70 properties in our portfolio (including an ownership interest in a joint venture which owns a data center facility in Ashburn, Virginia), in addition to one joint venture development in Patterson, California that was scheduled to be wholly acquired upon construction completion and an office asset in Nashville, Tennessee which we own a partial interest through a membership interest in a Delaware Statutory Trust, as of June 30, 2015. In preparing the Appraisal Report, Stanger, among other things:
performed a site visit of each Appraised Property;
interviewed our officers or the Advisor's personnel to obtain information relating to the physical condition of each Appraised Property, including known environmental conditions, status of ongoing or planned property additions and reconfigurations, and other factors for such leased properties;
reviewed lease agreements for those properties and discussed with us or the Advisor certain lease provisions and factors on each property; and
reviewed the acquisition criteria and parameters used by real estate investors for properties similar to the subject properties, including a search of real estate data sources and publications concerning real estate buyer's criteria, discussions with sources deemed appropriate, and a review of transaction data for similar properties.
Stanger employed the income approach to estimate the value of the Appraised Properties, which involves an economic analysis of the property based on its potential to provide future net annual income. As part of the valuation, a discounted cash flow analysis was used to determine the value of our interest in the portfolio, by valuing the subject interest in each Appraised Property in the portfolio based upon the leases that encumber such property. The indicated value by the discounted cash flow approach represents the amount an investor would probably pay for the expectation of receiving the net cash flow from the property during the subject lease term and the proceeds from the ultimate sale of the property.

39


Stanger prepared the Appraisal Report, summarizing key inputs and assumptions, for each of the Appraised Properties it appraised using financial information provided by us and our Advisor. From such review, Stanger selected the appropriate cash flow discount rate, residual discount rate, and terminal capitalization rate. As for those properties consolidated on our financials, and for which we do not own 100% of the ownership interest, the property value was adjusted to reflect our ownership interest in such property after consideration of the distribution priorities associated with such property.
Three additional properties located in Westchester, Ohio; Houston, Texas; and Glendale, California which were all acquired within nine months of January 1, 2015 were included in the NAV Report at their respective acquisition prices.
As of September 30, 2015, we owned 71 real estate assets (including an ownership interest in a joint venture which owns a data center facility in Ashburn, Virginia), in addition to one joint venture development in Patterson, California that was scheduled to be wholly acquired upon construction completion and one membership interest in a Delaware Statutory Trust which owns an office asset in Nashville, Tennessee. The total acquisition cost of these properties at our respective ownership interest, including the joint venture development and the office asset owned through a membership interest in a Delaware Statutory Trust was approximately $3.02 billion, excluding acquisition fees and expenses. In addition, through September 30, 2015, we had invested $26.8 million in capital improvements on these real estate assets since inception. As of September 30, 2015, the total value of the Appraised Properties at our respective ownership interest, as provided by Stanger, assuming the expected buyout of the joint venture development and the acquisition price of the three real estate assets acquired during 2015 was approximately $3.35 billion. This represents an approximately 10.0% increase in the total value of the real estate assets over the aggregate basis. The following summarizes the key assumptions that were used in the discounted cash flow models used to arrive at the appraised value of the Appraised Properties:
 
 
 
 
Weighted Average
 
 
 
Range
 
Terminal Capitalization Rate
6.25
%
8.5
%
 
6.97%
Cash Flow Discount Rate
4.75
%
9.5
%
 
6.64%
Residual Discount Rate
6.5
%
8.75
%
 
7.44%
Income and Expense Growth
3%
 
3%
While we believe that Stanger's assumptions and inputs are reasonable, a change in these assumptions and inputs would significantly impact the calculation of the appraised value of the Appraised Properties and thus, the estimated value per share. The table below illustrates the impact on the estimated value per share if the terminal capitalization rates or discount rates were adjusted by 25 basis points or 5.0%, and assuming all other factors remain unchanged:
 
Estimated Value Per Share due to:
 
Increase 25 Basis
 
Decrease 25 Basis
 
Increase
 
Decrease
 
Points
 
Points
 
5.0%
 
5.0%
Terminal Capitalization Rate
$10.09
 
$10.71
 
$9.98
 
$10.84
Cash Flow Discount Rate
$10.31
 
$10.49
 
$10.28
 
$10.52
Residual Discount Rate
$10.18
 
$10.62
 
$10.07
 
$10.73
Loans
Values for mortgage loans, the line of credit, and term loan (the "Loans") were estimated by Stanger using a discounted cash flow analysis, which used inputs based on the remaining loan terms and estimated current market interest rates for mortgage loans with similar characteristics, including remaining loan term, loan-to-value ratios, debt-service-coverage ratios, prepayment terms, and collateral property attributes. The current market interest rate was generally determined based on market rates for available comparable debt. The estimated current market interest rates for the loans ranged from 1.64% to 6.70%.
As of September 30, 2015, Stanger's estimate of fair value of our consolidated Loans and ownership interest in unconsolidated Loans was $1.3 billion and $87.3 million, respectively. The weighted-average discount rate applied to the future estimated debt payments, excluding the line of credit and term loan, was approximately 4.35% and including the line of credit and term loan was approximately 2.49%.
While we believe that Stanger's assumptions and inputs are reasonable, a change in these assumptions and inputs would significantly impact the calculation of the estimated value of our loans and thus, the estimated value per share. The table below illustrates the impact on the estimated value per share if the market interest rate were adjusted by 25 basis points or 5.0%, and assuming all other factors remain unchanged:


40


Estimated Value Per Share due to:
Decrease 25 Basis Points
 
Increase 25 Basis Points
 
Decrease 5.0%
 
Increase 5.0%
 
 
 
$10.37
 
$10.43
 
$10.37
 
$10.42
Unconsolidated Entities
In those situations where our assets and liabilities are held in unconsolidated entities, Stanger valued those interests by:
utilizing the value of the properties that are owned by the unconsolidated entities based upon its appraisal;
adding the other tangible assets held by the unconsolidated entities;
deducting the tangible liabilities of the unconsolidated entities, including any mortgage debt encumbering the unconsolidated entities properties after considering mark-to-market adjustments on such mortgage debt based on the debt information provided by us; and
taking the resulting unconsolidated entities equity from the above steps and processing such equity through the unconsolidated entities agreement as it pertains to capital distribution allocations, to determine the amount of equity attributable to us.
Other Assets and Liabilities
To derive our estimated value per share, Stanger added the other tangible assets and liabilities, including our redeemable preferred units from a draft of our September 30, 2015 balance sheet, to its estimated value of the real estate assets, mortgage loans, and the unconsolidated entities.
The carrying value of a majority of our other assets and liabilities are considered to equal their fair value due to their short maturities or liquid nature. Certain balances, such as straight-line rent receivables, lease intangible assets and liabilities, deferred financing costs, unamortized lease commissions, and unamortized lease incentives, have been eliminated for the purpose of the valuation due to the fact that the value of those balances were already considered in the valuation of the respective investments.
Different parties using different assumptions and estimates could derive a different estimated value per share, and these differences could be significant. The value of our shares will fluctuate over time in response to developments related to individual assets in our portfolio and the management of those assets and in response to the real estate and finance markets.
Advisor Promote
The estimated value per share was calculated net of the Advisor's subordinated share of net proceeds in the event of a liquidation of the portfolio, which we advised Stanger was equal to:
5% if stockholders are paid return of capital plus between 6% and 8% annual cumulative, non-compounded return;
10% if stockholders are paid return of capital plus between 8% and 10% annual cumulative, non-compounded return; and
15% if stockholders are paid return of capital plus a 10% or more annual cumulative, non-compounded return.
Limitations of Estimated Value Per Share
The various factors considered by our board of directors in determining the estimated value per share was based on a number of assumptions and estimates that may not be accurate or complete. As mentioned above, we are providing this estimated value per share to assist broker-dealers that participated in our public offerings in meeting their customer account statement reporting obligations. As with any valuation methodology, the methodologies used are based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated value per share. The estimated value per share is not audited and does not represent the fair value of our assets or liabilities according to GAAP.
Accordingly, with respect to the estimated value per share, we can give no assurance that:
a stockholder would be able to resell his or her shares at this estimated value;
a stockholder would ultimately realize distributions per share equal to our estimated value per share upon liquidation of our assets and settlement of our liabilities or a sale of our business;
our shares of common stock would trade at the estimated value per share on a national securities exchange;

41


an independent third-party appraiser or other third-party valuation firm would agree with our estimated value per share; or
the methodology used to estimate our estimated value per share would be acceptable to FINRA or for compliance with ERISA reporting requirements.
 Similarly, the amount a stockholder may receive upon repurchase of his or her shares, if he or she participates in our SRP, may be greater than or less than the amount a stockholder paid for the shares, regardless of any increase in the underlying value of any of our assets. 
In addition, the estimated value per share is based on the estimated value of our assets less the estimated value of our liabilities divided by the number of shares outstanding on an adjusted fully diluted basis, calculated as of September 30, 2015. The estimated value per share was based upon 179,693,496 shares of equity interest outstanding as of September 30, 2015, which was comprised of (i) 174,750,370 outstanding shares of our common stock, plus (ii) 4,939,793 outstanding units of limited partnership interest in our Operating Partnership, which units are exchangeable on a one-for-one basis into shares of common stock, plus (iii) 3,333 shares of unvested restricted common stock issued to our independent directors which shares vest ratably over time.
In addition, the estimated value per share considered by our board of directors as of October 22, 2015 does not reflect the actual or estimated portfolio liquidation value range or potential "enterprise value" range our business or our real estate portfolio. For example, it does not include a premium for:
the large size of our portfolio, as buyers may be willing to pay more for a large portfolio than they are willing to pay for each property in the portfolio separately, commonly referred to as a "portfolio premium" or "aggregation premium";
the potential increase in our share value if it were to list our shares on a national securities exchange reflecting potential premiums to net asset values and earnings multiples typically applied to valuing publicly-listed companies; or
the potential value per share we may achieve if we were to merge with or be acquired by a publicly-listed real estate investment trust or other real estate company, resulting from potential premiums to net asset values and earnings multiples typically applied to valuing companies in such transactions.
Further, the value of our shares will fluctuate over time in response to developments related to individual assets in our portfolio and the management of those assets and in response to the real estate and finance markets. The estimated value per share does not reflect a discount for the fact that we are externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. The estimated value per share also does not take into account estimated disposition costs and fees for real estate properties that are not held for sale. We currently expect to utilize an independent valuation firm to update the estimated value per share in the second half of 2016, in accordance with IPA Valuation Guidelines.
Distributions
We elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, for the year ended December 31, 2010, and for each year thereafter. To qualify as a REIT, we must meet certain organizational and operational requirements, and continue to adhere to these requirements for each subsequent year. As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders. However, we may be subject to certain state and local taxes on our income and property, and federal income and excise taxes on our undistributed taxable income, if any. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income taxes on our 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 us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. As of December 31, 2015, we satisfied the REIT requirements and distributed all of our taxable income.
Distributions to stockholders are characterized for federal income tax purposes as ordinary income, capital gains, non-taxable return of capital or a combination of the three. Distributions that exceed our current and accumulated earnings and profits (calculated for tax purposes) constitute a return of capital for tax purposes rather than a distribution and reduce the stockholders’ basis in our common shares. To the extent that a distribution exceeds both current and accumulated earnings and profits and the stockholders’ basis in the common shares, it will generally be treated as a capital gain. We will annually notify stockholders of the taxability of distributions paid during the preceding year.
Distributions for a given month are paid on or around the first day of the month following the month of distribution and are paid from operating cash flow generated from our properties or offering proceeds raised in future public offerings (if any).

42


The following table shows the distributions we have declared and paid during each quarter in the years ended December 31, 2015 and 2014 (in thousands, except per share amounts):
Quarter
Total
Distributions
Declared and
Paid to Preferred
Equity Holders (1)
 
Total
Distributions
Declared and
Paid to Limited
Partners (1)
 
Total
Distributions
Declared and
Paid to
Stockholders (1)
 
Distributions
Declared per
Common
Share
(2)
1st Quarter 2014
$
4,687

 
$
825

 
$
11,698

 
$
0.17

2nd Quarter 2014
$
4,740

 
$
858

 
$
21,168

 
$
0.17

3rd Quarter 2014
$
4,792

 
$
868

 
$
22,332

 
$
0.17

4th Quarter 2014
$
4,792

 
$
868

 
$
22,548

 
$
0.17

1st Quarter 2015
$
4,687

 
$
849

 
$
22,258

 
$
0.17

2nd Quarter 2015
$
2,904

 
$
858

 
$
24,370

 
$
0.17

3rd Quarter 2015
$
1,198

 
$
868

 
$
30,430

 
$
0.17

4th Quarter 2015
$
456

 
$
943

 
$
30,544

 
$
0.17

(1)
Declared distributions are paid monthly in arrears.
(2)
Distributions declared per common share amounts are rounded to the nearest $0.01.
Securities Authorized for Issuance under Equity Compensation Plans
On February 12, 2009, our board of directors adopted our Employee and Director Long-Term Incentive Plan (the “Plan”) in order to (1) provide incentives to individuals who are granted awards because of their ability to improve our operations and increase profits; (2) encourage selected persons to accept or continue employment with us or with our Advisor or its affiliates that we deem important to our long-term success; and (3) increase the interest of our independent directors in our success through their participation in the growth in value of our stock. Pursuant to the Plan, we may issue stock-based awards to our directors and full-time employees (should we ever have employees), executive officers and full-time employees of our Advisor and its affiliates that provide services to us and who do not have any beneficial ownership of our Advisor and its affiliates, entities and full-time employees of entities that provide services to us, and certain consultants to us, our Advisor and its affiliates that provide services to us.
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. As of December 31, 2015, awards totaling 14,000 shares of restricted stock have been granted to our independent board members under the Plan.
Upon our reorganization, merger or consolidation with one or more corporations as a result of which we are not the surviving corporation, or upon sale of all or substantially all of our assets, that, in each case, is not an equity restructuring, appropriate adjustments as to the number and kind of shares and exercise prices will be made either by our compensation committee or by such surviving entity. Such adjustment may provide for the substitution of such awards with new awards of the successor entity or the assumption of such awards by such successor entity. Alternatively, rather than providing for the adjustment, substitution or assumption of awards, the compensation committee may either (1) shorten the period during which awards are exercisable, or (2) cancel an award upon payment to the participant of an amount in cash that the compensation committee determines is equivalent to the amount of the fair market value of the consideration that the participant would have received if the participant exercised the award immediately prior to the effective time of the transaction.
In the event that the compensation committee determines that any distribution, recapitalization, stock split, reorganization, merger, liquidation, dissolution or sale, transfer, exchange or other disposition of all or substantially all of our assets, or other similar corporate transaction or event, affects the stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to an award, then the compensation committee shall, in such manner as it may deem equitable, adjust the number and kind of shares or the exercise price with respect to any award.

43


The following table provides information about the common stock that may be issued under the Plan as of December 31, 2015:
Plan Category
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
 
Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights
 
Number of Securities
Remaining for Future
Issuance Under Equity
Compensation Plans
(1)
Equity Compensation Plans Approved by Security Holders

 

 
9,986,000

Equity Compensation Plans Not Approved by Security Holders

 

 

Total

 

 
9,986,000

 
(1)
The total number of shares of our common stock (or common stock equivalents) reserved for issuance under the Plan is equal to 10% of our outstanding shares of stock at any time, but not to exceed 10,000,000 shares in the aggregate. As of December 31, 2015, we had 175,184,519 outstanding shares of common stock, including shares issued pursuant to the distribution reinvestment plan, therefore the Plan was limited to the issuance of 10,000,000 shares.

Recent Sales of Unregistered Securities
During the fourth quarter of 2015, there were no sales of unregistered securities.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Share Redemption Program
On February 20, 2009, our board of directors adopted a share redemption program, which enables our stockholders to have their shares redeemed by us, subject to certain 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 of December 31, 2015 and 2014, $110.2 million and $57.7 million in shares of common stock, respectively, had been issued under the DRP, pursuant to the Private Offering, the Public Offerings, and the DRP Offerings, of which $6.3 million and $1.2 million in redemptions, respectively, were reclassified from redeemable common stock to accounts payable and accrued liabilities in the consolidated balance sheets. During the year ended December 31, 2015, we redeemed 1,397,801 shares of common stock for approximately $13.8 million at a weighted average price per share of $9.89. Since inception and through December 31, 2015, we had redeemed 1,753,700 shares of common stock for approximately $17.3 million at a weighted average price per share of $9.88 pursuant to the SRP. As of December 31, 2015, there were 638,483 shares totaling $6.3 million subject to redemption requests. 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 December 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
October 31, 2015
 
845,051

 
$
9.94

 
845,051

 
(1) 
November 30, 2015
 

 
N/A

 

 
December 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 8, Equity, to the consolidated financial statements.

ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial and operating information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the financial statements and related notes thereto included elsewhere in this annual report on Form 10-K (in thousands, except per share data):

44


 
For the Year Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
Operating Data
 
 
 
 
 
 
 
 
 
Total revenue
$
290,095

 
$
202,394

 
$
68,916

 
$
25,490

 
$
15,009

Income (loss) from operations
35,109

 
22,501

 
(10,603
)
 
2,085

 
1,165

Net income (loss)
15,621

 
14

 
(24,469
)
 
(5,674
)
 
(4,621
)
Net loss attributable to common stockholders
(3,750
)
 
(18,654
)
 
(24,664
)
 
(4,195
)
 
(2,535
)
Net loss attributable to common stockholders per share, basic and diluted
(0.02
)
 
(0.17
)
 
(0.97
)
 
(0.46
)
 
(0.72
)
Distributions declared per common share
0.69

 
0.68

 
0.68

 
0.68

 
0.68

Balance Sheet Data
 
 
 
 
 
 
 
 
 
Total real estate, net
$
2,696,026

 
$
1,721,012

 
$
1,132,617

 
$
309,445

 
$
162,863

Total assets
3,050,289

 
2,065,447

 
1,225,396

 
334,796

 
175,945

Total debt
1,486,326

 
625,696

 
489,778

 
194,812

 
95,429

Total liabilities
1,649,758

 
755,498

 
563,466

 
213,190

 
107,130

Preferred units subject to redemption

 
250,000

 
250,000

 

 

Redeemable noncontrolling interests
4,887

 
12,543

 
4,887

 
4,887

 
4,887

Redeemable common stock
86,557

 
56,421

 
12,469

 
3,439

 
1,070

Total stockholders’ equity
1,287,769

 
973,507

 
374,838

 
95,769

 
41,071

Total equity
1,309,087

 
990,985

 
394,574

 
113,281

 
62,858

Other Data
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
92,458

 
$
73,249

 
$
948

 
$
5,058

 
$
(1,184
)
Net cash used in investing activities
(414,371
)
 
(757,903
)
 
(845,672
)
 
(154,066
)
 
(14,651
)
Net cash provided by financing activities
274,942

 
743,162

 
849,458

 
149,252

 
19,628

 

ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following “Management’s Discussion and Analysis of Financial Condition and Result of Operations” should be read in conjunction with the financial statements and the notes thereto contained in this report.
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.
On April 25, 2013, we terminated our Initial Public Offering, having issued approximately 19,200,570 total shares of our common stock for gross proceeds of approximately $191.5 million, including 585,533 shares, or $5.6 million, issued pursuant to the distribution reinvestment plan (“DRP”).
On April 22, 2014, we terminated our Follow-On Offering, having issued 107,144,337 total shares of our common stock for gross proceeds of approximately $1.1 billion, 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 “2014 DRP Offering”). On September 22, 2015, we filed a Registration Statement on Form S-3 with the SEC for the registration of $100.0 million in shares for sale pursuant to the DRP (the “2015 DRP Offering” and together with the 2014 DRP Offering, the “DRP Offerings”) and terminated the 2014 DRP Offering. In connection with our DRP Offerings, we had issued 8,579,699 shares of our common stock for gross proceeds of approximately $87.3 million through December 31, 2015. The 2015 DRP Offering may be terminated at any time upon 10 days' prior written notice to

45


stockholders. Since inception and through December 31, 2015, we had redeemed 1,753,700 shares of common stock for approximately $17.3 million at a weighted average price per share of $9.88 pursuant to the share redemption program.
As of December 31, 2015, our real estate portfolio consisted of 74 properties in 20 states for a total purchase price of approximately $3.0 billion, net of properties sold for a total selling price of approximately $104.7 million with an initial acquisition value of $96.2 million, and an 80% interest in an unconsolidated joint venture for a total purchase price of approximately $148.4 million, as discussed in Note 4, Investments, to the consolidated financial statements. The tenants of our properties operate in a diverse range of industries, including consumer products, financial services, manufacturing, education, printing, technology, telecommunications, insurance, energy, and aerospace, as described in more detail in Part I, Item 2 of this report.
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.
The following critical accounting policies discussion reflects what we believe are the most significant estimates, assumptions, and judgments used in the preparation of our consolidated financial statements. This discussion of our critical accounting policies is intended to supplement the description of our accounting policies in the footnotes to our consolidated financial statements and to provide additional insight into the information used by management when evaluating significant estimates, assumptions, and judgments. For further discussion on our significant accounting policies, see Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to our consolidated financial statements included in this report.

Real Estate - Valuation and Purchase Price Allocation
When we acquire operating properties, we allocate the purchase price to the various components of the acquisition based upon the fair value of each component. The components typically include land, building and improvements, tenant improvements, intangible assets related to above and below market leases, intangible assets related to in-place leases, debt and other assumed assets and liabilities. Because of the timing or complexity of completing certain fair value adjustments, the initial purchase price allocation may be incomplete at the end of a reporting period, in which case we may record provisional purchase price allocation amounts based on information available at the acquisition date. Subsequent adjustments to provisional amounts are recognized during the measurement period, which cannot exceed one year from the date of acquisition.
We allocate the purchase price to the fair value of the tangible assets of a property by valuing the property as if it were vacant. This “as-if vacant” value is estimated using an income, or discounted cash flow, approach that relies upon Level 3 inputs, which are unobservable inputs based on our assumptions about the assumptions a market participant would use. These Level 3 inputs include discount rates, capitalization rates, market rents and comparable sales data for similar properties. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions.
In determining the fair value of intangible lease assets or liabilities, we also consider Level 3 inputs. Acquired above- and below-market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases, if applicable. The estimated fair value of acquired in-place at-market tenant leases are the costs that would have been incurred to lease the property to the occupancy level of the property at the date of acquisition. Such estimates include the value associated with leasing commissions, legal and other costs, as well as the estimated period necessary to lease such property that would be incurred to lease the property to its occupancy level at the time of its acquisition. Acquisition costs associated with the business combination are expensed in the period they are incurred.

46


The difference between the fair value and the face value of debt assumed in connection with an acquisition is recorded as a premium or discount and amortized to “interest expense” over the life of the debt assumed. The valuation of assumed liabilities is based on our estimate of the current market rates for similar liabilities in effect at the acquisition date.
For acquisitions that do not meet the accounting criteria to be accounted for as a business combination, we allocate the cost of the acquisition, which includes any associated acquisition costs, to the individual assets (typically land and building) and liabilities assumed on a relative fair value basis.
Impairment of Real Estate and Related Intangible Assets and Liabilities
We continually monitor 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 will assess the recoverability of the assets by determining whether the carrying value of the assets will be recovered through the undiscounted future operating cash flows expected from the use of the assets and the eventual disposition. If based on this analysis we do not believe that we will be able to recover the carrying value of the asset, we will record an impairment loss to the extent the carrying value exceeds the estimated fair value 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 December 31, 2015, we did not record any impairment charges related to our real estate assets or intangible assets.
Revenue Recognition
Leases associated with the acquisition and contribution of certain real estate assets 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, we will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved.
Tenant reimbursement revenue, which is comprised of additional amounts collected from tenants for the recovery of certain operating expenses, including repair and maintenance, property taxes and insurance, and capital expenditures, to the extent allowed pursuant to the lease (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 our 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, we reconcile the amount of additional rent paid by the tenant during the year to the actual amount of Recoverable Expenses incurred by us 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 we can recover from the tenant such as a cap on certain or all property operating expenses.
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 this Annual Report on Form 10-K.
Same Store Analysis
As of December 31, 2015, our "Same Store" portfolio consisted of 38 properties, encompassing approximately 7.5 million square feet, with an acquisition value of $1.1 billion and annual net rent of $91.5 million (for the 12-month period subsequent to December 31, 2015). The following table provides a comparative summary of the results of operations for the 38 properties for the years ended December 31, 2015 and 2014 (dollars in thousands):

47


 
Year Ended December 31,
 
Increase/
(Decrease)
 
Percentage
Change
 
2015
 
2014
 
Rental income
$
113,381

 
$
109,994

 
$
3,387

 
3
 %
Property expense recoveries
30,002

 
30,743

 
(741
)
 
(2
)%
Asset management fees to affiliates
8,142

 
8,091

 
51

 
1
 %
Property management fees to affiliates
4,138

 
4,059

 
79

 
2
 %
Property operating expense
23,653

 
24,849

 
(1,196
)
 
(5
)%
Property tax expense
17,564

 
18,008

 
(444
)
 
(2
)%
Rental Income
The increase in rental income is primarily due to (1) $0.5 million in additional rent related to a lease commencement at the One Century Place property in the prior period, for which there was a full year of rent recognized in the current period; (2) $1.2 million in additional rent related to a lease commencement on January 1, 2015 at the Northpointe Corporate Center II property; and (3) a $1.9 million net adjustment to straight-line rent and accelerated amortization of the in-place lease intangible at the Wells Fargo property (acquired in 2013), which resulted from the early lease termination effective December 31, 2015. For comparability purposes, the rental income for the year ended December 31, 2015 does not include the $9.0 million termination fee related to the Wells Fargo property, which is included in rental income on the consolidated statements of operations.
Property Expense Recoveries
The decrease in property expense recoveries is primarily due to (1) a $0.4 million decrease in expense recoveries for the Nokia property, which became self-managed in August 2014; and (2) a $1.5 million decrease in the current year expense recoveries as a result of the 2015 common area maintenance ("CAM") reconciliations primarily related to decreases in operating and tax expenses; offset by (3) a $1.2 million increase in property tax recoveries related to the Community Insurance, Travelers, and other properties.
Property Operating Expense
The decrease in property operating expense is primarily due to (1) $0.6 million related to the Nokia and Community Insurance properties, which became self-managed in August 2014 and December 2014, respectively; and (2) $0.7 million related to the Schlumberger, IBM, and One Century Place properties, primarily for utilities and repairs and maintenance.
Property Tax Expense
The decrease in property tax expense is primarily due to (1) a $1.1 million decrease in property taxes due to a successful 2014 tax appeal in September 2015 for the Nokia property and an additional payment made during the year ended December 31, 2014 as a result of a prior year reassessment for the JPMorgan Chase property; offset by (2) a $0.6 million increase related to property reassessments for the Northrop Grumman, Schlumberger, CHRISTUS Health, and United HealthCare properties.
As of December 31, 2014, our "Same Store" portfolio consisted of 14 properties, encompassing approximately 3.3 million square feet, with an acquisition value of $325.2 million and annual net rent of $25.6 million (for the 12-month period subsequent to December 31, 2014). The following table provides a comparative summary of the results of operations for the 14 properties for the years ended December 31, 2014 and 2013 (dollars in thousands):
 
Year Ended December 31,
 
Increase/(Decrease)
 
Percentage
Change
 
2014
 
2013
 
Rental income
$
27,096

 
$
30,025

 
$
(2,929
)
 
(10
)%
Property expense recoveries
$
4,518

 
$
5,141

 
(623
)
 
(12
)%
Asset management fees to affiliates
$
2,443

 
$
2,441

 
2

 
 %
Property management fees to affiliates
$
934

 
$
976

 
(42
)
 
(4
)%
Property operating expenses
$
2,310

 
$
2,133

 
177

 
8
 %
Property tax expense
$
3,843

 
$
3,960

 
(117
)
 
(3
)%
Rental Income
The decrease in rental income is directly a result of the World Kitchen, LLC lease termination, which became effective on January 24, 2014. As a result of the termination, there was a decrease of approximately $1.8 million in base rent. Additionally,

48


the unamortized in-place lease valuation ($0.9 million) and deferred rent asset ($0.3 million) were written off during the year ended December 31, 2014. For comparability purposes, the rental income for the year ended December 31, 2014 does not include the $7.125 million termination fee, which is included in rental income on the consolidated statements of operations.
Property Expense Recoveries
The decrease in property expense recoveries is primarily a result of the World Kitchen, LLC lease termination which resulted in a decrease of approximately $0.6 million in property tax expense recoveries.
Property Management Fees to Affiliates
The property management fee decrease is primarily due to the differential between the base rent and the lease termination payments as a result of the World Kitchen, LLC lease termination, as discussed above, which represents approximately $0.02 million of the variance. The remaining $0.02 million is a result of various adjustments to the property management fee rates applied, pursuant to provisions of the leases.
Property Operating Expense
The increase in property operating expense is due to an increase of $0.2 million in utilities, repairs and maintenance, and property services primarily for the Will Partners and Northrop Grumman properties, offset by a decrease of approximately $0.02 million primarily related to the Travelers, Zeller Plastik, and Health Net properties.
Property Tax Expense
The decrease in property tax expense is primarily a result of a $0.2 million decrease for the Will Partners property, which is due to a $0.3 million tax rebate related to 2013 taxes paid in 2014, which World Kitchen, LLC was entitled to prior to the termination of its lease, offset by an increase of $0.07 million due to property tax reassessments and other services for the Plainfield, Travelers, Zeller Plastik, Northrop Grumman, and Health Net properties.
Portfolio Analysis
As of December 31, 2014, we owned 56 properties, and, as shown in the table in Part I, Item 2 of this report, as of December 31, 2015, we owned 74 properties. As of December 31, 2015, we have completed the offering stage of our life cycle, and continue to deploy capital raised in our Public Offerings, along with draws from our Unsecured Credit Facility (July 2015), to acquire assets that adhere to our investment criteria. Therefore, our results of operations for our entire portfolio for the year ended December 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.
Comparison of the Years Ended December 31, 2015 and 2014
The following table provides summary information about our results of operations for the years ended December 31, 2015 and 2014 (dollars in thousands):
 
Year Ended December 31,
 
Increase/(Decrease)
 
Percentage
Change
 
2015
 
2014
 
Rental income
$
235,148

 
$
164,412

 
$
70,736

 
43
 %
Property expense recoveries
54,947

 
37,982

 
16,965

 
45
 %
Asset management fees to affiliates
19,389

 
12,541

 
6,848

 
55
 %
Property management fees to affiliates
7,622

 
5,445

 
2,177

 
40
 %
Property operating expense
37,924

 
30,565

 
7,359

 
24
 %
Property tax expense
34,733

 
24,873

 
9,860

 
40
 %
Acquisition fees and expenses to non-affiliates
2,730

 
4,261

 
(1,531
)
 
(36
)%
Acquisition fees and expenses to affiliates
32,245

 
24,319

 
7,926

 
33
 %
General and administrative expenses
7,595

 
4,982

 
2,613

 
52
 %
Depreciation and amortization
112,748

 
72,907

 
39,841

 
55
 %
Interest expense
33,402

 
24,598

 
8,804

 
36
 %
Rental Income
Rental income for the year ended December 31, 2015 is comprised of base rent of $217.6 million, adjustments to straight-line contractual rent of $13.8 million, and in-place lease valuation amortization, net, of approximately $3.8 million. Rental

49


income for the year ended December 31, 2015 increased by $70.7 million compared to the same period in the prior year primarily as a result of (1) $49.3 million of additional rental income related to the real estate acquired in the current period and a development project with WRRH Patterson, LLC, which was placed into service on August 15, 2015; (2) $18.7 million of additional rental income related to the real estate acquired during the year ended December 31, 2014, which includes a full year of rental income for 2015; (3) a net increase of $1.9 million in termination income related to lease terminations at the SoftBank and Wells Fargo (acquired in 2013) properties effective August 31, 2015 and December 31, 2015, respectively, partially offset by the World Kitchen, LLC lease termination in the prior period; and (4) a $1.9 million net adjustment to straight-line rent and accelerated amortization of the in-place lease intangible at the Wells Fargo property, which resulted from the early lease termination; less (5) $3.4 million of decreased rental income due to the sale of the Eagle Rock and College Park properties on December 17, 2014 and February 20, 2015, respectively.
Property Expense Recoveries
Also included as a component of revenue is the recovery of property operating expenses, including repairs and maintenance, property taxes and insurance, and certain capital expenses (collectively "Recoverable Expenses"), which increased by $17.0 million compared to the same period in the prior year primarily as a result of (1) $14.1 million of additional expense recovery revenue related to properties acquired in the current period, net of the related CAM adjustments; and (2) $3.0 million of additional expense recovery revenue related to the real estate acquired during the year ended December 31, 2014, which includes a full period of recoverable expenses for the year ended December 31, 2015, net of the related CAM adjustments.
Management Fees (Asset and Property)
Asset management and property management fees for the years ended December 31, 2015 and 2014 totaled $27.0 and $18.0 million, respectively. The total increase of $9.0 million compared to the same period a year ago is primarily the result of (1) approximately $4.5 million and $1.7 million in asset management and property management fees, respectively, related to the acquisitions made during the current year; and (2) approximately $2.5 million and $0.5 million in asset management and property management fees, respectively, related to the acquisitions made during the year ended December 31, 2014.
Property Operating Expense
Property operating expenses for the years ended December 31, 2015and 2014 totaled $37.9 million and $30.6 million, respectively. Property operating expenses include insurance, repairs and maintenance, security, janitorial, landscaping, and other administrative expenses incurred to operate our properties. The total increase of $7.3 million compared to the same period a year ago is primarily a result of (1) $9.5 million in additional property operating expenses related to properties acquired during the current year; and (2) $1.2 million in additional property operating expenses related to properties acquired during the year ended December 31, 2014; offset by (3) a $3.4 million decrease in property operating expenses primarily related to the Eagle Rock and College Park properties, which were sold on December 17, 2014 and February 20, 2015, respectively, and certain properties which became self-managed in the prior year.
Property Tax Expense
Property tax expenses for the years ended December 31, 2015 and 2014 totaled $34.7 million and $24.9 million, respectively. The total increase of approximately $9.8 million compared to the same period a year ago is primarily a result of (1) $7.1 million in additional property tax expenses related to properties acquired during the current year; and (2) $3.7 million in additional property tax expenses related to properties acquired during the year ended December 31, 2014; offset by (3) a $0.7 decrease in property tax expenses related to the Eagle Rock and College Park properties, which were sold on December 17, 2014 and February 20, 2015, respectively; and (4) a $0.5 million decrease in property tax expenses for the Nokia property as a result of a successful 2014 tax appeal settled in September 2015.
Acquisition Fees and Expenses
Real estate acquisition fees and expenses to non-affiliates, which totaled $2.7 million for the year ended December 31, 2015, decreased by $1.5 million compared to the prior year due to decreased acquisition activity of individual properties in the current period. Acquisition fees and expenses to affiliates, which are based on the purchase price of each acquisition, increased by $7.9 million as a result of an increase in total purchase price of approximately $280.1 million compared to the prior year.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2015 increased by $2.6 million compared to the same period a year ago due to increased operating activity. General and administrative expenses represent costs unrelated to property operations or transaction costs. These expenses primarily include corporate office expenses related to being a public company, including transfer agent fees, certain audit fees, regulatory fees, legal costs, and other professional fees. The $2.6 million increase is primarily due to the following: (1) an increase of $1.2 million in professional fees primarily for valuation

50


services by third party providers and proxy campaign management services; (2) an increase of $0.7 million in allocated expenses for additional personnel and rent costs incurred by our Advisor, which is due in part to the growth in our portfolio; and (3) an increase of $0.6 million in transfer agent fees and insurance expense primarily due to increased fees related to the SOR Merger.
Depreciation and Amortization Expense
Depreciation and amortization expense for the year ended December 31, 2015 consisted of depreciation of building and building improvements of our properties of $43.3 million and amortization of the contributed and acquired values allocated to tenant origination and absorption costs of $69.4 million. The increase of $39.8 million as compared to the year ended December 31, 2014 is primarily the result of additional depreciation and amortization of (1) $24.4 million related to the acquisitions made during the year ended December 31, 2015; (2) $7.9 million related to the acquisitions made during the year ended December 31, 2014, which includes a full year of depreciation and amortization compared to partial months of activity during the year ended December 31, 2014; and (3) $12.7 million in additional amortization of absorption costs as a result of the early lease terminations at the SoftBank and Wells Fargo (acquired in 2013) properties, which were effective August 31, 2015 and December 31, 2015, respectively; less (4) $5.9 million in amortization of absorption costs primarily related to the lease termination at the Will Partners property, the sale of the Eagle Rock and College Park properties, which were sold on December 17, 2014 and February 20, 2015, respectively, and the expiration of certain leases at the Roush and One Century Place properties.
Interest Expense
Interest expense for the year ended December 31, 2015 increased by $8.8 million compared to the same period in 2014 primarily due to the following: (1) an $8.4 million increase in interest expense related to the Unsecured Credit Facility (May 2014) and the Unsecured Credit Facility (July 2015) as a result of borrowings utilized for the GE Aviation, Westgate III, DreamWorks, DynCorp, Mercedes-Benz, and Samsonite property acquisitions, preferred equity redemption, payoff of SOR debt on the merger date, and mortgage receivable entered into in the current year; (2) $3.1 million in interest expense related to the interest rate swaps entered into on July 9, 2015; and (3) an approximately $1.2 million increase in mortgage interest expense related to the AIG loan, TW Telecom loan, Ace Hardware mortgage loan, and the four mortgage loans assumed in the current year; offset by decreases of (4) $2.1 million in interest expense related to the KeyBank credit facility and the KeyBank term loan, which were terminated in conjunction with the execution of the Unsecured Credit Facility (May 2014) on May 8, 2014; (5) $0.8 million of capitalized interest related to the Restoration Hardware real estate development, which was substantially complete as of August 15, 2015; (6) $0.6 million of unused commitment fees; and (7) $0.3 million in amortization of deferred financing costs.
Comparison of the Years Ended December 31, 2014 and 2013
The following table provides summary information about our results of operations for the years ended December 31, 2014 and 2013 (dollars in thousands):
 
Year Ended December 31,
 
Increase/(Decrease)
 
Percentage
Change
2014
 
2013
 
Rental income
$
164,412

 
$
54,605

 
$
109,807

 
201
 %
Property expense recoveries
37,982

 
14,311

 
23,671

 
165
 %
Asset management fees to affiliates
12,541

 
4,317

 
8,224

 
191
 %
Property management fees to affiliates
5,445

 
1,839

 
3,606

 
196
 %
Property operating expense
30,565

 
8,865

 
21,700

 
245
 %
Property tax expense
24,873

 
8,061

 
16,812

 
209
 %
Acquisition fees and expenses to non-affiliates
4,261

 
4,639

 
(378
)
 
(8
)%
Acquisition fees and expenses to affiliates
24,319

 
24,849

 
(530
)
 
(2
)%
General and administrative expenses
4,982

 
2,758

 
2,224

 
81
 %
Depreciation and amortization
72,907

 
24,191

 
48,716

 
201
 %
Interest expense
24,598

 
13,922

 
10,676

 
77
 %
Rental Income
Rental income for the year ended December 31, 2014 is comprised of base rent of $152.4 million, adjustments to straight-line contractual rent of $11.6 million, and in-place lease valuation amortization of $0.5 million. Rental income for the year ended December 31, 2014 increased by $109.8 million compared to the same period in the prior year as a result of (1) $66.8 million of additional rental income related to the real estate acquired during the year ended December 31, 2013, which includes

51


a full year of activity for the year ended December 31, 2014; (2) $38.7 million in additional rental income related to the real estate acquired during the year ended December 31, 2014; (3) approximately $6.6 million in additional lease termination fees related to World Kitchen, LLC, the tenant previously occupying the Will Partners property; (4) approximately $0.1 million in in-place lease valuation amortization; and less (5) $2.2 million in rental income as a result of the World Kitchen, LLC lease termination.
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 $23.7 million compared to the same period in the prior year as a result of (1) $8.1 million in property tax recoveries related to certain properties, as a result of changes in property tax expense for properties acquired during the year ended December 31, 2013 of $4.8 million, partially offset by a decrease of $0.6 million related to World Kitchen, LLC, and additional property tax recoveries related to properties acquired during the year ended December 31, 2014 of $3.9 million; (2) $14.9 million in property expense recoveries for recoverable expenses primarily related to $12.8 million for properties acquired during the year ended December 31, 2013 and $2.2 million for properties acquired during the year ended December 31, 2014; and (3) a $0.7 million increase comprised of (A) $0.4 million in other property expense recoveries related to properties acquired during the year ended December 31, 2013; (B) $0.4 million of tenant reimbursable expenses; and (C) less $0.1 million of net over collected expense recoveries.
Management Fees (Asset and Property)
Asset management and property management fees for the years ended December 31, 2014 and 2013 totaled $18.0 million and $6.2 million, respectively. The total increase of $11.8 million compared to the same period in the prior year is a result of (1) $4.5 million in asset management fees and $2.5 million in property management fees related to the acquisitions made during the year ended December 31, 2013; (2) $3.7 million in asset management fees related to the properties acquired during the year ended December 31, 2014 and the investment in an unconsolidated joint venture discussed in Note 4, Investments; and (3) $1.1 million in property management fees related to the properties acquired during the year ended December 31, 2014.
Property Operating Expense
Property operating expenses for the years ended December 31, 2014 and 2013 totaled $30.6 million and $8.9 million, respectively. Property operating expenses include insurance, repairs and maintenance, security, janitorial, landscaping, and other administrative expenses incurred to operate our properties. The total increase of $21.7 million compared to the same period in the prior year is primarily a result of (1) $0.4 million in ground lease rent expense for the Waste Management property, which was acquired on January 16, 2014; (2) $10.6 million in property operating expenses related to certain real estate for which we paid operating expenses on behalf of the tenant and recovered through estimated monthly recoverable expense reimbursements; (3) $10.2 million in property operating expenses related to certain properties that are leased pursuant to modified gross leases in which we recovered, through estimated monthly recoverable expense reimbursements, any portion of the operating expenses that exceeded the specified operating expenses (base year or expense stop) as set forth in the lease, of which $1.1 million relates to properties acquired during the year ended December 31, 2014; and (4) $0.4 million in property operating expenses related to certain properties for which it is our responsibility to cover such expenses.
Property Tax Expense
Property tax expenses for the years ended December 31, 2014 and 2013 totaled $24.9 million and $8.1 million, respectively. The total increase of $16.8 million compared to the same period in the prior year is primarily a result of (1) $11.9 million in additional property tax expenses related to the properties acquired during the year ended December 31, 2013; and (2) $5.1 million in additional property tax expenses related to the properties acquired during the year ended December 31, 2014; less (3) $0.2 million related to a property tax rebate the former tenant at the Will Partners property, World Kitchen, LLC, was entitled to receive prior to terminating the lease pursuant to the Redevelopment Agreement with the Village of Monee.
Acquisition Fees and Expenses
Real estate acquisition fees and expenses to non-affiliates, which totaled $4.3 million for the year ended December 31, 2014, decreased by approximately $0.3 million compared to the year ended December 31, 2013 due to decreased acquisition activity in 2014. Real estate acquisition fees and expenses to affiliates of $24.3 million represent the acquisition fees and expense reimbursement earned by our Advisor for 14 of the 15 properties acquired in the current period totaling $684.7 million and one investment in an unconsolidated joint venture totaling $148.4 million, which represents an 80% investment as discussed in Note 4, Investments. In addition, $0.8 million of non-affiliated acquisition expenses and affiliated acquisition fees and expenses earned by our Advisor, for a property acquired in a sale-leaseback transaction, were allocated between land and building and will be depreciated accordingly. In comparison, real estate acquisition fees and expenses to affiliates in the prior year totaled $24.8 million, which was (1) based on a total acquisition value of $851.3 million and (2) included actual

52


acquisition expense reimbursement of $1.9 million paid on the Investment Grade Portfolio acquisition, which was less than the 0.50% fee pursuant to the Advisory Agreement.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2014 increased by $2.2 million compared to the same period in the prior year due to increased operating activity. General and administrative expenses represent costs unrelated to property operations or transaction costs. These expenses primarily include corporate office expenses related to being a public company, including transfer agent fees, certain audit fees, regulatory fees, legal costs, and other professional fees. The $2.2 million increase is primarily due to the following: (1) an increase of $0.9 million in transfer agent fees as a result of higher equity sales during the year ended December 31, 2014 compared to the year ended December 31, 2013; (2) an increase of $0.4 million in allocated expenses which are related to additional personnel and rent costs incurred by our Advisor which is due in part to the growth in our portfolio; (3) an increase of $0.3 million in professional fees primarily for audit and tax fees, lease administration costs, and proxy campaign management services; (4) an increase of $0.3 million in state franchise tax expense primarily due to the allocation of properties across 19 states for the year ended December 31, 2014 compared to 18 states for the year ended December 31, 2013, as well as an increase related to a $0.2 million extension fee for Tennessee state taxes and an increase in withholding tax as a result of higher taxable income for our Operating Partnership; (5) $0.1 million in stock-based compensation for restricted stock units issued to our independent directors in 2014, where no stock awards were made in 2013; (6) an increase of $0.1 million in organizational costs primarily due to a write-off of prepaid filing fees as a result of the termination of the Follow-On Offering in 2014; and (7) an increase of $0.1 million in professional liability insurance expense as a result of an increase in coverage due to the acquisition of 15 properties during the year ended December 31, 2014, and transactions to occur in future periods.
Depreciation and Amortization Expense
Depreciation and amortization expense for the year ended December 31, 2014 consisted of depreciation of building and building improvements of our properties of $27.7 million and amortization of the contributed and acquired values allocated to tenant origination and absorption costs of $45.2 million. The increase of $48.7 million as compared to the year ended December 31, 2013 is a result of additional depreciation and amortization of (1) $17.8 million related to the acquisitions made during the year ended December 31, 2014; (2) $28.2 million related to the acquisitions made during the year ended December 31, 2013, which includes a full year of activity compared to partial months of activity during the year ended December 31, 2013; (3) $2.5 million related to the write off of unamortized tenant origination and absorption intangible assets, as allocated when the Will Partners property was contributed to the operating partnership, as a result of the lease termination; (4) $0.1 million related to leasing commissions; and (5) $0.1 million related to tenant improvements.
Interest Expense
Interest expense for the year ended December 31, 2014 increased by $10.7 million compared to the same period in 2013 due to the following: (1) $0.1 million in mortgage interest expense for seven of the eight properties refinanced on the Midland Mortgage Loan on February 28, 2013, which previously served as collateral for the KeyBank credit facility, and had a lower variable interest rate; (2) $1.2 million in mortgage interest expense related to the 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; (3) $4.0 million in mortgage interest expense for five properties refinanced through the AIG loan on January 24, 2014, which previously served as collateral for the KeyBank credit facility, and had a lower variable interest rate; (4) $0.9 million in new interest expense as it relates to the KeyBank term loan, which was originated in November 2013 to acquire the Investment Grade Portfolio, which was refinanced and terminated on May 8, 2014; (5) $3.2 million of interest expense related to the Unsecured term loan (May 2014) which was entered into on May 8, 2014; (6) $2.1 million in amortization of deferred financing costs, including $1.7 million of write-offs related to the unamortized deferred financing costs associated with the KeyBank credit facility, which was refinanced through the AIG loan on January 24, 2014, and the KeyBank term loan which was terminated in conjunction with the execution of the Unsecured term loan (May 2014) on May 8, 2014; (7) $0.8 million in additional unused commitment fees of which $0.7 million related to the Unsecured revolver (May 2014) and the remaining $0.1 million related to the KeyBank credit facility, which was fully paid off in February 2014; partially offset by (8) a $0.1 million decrease in interest expense due to the amortization of the property specific mortgages, primarily related to the Plainfield and LTI properties; (9) a $1.4 million decrease in interest expense related to the KeyBank credit facility, which was fully paid off in February 2014; and (10) a $0.1 million decrease in interest expense related to the KeyBank bridge loan, which was terminated during the three months ended December 31, 2013.

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

53


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 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 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

54


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.
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.
Gain or loss from the extinguishment of debt. We use debt as a partial source of capital to acquire properties in our portfolio. As a term of obtaining this debt, we will pay financing costs to the respective lender. Financing costs are capitalized as a component of total assets on the consolidated balance sheets and amortized into interest expense on a straight-line basis over the term of the debt. We consider the amortization expense to be a component of operations if the debt was used to acquire properties. From time to time, we may cancel certain debt obligations and replace these canceled debt obligations with new debt at more favorable terms to us. In doing so, we are required to write off the remaining capitalized financing costs associated with the canceled debt, which we consider to be a cost, or loss, on extinguishing such debt. Management will no longer consider the effect of amortization of these financing costs in operating models and also believes that this loss is considered an isolated event not associated with our operations, and therefore, deems this write off to be an exclusion from MFFO.

55


Preferred units redemption premium. Preferred units were issued as a partial source of capital to acquire properties. As a term of the purchase agreement, we paid issuance costs to the investor that were capitalized as a component of equity on the consolidated balance sheets. Further, the purchase agreement allows us to exercise our right to redeem the outstanding preferred units, and, in doing so, we will be obligated to pay a redemption fee. In conjunction with the redemption, GAAP requires us to write off the issuance costs on a proportional basis of the redeemed preferred units to the total amount of preferred units issued. The write off of the issuance costs would be reflected on the statement of operations as a loss due to preferred unit redemptions. Management believes the loss, similar to the extinguishment of debt, is considered an isolated event not associated with our continuing operations, and therefore, deems it an exclusion from 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 years ended December 31, 2015, 2014 and 2013 (in thousands):
 
Year Ended December 31,
 
2015
 
2014
 
2013
Net income (loss)
$
15,621

 
$
14

 
$
(24,469
)
Adjustments:
 
 
 
 
 
Depreciation of building and improvements
43,320

 
27,694

 
10,093

Amortization of leasing costs and intangibles
69,400

 
45,187

 
14,098

Equity interest of depreciation of building and improvements - unconsolidated entities
2,472

 
853

 
42

Equity interest of amortization of intangible assets - unconsolidated entities
4,799

 
1,643

 
47

Gain from sale of depreciable operating property
(13,813
)
 
(3,104
)
 

FFO/(FFO deficit)
$
121,799

 
$
72,287

 
$
(189
)
Distributions to redeemable preferred unit holders
(9,245
)
 
(19,011
)
 
(2,969
)
Distributions to noncontrolling interests
(3,518
)
 
(3,419
)
 
(3,097
)
 Preferred units redemption premium
(9,905
)
 

 

FFO/(FFO deficit), adjusted for redeemable preferred and noncontrolling interest distributions
$
99,131

 
$
49,857

 
$
(6,255
)
Reconciliation of FFO to MFFO:
 
 
 
 
 
Adjusted FFO/(FFO deficit)
$
99,131

 
$
49,857

 
$
(6,255
)
Adjustments:
 
 
 
 
 
Acquisition fees and expenses to non-affiliates
2,730

 
4,261

 
4,639

Acquisition fees and expenses to affiliates
32,245

 
24,319

 
24,849

Equity interest of acquisition fees and expenses to non-affiliates - unconsolidated entities

 
826

 
120

Revenues in excess of cash received (straight-line rents)
(13,792
)
 
(11,563
)
 
(3,515
)
Amortization of above/(below) market rent
(3,785
)
 
(468
)
 
(546
)
Amortization of ground leasehold interests (below market)
28

 
26

 

Revenues in excess of cash received
(2,078
)
 
(7,125
)
 

Financed termination fee payments received
1,061

 
1,050

 

Loss on extinguishment of debt - write-off of deferred financing costs
1,367

 
1,755

 

Equity interest of revenues in excess of cash received (straight-line rents) - unconsolidated entities
(1,155
)
 
(615
)
 
(17
)
Equity interest of amortization of above/(below) market rent - unconsolidated entities
3,000

 
1,014

 
15

Gain from discount on investment in unconsolidated entities

 

 
(160
)
       Preferred units redemption premium
9,905

 

 

MFFO
$
128,657

 
$
63,337

 
$
19,130


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Liquidity and Capital Resources
Long-Term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds will be for the payment of operating and capital expenses, including costs associated with re-leasing a property, distributions, and for the payment of debt service on our outstanding indebtedness, including repayment of the Unsecured Credit Facility (July 2015) and property secured mortgage loans discussed below, and other investments. Generally, cash needs for items, other than property acquisitions, will be met from operations. 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 in certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions.
Unsecured Credit Facility (May 2014)
On May 8, 2014, we, through our Operating Partnership, entered into an unsecured credit agreement (the "Unsecured Credit Agreement (May 2014)") co-led by KeyBank National Association ("KeyBank") and Bank of America, N.A. ("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 (May 2014), we were provided with a $750.0 million senior unsecured credit facility (the "Unsecured Credit Facility (May 2014)"), consisting of a $450.0 million senior unsecured revolver (the "Unsecured Revolver (May 2014)") and a $300.0 million senior unsecured term loan (the "Unsecured Term Loan (May 2014)"). The Unsecured Credit Facility (May 2014) could be increased up to $500.0 million for a maximum of $1.25 billion by increasing the Unsecured Revolver (May 2014), the Unsecured Term Loan (May 2014) or a combination of both.
The Unsecured Credit Facility (May 2014) was retired in full on July 20, 2015, and we entered into the Unsecured Credit Facility (July 2015).
Unsecured Credit Facility (July 2015)
On July 20, 2015, we, through our Operating Partnership, entered into a credit agreement (the "Unsecured Credit Agreement (July 2015)") with a syndicate of lenders, co-led by KeyBank, Bank of America, Fifth Third Bank ("Fifth Third"), and BMO Harris Bank, N.A. ("BMO Harris"), under which KeyBank serves as administrative agent and Bank of America, Fifth Third, and BMO Harris serve as co-syndication agents, and KeyBanc Capital Markets ("KeyBank Capital Markets"), Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Fifth Third, and BMO Capital Markets serve as joint bookrunners and joint lead arrangers. Pursuant to the Unsecured Credit Agreement (July 2015), we were provided with a $1.14 billion senior unsecured credit facility (the "Unsecured Credit Facility (July 2015)"), consisting of a $500.0 million senior unsecured revolver (the "Revolver Loan (July 2015)") and a $640.0 million senior unsecured term loan (the "Term Loan (July 2015)"). The Unsecured Credit Facility (July 2015) may be increased up to $860.0 million, in minimum increments of $50.0 million, for a maximum of $2.0 billion by increasing either the Revolver Loan (July 2015), the Term Loan (July 2015), or both. The Revolver Loan (July 2015) has an initial term of four years, maturing on July 20, 2019, and may be extended for a one-year period if certain conditions are met and upon payment of an extension fee. The Term Loan (July 2015) has a term of five years, maturing on July 20, 2020.
The Unsecured Credit Facility (July 2015) has an interest rate calculated based on LIBO Rate plus the applicable LIBO Rate margin or Base Rate plus the applicable Base Rate margin, both as provided in the Unsecured Credit Agreement (July 2015). The applicable LIBO Rate margin and Base Rate margin are dependent on whether the interest rate is calculated prior to or after we have received an investment grade senior unsecured credit rating of BBB-/Baa3 from Standard & Poors, Moody's, or Fitch, and we have elected to utilize the investment grade pricing list, as provided in the Unsecured Credit Agreement (July 2015). Otherwise, the applicable LIBO Rate margin will be based on a leverage ratio computed in accordance with our quarterly compliance package and communicated to KeyBank. 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 (July 2015) are interest only and are due on the first day of each quarter.
Highway 94 Mortgage Loan
On November 6, 2015, we assumed a $19.0 million mortgage loan (the "Highway 94 mortgage loan") from Wells Fargo Bank Northwest, N.A., and Teachers Insurance and Annuity Association, as participating holder of the note. The Highway 94 mortgage loan matures on August 1, 2024, has a fixed interest rate of 3.75%, and requires monthly payments of principal and interest.

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DynCorp Mortgage Loan, Mercedes-Benz Mortgage Loan, and Samsonite Mortgage Loan
On December 11, 2015, we, through three wholly-owned subsidiaries of the Operating Partnership, assumed the following three mortgage loans related to the acquisition of the following three properties:
DynCorp - Approximately $11.2 million, secured by the DynCorp property (the "DynCorp mortgage loan"). The DynCorp mortgage loan has a fixed interest rate of 4.70%, matures in July 2016, and requires monthly principal and interest payments.
Mercedes-Benz - Approximately $18.9 million, secured by the Mercedes-Benz property (the "Mercedes-Benz mortgage loan"). The Mercedes-Benz mortgage loan has a fixed interest rate of 6.018%, matures in November 2016, and requires monthly principal and interest payments.
Samsonite - Approximately $24.6 million, secured by the Samsonite property (the "Samsonite mortgage loan"). The Samsonite mortgage loan has a fixed interest rate of 6.08%, matures in September 2023, and requires monthly principal and interest payments.
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 2015 DRP Offering and our income from operations.
Contractual Commitments and Contingencies
The following is a summary of our contractual obligations as of December 31, 2015 (in thousands):
 
Payments Due During the Years Ending December 31,
 
 
Total
 
2016
 
2017-2018
 
2019-2020
 
Thereafter
 
Outstanding debt obligations (1)
$
1,485,516

 
$
40,078

(4) 
$
29,314

(5) 
$
1,153,639

(6) 
$
262,485

(7) 
Interest on outstanding debt obligations (2)
210,307

 
33,985

 
63,396

 
55,918

 
57,008

 
Interest rate swaps (3)
39,238

 
9,772

 
19,618

 
9,848

 

 
Ground lease obligations
35,020

 
180

 
396

 
396

 
34,048

 
Total
$
1,770,081

 
$
84,015

 
$
112,724

 
$
1,219,801

 
$
353,541

 
(1)
Amounts only include principal payments. Mortgage debt does not include the premiums or discount related to four properties of $0.8 million, net premium.
(2)
Projected interest payments are based on the outstanding principal amounts at December 31, 2015. Projected interest payments on the Revolver Loan (July 2015) and Term Loan (July 2015) are based on the contractual interest rate in effect at December 31, 2015.
(3)
The interest rate swaps contractual commitment was calculated based on the swap rate less the LIBO rate.
(4)
Amount includes payment of the balances of the TransDigm, DynCorp, and Mercedes-Benz property mortgage loans, which mature in 2016.
(5)
Amount includes payment of the balance of the Plainfield property mortgage, which matures in 2017.
(6)
Amount includes payment of the balance of the TW Telecom loan, which matures in 2019. Amount also includes payment of the Term Loan (July 2015), which matures in 2020 and the Revolver Loan (July 2015), which matures in 2020, assuming the one-year extension is exercised.
(7)
Amount includes payment of the balances of:
the Midland Mortgage, Emporia Partners, and Samsonite property mortgage loans, all of which mature in 2023,
the Ace Hardware and Highway 94 property mortgage loans, which mature in 2024, and
the AIG loan, which matures in 2029.
Short-Term Liquidity and Capital Resources
We expect to meet our short-term operating liquidity requirements with 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 $47.0 million during the year ended December 31, 2015 and were used in or provided by the following:
Operating Activities. During the year ended December 31, 2015, we generated $92.5 million of net cash from operating activities compared to $73.2 million generated during the same period in 2014. Net cash provided by operating activities before changes in operating assets and liabilities for the year ended December 31, 2015 increased by $39.8 million to

59


$96.7 million compared to $56.9 million for the year ended December 31, 2014. The increase is primarily related to the acquisition of 35 properties from January 1, 2014 through December 31, 2015, partially offset by the sale of four non-strategic properties over the same period.
Investing Activities. During the year ended December 31, 2015, we used $414.4 million in cash for investing activities, compared to $757.9 million used during the same period in 2014. The $343.5 million decrease in cash used in investing activities is related to the following:
$260.2 million decrease in cash used to acquire properties;
$68.4 million decrease for the investment in an unconsolidated entity;
$7.5 million decrease related to the investment in a land development joint venture, of which there was none in the current period;
$5.9 million increase in distributions from the investment in unconsolidated entities primarily related to the Digital Realty joint venture, which was entered into on September 9, 2014;
$8.6 million in cash assumed through the SOR Merger;
$80.2 million increase in proceeds related to the sale of three properties during the year ended December 31, 2015 compared to the sale of one property during the prior year;
$2.5 million in reserves for tenant improvements primarily related to the SoftBank property, which was written off as a result of the lease termination effective August 31, 2015; offset by
$26.8 million increase related to the proceeds held by a third party intermediary from the sale of the Will Partners and LTI properties, as discussed in Note 3, Real Estate, to the consolidated financial statements, which will be released upon completion of the tax-deferred real estate exchange, as permitted by Section 1031 of the Internal Revenue Code;
$34.6 million increase related to payments for construction-in-progress and tenant improvements;
$24.2 million in a mortgage receivable to a related party as discussed in Note 9, Related Party Transactions; and
$4.1 million in acquisition deposits applied during the year ended December 31, 2014.
Financing Activities. During the year ended December 31, 2015, we generated $274.9 million in financing activities compared to $743.2 million generated during the same period in 2014, a decrease in cash provided by financing activities of approximately $468.3 million which is comprised of the following:
$710.8 million decrease in proceeds from the issuance of common stock and noncontrolling interest, net of the decrease in offering costs and repurchases of common stock, during the year ended December 31, 2015;
$518.1 million increase in principal payoff of secured indebtedness, including the SOR credit facility, net of the decrease of deferred financing costs and financing deposits;
$21.6 million increase in distribution payments to common stockholders and noncontrolling interest due to an increase in shares issued;
$254.5 million for the preferred units repurchase; offset by
$8.2 million decrease in distributions paid on preferred units as a result of the full redemption during the current year; and
$1.0 billion net increase in proceeds from borrowings related to the Unsecured Revolver (May 2014), Term Loan (July 2015), and Revolver Loan (July 2015) during the year ended December 31, 2015 offset by proceeds from borrowings related to the KeyBank credit facility, AIG loan, and TW Telecom loan during the same period in the prior year.
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. The funds we receive from operations that are available for distribution may be affected by a number of factors, including the following:
our operating and interest expenses;
the amount of distributions or dividends received by us from our indirect real estate investments;

60


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
debt maturity, financings, and refinancings.
Distributions may be funded with operating cash flow from our properties, offering proceeds raised in future public offerings (if any), or a combination thereof. For the year ended December 31, 2015, we funded 90% of our cash distributions from cash flows provided by operating activities and 10% from offering proceeds. 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 declared, distributions paid, and cash flow provided by operating activities during the year ended December 31, 2015:
 
 
 
 
 
 
Distributions Paid (3)
 
 
Period
 
Distributions Declared (1) (4)
 
Distributions Declared Per Common Share (1)(2)
 
Cash (4)
 
Reinvested
 
Total
 
Cash Flow from Operating Activities
First Quarter 2015
 
$
27,794

 
$
0.17

 
$
14,819

 
$
12,896

 
$
27,715

 
$
18,518

Second Quarter 2015
 
$
31,526

 
$
0.17

 
$
18,099

 
$
13,055

 
$
31,154

 
$
14,287

Third Quarter 2015
 
$
33,627

 
$
0.17

 
$
18,452

 
$
13,303

 
$
31,755

 
$
31,400

Fourth Quarter 2015
 
$
37,323

 
$
0.17

 
$
25,277

 
$
13,303

 
$
38,580

 
$
29,093

(1)
Distributions for the period from January 1, 2015 through December 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 for all record dates of a given month are paid on a monthly basis, on or about the first business day of the following month.
(4)
Includes distributions paid to noncontrolling interests and preferred unit holders, including the liquidation preference related to the redemption of the preferred units on May 14, 2015 and November 5, 2015.
For the year ended December 31, 2015, we paid and declared distributions of approximately $107.6 million to common stockholders including shares issued pursuant to the DRP, and approximately $22.7 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 year ended December 31, 2015 of $99.1 million and $128.7 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.
Off-Balance Sheet Arrangements
As of December 31, 2015, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.
Subsequent Events
See Note 13, Subsequent Events, to the consolidated financial statements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.
In order to modify and manage the interest rate characteristics of our outstanding debt and to limit the effects of interest rate risks on our operations, we may utilize a variety of financial instruments, including interest rate swap agreements, caps, floors, and other interest rate exchange contracts. The use of these types of instruments to hedge a portion of our exposure to changes in interest rates carries additional risks, such as counterparty credit risk and the legal enforceability of hedging contracts.
Our future earnings and fair values relating to financial instruments are primarily dependent upon prevalent market rates of interest, such as LIBO Rate. However, our interest rate swap agreements are intended to reduce the effects of interest rate changes. The following table illustrates the effect of a 1% increase in interest rates, assuming a LIBO Rate floor of 0%, on our

61


variable-rate debt, including our unsecured credit facility and mortgage loans, after considering the effect of our interest rate swap agreements, secured debt, and unsecured senior notes payable as of December 31, 2015 (in thousands):
Impact of future earnings due to variable-rate debt
Rate increase of 1%
 
$
(5,504
)
Effect of fair value of total consolidated debt and interest rate swap agreements
Rate increase of 1%
 
$
(357
)
These amounts are determined by considering the impact of the hypothetical interest rates on our borrowing cost and our interest rate swap agreements in effect as of December 31, 2015. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, we would consider taking actions to further mitigate our exposure to the change. However, because of the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analyses assume no changes in our capital structure.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data filed as part of this annual report are set forth beginning on page F-1 of this report.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with our independent registered public accountant during the years ended December 31, 2015 and 2014.
ITEM 9A.
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 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 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
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for us. Our management, including our chief executive officer and chief financial officer, evaluated, as of December 31, 2015, the effectiveness of our internal control over financial reporting using the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2015.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION

62


(a)
During the quarter ended December 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 December 31, 2015, there were no material changes to the procedures by which security holders may recommend nominees to our board of directors.
PART III
We expect to file a definitive proxy statement for our 2016 Annual Meeting of Stockholders (the “2016 Proxy Statement”) with the SEC, pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to Form 10-K and is incorporated by reference to the 2016 Proxy Statement. Only those sections of the 2016 Proxy Statement that specifically address the items required to be set forth herein are incorporated by reference.

ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated by reference to the 2016 Proxy Statement to be filed with the SEC.

ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the 2016 Proxy Statement to be filed with the SEC.

ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to the 2016 Proxy Statement to be filed with the SEC.

ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference to the 2016 Proxy Statement to be filed with the SEC.

ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference to the 2016 Proxy Statement to be filed with the SEC.

PART IV
 
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) List of Documents Filed.
1. The list of the financial statements contained herein is set forth on page F-1 hereof.
2. Schedule III — Real Estate and Accumulated Depreciation is set forth beginning on page S-1 hereof. All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable and therefore have been omitted.
3. The Exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index below.
(b) See (a) 3 above.
(c) See (a) 2 above.

EXHIBIT INDEX

63


The following exhibits are included in this Annual Report on Form 10-K for the year ended December 31, 2015 (and are numbered in accordance with Item 601 of Regulation S-K).
 
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
  
Griffin Capital Essential Asset REIT, Inc. Second Amended and Restated Distribution Reinvestment Plan, incorporated by reference to Appendix B to the prospectus contained in the Registrant's Registration Statement on Form S-3D, filed on September 22, 2015, Commission File No. 333-207075
4.2
 
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 September 22, 2015, Commission File No. 333-207075
10.1
  
Griffin Capital Essential Asset REIT, Inc. 2009 Long Term Incentive Plan, incorporated by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-11, filed on May 12, 2009, Commission File No. 333-159167
10.2
  
Tax Protection Agreement by and among Griffin Capital Essential Asset REIT, Inc., Griffin Capital Essential Asset Operating Partnership, L.P., Kevin A. Shields, Don G. Pescara and David C. Rupert, incorporated by reference to Exhibit 10.5 to the Registrant’s Registration Statement on Form S-11, filed on May 12, 2009, Commission File No. 333-159167
10.3
  
Form of Master Property Management, Leasing and Construction Management Agreement, incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q, filed on December 10, 2009, Commission File No. 333-159167
10.4
  
Fixed Rate Note for Plainfield Property, incorporated by reference to Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K, filed on March 30, 2010, Commission File No. 333-159167
10.5
 
Tax Protection Agreement for Will Partners Property dated June 4, 2010, incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K, filed on June 9, 2010, Commission File No. 333-159167
10.6
 
Tax Protection Agreement for LTI Property dated May 13, 2011, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed on May 16, 2011, Commission File No. 000-54377
10.7
  
Promissory Note dated February 27, 2013 issued to Midland National Life Insurance Company, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2013, Commission File No. 000-54377
10.8
  
Open End Mortgage and Security Agreement for Westinghouse Property dated February 27, 2013, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2013, Commission File No. 000-54377
10.9
  
Separate Guaranty of Retained Liability Matters Agreement for Midland Mortgage Loan dated February 27, 2013, incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2013, Commission File No. 000-54377
10.10
  
NUF Note for the Schlumberger Property, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on January 30, 2014, Commission File No. 000-54377
10.11
  
VALIC Note for the Schlumberger Property, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on January 30, 2014, Commission File No. 000-54377
10.12
  
First Deed of Trust for the Schlumberger Property, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on January 30, 2014, Commission File No. 000-54377
10.13
  
Second Deed of Trust for the Schlumberger Property, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on January 30, 2014, Commission File No. 000-54377

64


Exhibit
No.
  
Description
10.14
  
First Mortgage for the Verizon Property, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on January 30, 2014, Commission File No. 000-54377
10.15
  
Second Mortgage for the Verizon Property, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on January 30, 2014, Commission File No. 000-54377
10.16
  
Recourse Carve-Out Guaranty Agreement, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on January 30, 2014, Commission File No. 000-54377
10.17
 
Third Amended and Restated Advisory Agreement, incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed on October 17, 2014, Commission File No. 000-54377
10.18
 
Third Amended and Restated Limited Partnership Agreement, incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K, filed on October 17, 2014, Commission File No. 000-54377
10.19
 
Agreement and Plan of Merger, dated as of November 21, 2014, by and among Griffin Capital Essential Asset REIT, Inc., Griffin SAS, LLC, and Signature Office REIT, Inc., incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K, filed on November 24, 2014, Commission File No. 000-54377
10.20
 
Board Observer and Indemnification Agreement, incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on June 11, 2015, Commission File No. 000-54377
10.21
 
DreamWorks Purchase Agreement, incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on July 23, 2015, Commission File No. 000-54377
10.22
 
Unsecured Credit Agreement, incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on July 23, 2015, Commission File No. 000-54377
10.23
 
Revolving Loan Note, incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed on July 23, 2015, Commission File No. 000-54377
10.24
 
Term Loan Note, incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K filed on July 23, 2015, Commission File No. 000-54377
10.25
 
Guaranty, incorporated by reference to Exhibit 10.5 to the Registrant's Current Report on Form 8-K filed on July 23, 2015, Commission File No. 000-54377
10.26
 
Schedule of Omitted Documents, incorporated by reference to Exhibit 10.6 to the Registrant's Current Report on Form 8-K filed on July 23, 2015, Commission File No. 000-54377
10.27*
 
First Amendment to Unsecured Credit Agreement dated February 12, 2016
21.1
  
Subsidiaries of Griffin Capital Essential Asset REIT, Inc., incorporated by reference to Exhibit 21.1 to the Registrant’s Registration Statement on Form S-4, filed on February 3, 2015, Commission File No. 333-201835
23.1*
 
Consent of Ernst & Young, LLP, Independent Registered Accounting Firm
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 year ended December 31, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Equity, (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements.
 
*
Filed herewith.

65


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of El Segundo, State of California, on March 10, 2016.
 
 
 
 
 
 
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
 
 
 
 
By:
 
/s/ Kevin A. Shields
 
 
 
Kevin A. Shields
 
 
 
Chief Executive Officer and Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
 
Signature
  
Title
  
Date
 
 
 
/s/ Kevin A. Shields
  
Chief Executive Officer and Chairman (Principal Executive Officer)
  
March 10, 2016
Kevin A. Shields
 
 
 
/s/ Joseph E. Miller
  
Chief Financial Officer and Treasurer (Principal Financial Officer)
  
March 10, 2016
Joseph E. Miller
 
 
 
/s/ Gregory M. Cazel
  
Independent Director
  
March 10, 2016
Gregory M. Cazel
 
 
 
/s/ Timothy J. Rohner
  
Independent Director
  
March 10, 2016
Timothy J. Rohner

66


GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

F-1


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of
Griffin Capital Essential Asset REIT, Inc.:
We have audited the accompanying consolidated balance sheets of Griffin Capital Essential Asset REIT, Inc. (the Company) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive loss, equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Griffin Capital Essential Asset REIT, Inc. at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company changed its method for reporting discontinued operations effective January 1, 2014.
/s/ Ernst & Young LLP
Los Angeles, California
March 10, 2016


F-2


GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
 
December 31,
2015
 
December 31,
2014
ASSETS
 
 
 
Cash and cash equivalents
$
21,944

 
$
68,915

Restricted cash
24,187

 
40,752

Restricted cash - real estate funds held for exchange
47,031

 
10,105

Real estate:
 
 
 
Land
355,443

 
250,078

Building and improvements
2,020,947

 
1,178,751

Tenant origination and absorption cost
516,879

 
359,416

Construction in progress
4,805

 
35,650

Total real estate
2,898,074

 
1,823,895

Less: accumulated depreciation and amortization
(202,048
)
 
(102,883
)
Total real estate, net
2,696,026

 
1,721,012

Real estate assets and other assets held for sale, net
68,792

 
96,862

Investments in unconsolidated entities
56,863

 
66,249

Intangible assets, net
36,769

 
23,621

Deferred rent
26,432

 
15,619

Deferred financing costs, net
12,899

 
11,791

Mortgage receivable from affiliate
24,513

 

Other assets, net
34,833

 
10,521

Total assets
$
3,050,289

 
$
2,065,447

LIABILITIES AND EQUITY
 
 
 
Debt:
 
 
 
Mortgage payable, plus unamortized premium of $810 and $1,858, respectively
$
364,673

 
$
325,696

Unsecured term loan (May 2014)

 
300,000

Term Loan (July 2015)
640,000

 

Revolver Loan (July 2015)
481,653

 

Total debt
1,486,326

 
625,696

Restricted reserves
11,286

 
37,050

Interest rate swap liability
6,394

 

Mandatory redemption of noncontrolling interest
18,129

 

Accounts payable and other liabilities
68,168

 
41,518

Distributions payable
6,147

 
5,083

Due to affiliates
8,757

 
1,851

Below market leases, net
41,706

 
40,394

Liabilities of real estate assets held for sale
2,845

 
3,906

Total liabilities
1,649,758

 
755,498

Commitments and contingencies (Note 10)

 

Preferred units subject to redemption, nil and 24,319,066 units outstanding as of December 31, 2015 and 2014, respectively

 
250,000

Noncontrolling interests subject to redemption, 531,000 units eligible towards redemption as of December 31, 2015 and 2014
4,887

 
12,543

Common stock subject to redemption
86,557

 
56,421

Stockholders' Equity:
 
 
 
Preferred stock, $0.001 par value; 200,000,000 shares authorized; no shares outstanding, as of December 31, 2015 and 2014

 

Common stock, $0.001 par value; 700,000,000 shares authorized; 175,184,519 and 129,763,016 shares outstanding, as of December 31, 2015 and 2014, respectively
175

 
1,326

Additional paid-in capital
1,561,499

 
1,128,318

Cumulative distributions
(212,031
)
 
(104,429
)
Accumulated deficit
(55,035
)
 
(51,285
)
Accumulated other comprehensive loss
(6,839
)
 
(423
)
Total stockholders’ equity
1,287,769

 
973,507

Noncontrolling interests
21,318

 
17,478

Total equity
1,309,087

 
990,985

Total liabilities and equity
$
3,050,289

 
$
2,065,447

See accompanying notes.

F-3


GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
 
 
Year Ended December 31,
 
2015
 
2014
 
2013
Revenue:
 
 
 
 
 
Rental income
$
235,148

 
$
164,412

 
$
54,605

Property expense recoveries
54,947

 
37,982

 
14,311

Total revenue
290,095

 
202,394

 
68,916

Expenses:
 
 
 
 
 
Asset management fees to affiliates
19,389

 
12,541

 
4,317

Property management fees to affiliates
7,622

 
5,445

 
1,839

Property operating expense
37,924

 
30,565

 
8,865

Property tax expense
34,733

 
24,873

 
8,061

Acquisition fees and expenses to non- affiliates
2,730

 
4,261

 
4,639

Acquisition fees and expenses to affiliates
32,245

 
24,319

 
24,849

General and administrative expenses
7,595

 
4,982

 
2,758

Depreciation and amortization
112,748

 
72,907

 
24,191

Total expenses
254,986

 
179,893

 
79,519

Income (loss) from operations
35,109

 
22,501

 
(10,603
)
Other income (expense):
 
 
 
 
 
Interest expense
(33,402
)
 
(24,598
)
 
(13,922
)
Interest income
1,576

 
365

 
2

Gain from investment in unconsolidated entities

 

 
160

Loss from investment in unconsolidated entities
(1,475
)
 
(1,358
)
 
(106
)
Gain from sale of depreciable operating property
13,813

 
3,104

 

Net income (loss)
15,621

 
14

 
(24,469
)
Distributions to redeemable preferred unit holders
(9,245
)
 
(19,011
)
 
(2,969
)
Preferred units redemption premium
(9,905
)
 

 

Less: Net loss attributable to noncontrolling interests
138

 
698

 
3,092

Net loss attributable to controlling interests
(3,391
)
 
(18,299
)
 
(24,346
)
Distributions to redeemable noncontrolling interests attributable to common stockholders
(359
)
 
(355
)
 
(318
)
Net loss attributable to common stockholders
$
(3,750
)
 
$
(18,654
)
 
$
(24,664
)
Net loss attributable to common stockholders per share, basic and diluted
$
(0.02
)
 
$
(0.17
)
 
$
(0.97
)
Weighted average number of common shares outstanding, basic and diluted
155,059,231

 
112,358,422

 
25,404,780

See accompanying notes.

F-4


GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS
(in thousands)
 
 
Year Ended December 31,
 
2015
 
2014
 
2013
Net income (loss)
$
15,621

 
$
14

 
$
(24,469
)
Other comprehensive loss:
 
 
 
 
 
Equity in other comprehensive loss of unconsolidated joint venture
(189
)
 
(423
)
 

Change in fair value of swap agreement
(6,371
)
 

 

Total comprehensive income (loss)
9,061

 
(409
)
 
(24,469
)
Distributions to redeemable preferred unit holders
(9,245
)
 
(19,011
)
 
(2,969
)
Preferred units redemption premium
(9,905
)
 

 

Distributions to redeemable noncontrolling interests attributable to common stockholders
(359
)
 
(355
)
 
(318
)
Less: other comprehensive loss attributable to noncontrolling interests
282

 
698

 
3,092

Net other comprehensive loss attributable to common stockholders
$
(10,166
)
 
$
(19,077
)
 
$
(24,664
)
See accompanying notes.



F-5


GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share amounts)
 
 
 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
Common Stock
 
Additional Paid-In Capital
 
Cumulative Distributions
 
Accumulated Deficit
 
 
Total Stockholders' Equity
 
Non-controlling Interests
 
Total Equity
 
Shares
 
Amount
 
 
 
 
 
 
 
BALANCE December 31, 2012
13,376,868

 
$
134

 
$
112,794

 
$
(9,192
)
 
$
(7,967
)
 

 
$
95,769

 
$
17,512

 
$
113,281

Gross proceeds from issuance of common stock
35,666,880

 
366

 
365,285

 

 

 

 
365,650

 

 
365,650

Discount on issuance of common stock

 

 
(910
)
 

 

 

 
(910
)
 

 
(910
)
Offering costs including dealer manager fees to affiliates

 

 
(37,761
)
 

 

 

 
(37,761
)
 

 
(37,761
)
Distributions to common stockholders

 

 

 
(8,589
)
 

 

 
(8,589
)
 

 
(8,589
)
Issuance of shares for distribution reinvestment plan
912,214

 
9

 
8,893

 
(8,902
)
 

 

 

 

 

Repurchase of common stock
(62,460
)
 
(1
)
 
(614
)
 

 

 

 
(614
)
 

 
(614
)
Additions to common stock subject to redemption

 

 
(8,902
)
 

 

 

 
(8,902
)
 

 
(8,902
)
Contribution of noncontrolling interest

 

 
239

 

 

 

 
239

 
8,095

 
8,334

Distributions to noncontrolling interests

 

 

 

 

 

 

 
(2,730
)
 
(2,730
)
Distributions to noncontrolling interests subject to redemption

 

 

 

 

 

 

 
(49
)
 
(49
)
Offering costs on preferred equity

 

 
(5,380
)
 

 

 

 
(5,380
)
 

 
(5,380
)
Net loss

 

 

 

 
(24,664
)
 
 
 
(24,664
)
 
(3,092
)
 
(27,756
)
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

Issuance of shares pursuant to Signature Office REIT merger
41,764,968

 
42

 
433,625

 

 

 

 
433,667

 

 
433,667

Adjustment to par value - common stock

 
(1,217
)
 
1,217

 

 

 

 

 

 

Adjustments to redemption value of redeemable noncontrolling interests

 

 
(10,473
)
 

 

 

 
(10,473
)
 

 
(10,473
)
Stock-based compensation
667

 

 
12

 

 

 

 
12

 

 
12

Offering costs

 

 
(62
)
 

 

 

 
(62
)
 

 
(62
)
Distributions to common stockholders

 

 

 
(55,045
)
 

 

 
(55,045
)
 

 
(55,045
)
Issuance of shares for distribution reinvestment plan
5,053,669

 
28

 
52,529

 
(52,557
)
 

 

 

 

 

Repurchase of common stock
(1,397,801
)
 
(4
)
 
(13,815
)
 

 

 
 
 
(13,819
)
 

 
(13,819
)
Additions to common stock subject to redemption

 

 
(35,232
)
 

 

 

 
(35,232
)
 

 
(35,232
)
Issuance of limited partnership units

 

 

 

 

 

 

 
7,282

 
7,282

Distributions to noncontrolling interests

 

 

 

 

 

 

 
(3,150
)
 
(3,150
)
Distributions to noncontrolling interests subject to redemption

 

 

 

 

 

 

 
(10
)
 
(10
)
Write-off of offering costs on redemption of preferred units

 

 
5,380

 

 

 

 
5,380

 

 
5,380

Net loss

 

 

 

 
(3,750
)
 

 
(3,750
)
 
(138
)
 
(3,888
)
Other comprehensive loss

 

 

 

 

 
(6,416
)
 
(6,416
)
 
(144
)
 
(6,560
)
BALANCE December 31, 2015
175,184,519

 
$
175

 
$
1,561,499

 
$
(212,031
)
 
$
(55,035
)
 
$
(6,839
)
 
$
1,287,769

 
$
21,318

 
$
1,309,087

See accompanying notes.

F-6


GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
 
Year Ended December 31,
 
2015
 
2014
 
2013
Operating Activities:
 
 
 
 
 
Net income (loss)
$
15,621

 
$
14

 
$
(24,469
)
Adjustments to reconcile net income (loss) to net cash provided by operations:
 
 
 
 
 
Depreciation of building and building improvements
43,320

 
27,694

 
10,093

Amortization of leasing costs and intangibles, including ground leasehold interests
69,428

 
45,213

 
14,098

Amortization of above and below market leases, net
(3,785
)
 
(468
)
 
(546
)
Amortization of deferred financing costs
3,764

 
3,853

 
1,943

Amortization of debt premium
(285
)
 
(255
)
 
(139
)
Amortization of deferred revenue
(282
)
 

 

Deferred rent
(13,792
)
 
(11,563
)
 
(3,515
)
Termination fee revenue - release of tenant obligation
(2,078
)
 

 

Termination fee revenue receivable from tenant, net
(2,904
)
 
(5,937
)
 

Gain from sale of depreciable operating property
(13,813
)
 
(3,104
)
 

Unrealized loss on interest rate swaps
23

 

 

Gain from investment in unconsolidated entities

 

 
(160
)
Loss from investment in unconsolidated entities
1,475

 
1,358

 
106

Stock-based compensation
12

 
108

 

Change in operating assets and liabilities:
 
 
 
 
 
Other assets
(19,331
)
 
3,490

 
(8,537
)
Restricted cash
(8,811
)
 
616

 
(3,597
)
Accounts payable and other liabilities
19,978

 
13,414

 
13,077

Due to affiliates, net
3,918

 
(1,184
)
 
2,594

Net cash provided by operating activities
92,458

 
73,249

 
948

Investing Activities:
 
 
 
 
 
Acquisition of properties, net
(401,418
)
 
(661,618
)
 
(840,691
)
Cash assumed from the Signature Office REIT merger
8,557

 

 

Proceeds from disposition of properties
90,323

 
10,141

 

Real estate acquisition deposits

 
4,100

 
(3,350
)
Real estate funds held for exchange
(36,926
)
 
(10,105
)
 

Reserves for tenant improvements
2,537

 

 

Improvements to real estate
(7,173
)
 
(2,826
)
 
(256
)
Payments for construction in progress
(5,448
)
 
(1,766
)
 
(7
)
Real estate development, net of unpaid construction costs
(48,314
)
 
(21,691
)
 

Mortgage receivable from affiliate
(24,231
)
 

 

Land acquisition - real estate development

 
(7,529
)
 

Investment in unconsolidated joint venture

 
(68,424
)
 
(1,440
)
Distributions of capital from investment in unconsolidated entities
7,722

 
1,815

 
72

Net cash used in investing activities
(414,371
)
 
(757,903
)
 
(845,672
)
Financing Activities:
 
 
 
 
 
Proceeds from borrowings - KeyBank credit facility

 
151,000

 
198,000

Proceeds from borrowings - Mortgage debt

 
132,140

 
105,600

Proceeds from borrowings - KeyBank term loan

 

 
282,000

Proceeds from borrowings - Unsecured term loan (May 2014)

 
300,000

 

Proceeds from borrowings - Unsecured revolver (May 2014)
490,100

 

 

Proceeds from borrowings - Term Loan (July 2015)
640,000

 

 

Proceeds from borrowings - Revolver Loan (July 2015)
481,653

 

 

Principal payoff of secured indebtedness - Keybank credit facility

 
(195,500
)
 
(282,530
)
Principal payoff of secured indebtedness - Keybank term loan

 
(282,000
)
 

Principal payoff of secured indebtedness - Unsecured term loan (May 2014)
(300,000
)
 

 

Principal payoff of secured indebtedness - Unsecured revolver (May 2014)
(490,100
)
 

 

Principal payoff of secured indebtedness - Signature Office REIT Credit Facility
(173,000
)
 

 

Principal payoff of secured indebtedness - LTI mortgage loan
(31,407
)
 

 

Principal amortization payments on secured indebtedness
(2,283
)
 
(1,707
)
 
(1,396
)
Deferred financing costs
(4,872
)
 
(6,688
)
 
(8,750
)
Financing deposits

 
2,325

 
(2,325
)
Offering costs
(62
)
 
(76,638
)
 
(37,761
)
Issuance of common stock, net

 
774,722

 
364,740

Issuance of preferred equity subject to redemption

 

 
250,000

Issuance of noncontrolling interests, net

 
1,364

 

Repurchase of common stock
(13,819
)
 
(2,560
)
 
(614
)
Repurchase of preferred units
(254,525
)
 

 

Payment of offering costs - preferred units

 

 
(5,380
)
Distributions paid on preferred units subject to redemption
(10,859
)
 
(19,011
)
 
(1,354
)
Distributions to noncontrolling interests
(3,477
)
 
(3,410
)
 
(3,041
)
Distributions to common stockholders
(52,407
)
 
(30,875
)
 
(7,731
)
Net cash provided by financing activities
274,942

 
743,162

 
849,458

Net (decrease) increase in cash and cash equivalents
(46,971
)
 
58,508

 
4,734

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

 
10,407

 
5,673

Cash and cash equivalents at the end of the period
$
21,944

 
$
68,915

 
$
10,407

Supplemental Disclosures of Cash Flow Information:
 
 
 
 
 
Cash paid for interest
$
27,518

 
$
19,718

 
$
11,255

Restricted cash - funded as a component of proceeds from borrowings
$

 
$
21,500

 
$
23,761

Supplemental Disclosures of Significant Non-cash Transactions:
 
 
 
 
 
Change in fair value of interest rate swap agreements
$
(6,560
)
 
$
(423
)
 
$

Construction in progress costs - real estate development
$
(38,208
)
 
$
(35,114
)
 
$

Unpaid construction in progress costs - real estate development
$
(10,106
)
 
$
13,423

 
$

Limited partnership units of the operating partnership issued in conjunction with the acquisition of real estate assets
$
7,282

 
$

 
$
8,335

Mortgage debt assumed in conjunction with the acquisition of real estate assets plus a premium of $749 and $1,799, respectively
$
73,701

 
$
23,843

 
$

Noncontrolling interest in land development
$

 
$
7,656

 
$

Increase in distributions payable to noncontrolling interests
$
42

 
$
9

 
$
56

Increase in distributions payable to common stockholders
$
2,637

 
$
1,924

 
$
859

(Decrease) increase in distributions payable to preferred unit holders
$
(1,615
)
 
$

 
$
1,615

Distributions to redeemable noncontrolling interests attributable to common stockholders as reflected on the consolidated statements of operations
$
359

 
$
355

 
$
318

Common stock issued pursuant to the distribution reinvestment plan
$
52,557

 
$
44,947

 
$
8,902

Common stock redemptions funded subsequent to year-end
$
6,336

 
$
1,240

 
$
244

Assets and liabilities assumed in conjunction with the Signature Office REIT merger:
 
 
 
 
 
Land
$
71,529

 
$

 
$

Building and improvements
$
436,350

 
$

 
$

Tenant origination and absorption cost
$
89,357

 
$

 
$

Above market leases
$
16,860

 
$

 
$

Other assets
$
2,148

 
$

 
$

Unsecured debt
$
173,000

 
$

 
$

Below market leases
$
6,996

 
$

 
$

Accounts payable and other liabilities
$
11,138

 
$

 
$

Equity consideration for the Signature Office REIT merger
$
433,667

 
$

 
$

See accompanying notes.

F-7

Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(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 and for each year thereafter. 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 of the Company's board of directors, controls the Sponsor as the trustee of the trust entity that is the sole shareholder of the Sponsor.
Griffin Capital Essential Asset Advisor, LLC, a Delaware limited liability company (the "Advisor"), was formed on August 27, 2008. Griffin Capital Asset Management Company, LLC ("GAMCO," formerly known as Griffin Capital REIT Holdings, LLC) is the sole member of the Advisor, and Griffin Capital, LLC ("GC") is the sole member of GAMCO. 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 (collectively, 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 ("SEC"), and the Company 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 April 25, 2013, the Company terminated its Initial Public Offering, having issued approximately 19,200,570 total shares of the Company's common stock for gross proceeds of approximately $191.5 million, including 585,533 shares, or $5.6 million, 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 97,200,000 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 $100.0 million in shares of common stock, consisting of approximately 10,200,000 shares pursuant to the DRP at a price equal to 95% of the share price, which was approximately $9.77 per share (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 it expected to reach the maximum amount of offering proceeds. 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 "2014 DRP Offering"). On September 22, 2015, the Company filed a Registration Statement on Form S-3 with the SEC for the registration of $100.0 million in shares for sale pursuant to the DRP (the "2015 DRP Offering" and together with the 2014 DRP Offering, the "DRP Offerings") and terminated the 2014 DRP Offering. In connection with the DRP Offerings, the Company had issued 8,579,699 shares of the Company's common stock for gross proceeds of approximately $87.3 million through December 31, 2015. The 2015 DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders.
On November 21, 2014, the Company entered into a merger agreement with Signature Office REIT, Inc. ("SOR"). In connection with the merger (the "SOR Merger"), (1) SOR merged into a wholly-owned subsidiary of the Company, and (2)

F-8

Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

each share of common stock of SOR issued and outstanding was converted into 2.04 shares ("Merger Consideration") of the Company's common stock. On June 10, 2015, the Company issued approximately 41.8 million shares of common stock upon the consummation of the SOR Merger. The assets and liabilities of SOR are included in the Company's consolidated financial statements as of the closing date, June 10, 2015. See Note 3, Real Estate, for further discussion.
On October 22, 2015, the Company's board of directors (the "Board"), at the recommendation of the Nominating and Corporate Governance Committee of the Board (the "Nominating and Corporate Governance Committee") comprised solely of independent directors, approved an estimated value per share of the Company's common stock of $10.40 (unaudited) based on the estimated value of the Company's assets less the estimated value of the Company's liabilities, or net asset value, divided by the number of shares outstanding on a fully diluted basis (the "NAV"), calculated as of September 30, 2015. The Company is providing this estimated value per share to assist broker dealers in connection with their obligations under applicable Financial Industry Regulatory Authority rules with respect to customer account statements. This valuation was performed in accordance with the provisions of Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs, issued by the Investment Program Association ("IPA") in April 2013, in addition to guidance from the SEC.
As of December 31, 2015, the Company had received aggregate gross offering proceeds of approximately $1.4 billion from the sale of shares in the Private Offering, the Public Offerings, and the DRP Offerings. There were 175,184,519 shares outstanding at December 31, 2015, including shares issued pursuant to the DRP, less shares redeemed pursuant to the share redemption program. As of December 31, 2015 and 2014, the Company had issued $110.2 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. The common stock subject to redemptions is net of cumulative redemptions which includes stock tendered at December 31, 2015 of approximately $6.3 million and $1.2 million, respectively, which is included in accounts payable and other liabilities on the consolidated balance sheets. See Note 8, Equity — Share Redemption Program. Since inception and through December 31, 2015, the Company had redeemed 1,753,700 shares of common stock for approximately $17.3 million at a weighted average price per share of $9.88 pursuant to the share redemption program.
Griffin Capital Securities, LLC (formerly known as Griffin Capital Securities, Inc., the "Dealer Manager") is an affiliate of the Sponsor, and is a wholly-owned subsidiary of GC. 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 December 31, 2015, the Company owned approximately 97% of the limited partnership units of the Operating Partnership, 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 1% of the limited partnership units of the Operating Partnership. The remaining approximately 2% of the limited partnership units were owned by third parties. No limited partnership units of the Operating Partnership have been redeemed during the years ended December 31, 2015 and 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 December 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 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”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”), and in conjunction with rules and regulations of the SEC. The 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 years ended December 31, 2015 and 2014. The consolidated financial

F-9

Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

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 statements and accompanying notes. Actual results could materially differ from those estimates.
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. Based on certain criteria discussed below, the Company classified an office property as held for sale as of December 31, 2015. As a result, certain assets and liabilities are presented as held for sale on the consolidated balance sheets for all periods presented. See Assets Held for Sale in Note 3, Real Estate.
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 December 31, 2015 and 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 December 31, 2015 and 2014, the balance of these reserves, included in the consolidated balance sheets as restricted cash, was approximately $24.2 million and $40.8 million, respectively. The balance as of December 31, 2015 includes $2.0 million in rent collections from the eight properties, which serve as collateral under the Midland Mortgage loan and the DynCorp property, which was acquired in the current period, $13.3 million designated for deferred maintenance and re-leasing costs, $2.2 million of taxes and insurance reserves to be applied to future amounts incurred, and $6.6 million in rent received from the DreamWorks property, which is to be held in escrow pending the wind down of a tax-deferred real estate exchange, as permitted by Section 1031 of the Internal Revenue Code, with the sale of the Will Partners and LTI properties. Such exchange was completed on January 12, 2016, thus, releasing any restrictions on the DreamWorks rent receipts.
The proceeds of approximately $47.0 million from the sale of the Will Partners and LTI properties were deposited with a qualified intermediary, as both properties were treated as a tax-deferred exchange. See Note 3, Real Estate.
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

F-10

Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

a component of a business combination and, therefore, are expensed as incurred. Acquisition-related costs for the years ended December 31, 2015, 2014, and 2013 totaled $35.0 million, $28.6 million, and $29.5 million, respectively. For properties acquired in a sale-leaseback transaction or part of a development project, acquisition fees and acquisition expenses are included as part of the acquisition price.
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 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 will be 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.
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 years ended December 31, 2015, 2014, and 2013 was $43.3 million, $27.7 million, and $10.1 million, respectively. Amortization expense for intangibles, including but not limited to, tenant origination and absorption costs for the years ended December 31, 2015, 2014, and 2013 was $69.4 million, $45.2 million, and $14.1 million, respectively. See Note 3, Real Estate, for amortization related to in-place lease valuations.
Assets Held for Sale
The Company accounts 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,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

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 required criteria are met.
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 December 31, 2015, one property owned by the Company met the criteria to be classified as held for sale and was included in continuing operations in the consolidated statements of operations based on the Company's early adoption of ASU No. 2014-08, as it did not meet the prerequisite requirements to be classified as discontinued operations. 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 December 31, 2015 and 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 liabilities and assets, 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 80 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 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.    

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Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

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 years ended December 31, 2015, 2014, and 2013, the Company recognized deferred rent from tenants of $13.8 million, $11.6 million, and $3.5 million, respectively. As of December 31, 2015 and 2014, the cumulative deferred rent balance for assets not held for sale was $26.4 million and $15.6 million, respectively.
Tenant reimbursement revenue, which is comprised of additional amounts collected from tenants for the recovery of certain operating expenses, including repair and maintenance, property taxes and insurance, and capital expenditures, to the extent allowed pursuant to the lease (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, 2015, the Company estimated that approximately $2.3 million, net, was over collected from tenants throughout the year, and as a result, the Company recorded a liability to reflect the net over collections which will be refunded to the tenants 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 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 December 31, 2015, the Company was not obligated to reimburse the Advisor for any organizational and offering expenses. As of December 31, 2015, the Company incurred approximately $130.6 million of offering costs and approximately $0.8 million in organizational costs.
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 years ended December 31, 2015, 2014, and 2013 was $3.8 million, $3.9 million, and $1.9 million, respectively. Amortization expense for the year ended December 31, 2015 includes approximately $1.4 million of write-offs

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Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

related to the Unsecured credit facility (May 2014), which was terminated upon the execution of the Unsecured Credit Facility (July 2015) on July 20, 2015. Similarly, the amortization expense for the year ended December 31, 2014 includes approximately $1.7 million of write-offs related to the refinancing through the AIG loan on January 24, 2014 and the Company's previously existing KeyBank credit facility and KeyBank term loan, which were both terminated in conjunction with the execution of the Unsecured credit facility (May 2014) on May 8, 2014. As of December 31, 2015 and 2014, the Company’s deferred financing costs, net of accumulated amortization, were $12.9 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 $4.9 million and a $2.9 million termination fee, as a result of the lease terminations with World Kitchen, LLC, the former tenant at the Will Partners property, on January 24, 2014, and with Wells Fargo Bank, N.A., the former tenant at the Wells Fargo property, on December 31, 2015, respectively. Prepaid expenses, which are capitalized as other assets, will be expensed over the corresponding period. 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, net of the Deferred Leasing Costs related to the real estate held for sale, totaled $13.2 million and $2.2 million as of December 31, 2015 and 2014, respectively.
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).
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 8, 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. One-third of the shares of restricted stock, or 333 shares, for

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Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

each of the Company's independent directors, vested during the year ended December 31, 2015. 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.
Upon re-election of each independent director at the June 16, 2015 annual stockholders' meeting, the Company granted 1,000 shares of restricted common stock to each of the independent directors. The fair value of such issuance was estimated at $10.40 per share, the then most recent price paid to acquire a share of the Company's common stock related to the 2014 DRP Offering. Immediately upon granting the restricted common shares, the Company measured and began recognizing director compensation expense, subject to the same vesting period discussed above.
Derivative Instruments and Hedging Activities
FASB ASC Topic 815: Derivatives and Hedging ("ASC 815"), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by ASC 815, the Company recorded all derivatives on the consolidated balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, and whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. See Note 6, Interest Rate Contracts.
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.
See Note 7, Fair Value Measurements.
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

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Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

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 December 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 December 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 December 31, 2015 and 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 assume each share was issued and outstanding each day during the three months ended December 31, 2015. Distributions declared per common share were 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 independent registered public accounting firm's audit of its consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board. 
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective beginning in the first quarter of 2019. Early adoption of ASU 2016-02 as of its issuance is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the impact of adopting the new leases standard on the consolidated financial statements.
In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement Period Adjustments (“ASU No. 2015-16”). In a business combination, ASU No. 2015-16 requires an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer is required to disclose, by financial statement line item, the nature and amount for the adjustments and the current period income statement impact related to prior periods. The amendments in this ASU are effective for fiscal years beginning December 15, 2016 and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company elected to adopt ASU No. 2015-16 early, beginning with the quarter ended September 30, 2015. There was no significant impact to the Company's consolidated financial statements or notes to theconsolidated financial statements as a result of early adoption.
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

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Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

after December 15, 2015 and retrospective application is required. Early adoption of the guidance is permitted. The Company does not expect the adoption of ASU No. 2015-03 to have a significant impact on its 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 does not expect the adoption of ASU No. 2015-02 to have a significant impact on its financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU No. 2014-15”). The amendments in ASU No. 2014-15 require management to evaluate, for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or are available to be issued when applicable) and, if so, provide related disclosures. ASU No. 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company does not expect the adoption of ASU No. 2014-15 to have a significant impact on its financial statements.
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. ASU No. 2014-09 was originally effective for reporting periods beginning after December 31, 2016 (for public entities). On April 1, 2015, the FASB voted to defer the effective date of ASU No. 2014-09 by one year, to annual reporting periods beginning after December 15, 2017. On July 9, 2015, the FASB affirmed its proposal to defer the effective date to annual reporting periods beginning after December 15, 2017, although entities may elect to adopt the standard as of the original effective date. The Company is currently evaluating the potential impact of the pending adoption of this new guidance on its consolidated financial statements.

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3.     Real Estate
As of December 31, 2015, the Company’s real estate portfolio consisted of 74 properties in 20 states consisting substantially of office, warehouse, and manufacturing facilities with a combined acquisition value of approximately $3.0 billion, including the allocation of the purchase price to above and below-market lease valuation.
2015 Acquisitions and SOR Merger
During the year ended December 31, 2015, the Company acquired six properties from unaffiliated parties and one property from an affiliated party. The aggregate purchase price of the acquisitions was approximately $483.6 million.
As previously discussed in Note 1, the SOR Merger closed on June 10, 2015, and as part of the SOR Merger, the Company assumed 15 buildings located on 13 properties in 8 states, comprising a total of approximately 2.6 million square feet. The properties assumed through the SOR Merger have been allocated a combined value of $607.1 million.
A summary of the fair value of the assets and liabilities acquired and assumed through the SOR Merger in exchange for approximately 41.8 million shares of the Company's stock is shown in the table below:
Cash assumed
$
8,557

Land
71,529

Building and improvements
436,350

Tenant origination and absorption cost
89,357

Above market leases
16,860

Other assets
2,148

Total assets
$
624,801

 
 
Unsecured debt (1)
$
173,000

Below market leases
6,996

Accounts payable and other liabilities
11,138

Total liabilities
191,134

Equity consideration for SOR Merger
433,667

Total liabilities and equity
$
624,801

(1)
The unsecured debt was terminated simultaneously with the closing of the SOR Merger, and repaid with borrowings from the Company's Unsecured credit facility (May 2014).
Highway 94
On November 6, 2015, the Company, through a wholly-owned subsidiary of the Operating Partnership, acquired the interests of Griffin Capital (Highway 94) Investors, DST ("Highway 94") from 45 unaffiliated third party investors. The Highway 94 property is a 660,000 square foot manufacturing facility located in Jefferson City, Missouri, and was managed by an affiliate of the Advisor. The Highway 94 property is leased in its entirety to ABB, Inc., which lease terminates on August 31, 2024. ABB, Inc. has the option to purchase the Highway 94 property through the termination date of the lease. The unaffiliated third party investors contributed all of their ownership interests in Highway 94 in exchange for either limited partnership units in the Operating Partnership or cash. The purchase price of the Highway 94 property was $31.9 million. The Company, through the Operating Partnership, issued approximately $7.3 million in limited partnership units to those investors who elected to exchange their ownership interest. The issuance of the limited partnership units is included as a component of noncontrolling interest in the Company's permanent equity. The

F-18


remaining balance of approximately $24.6 million consists of a mortgage loan assumption of approximately $19.0 million and a cash payment made to the unaffiliated third party investors of $5.6 million.
The aggregate value of the 21 properties related to the 2015 acquisitions, SOR Merger, and completion of the Restoration Hardware project, which was transferred out of construction in progress in August 2015, was approximately $1.2 billion as shown below:
Property
 
Location
 
Tenant/Major Lessee
 
Acquisition/
Merger
Date
 
Purchase
Price
 
Approx.
Square
Feet
 
Acquisition
Fees and
Reimbursable
Expenses
Paid to the
Advisor (1)
 
Unsecured Credit
Facility
 
Other Debt Financings
 
Year of
Lease
Expiration (for Major Lessee)
GE Aviation
 
West Chester, OH
 
General Electric Company
 
2/19/2015
 
$
66,000

 
409,800

 
$
1,980

 
$
50,000

 
$

 
2020
Westgate III
 
Houston, TX
 
Wood Group Mustang, Inc.
 
4/1/2015
 
77,000

 
225,500

 
2,310

 
76,100

 

 
2026
Lisle
 
Lisle, IL
 
McCain Foods USA, Inc.
 
6/10/2015
 
19,500

(2) 
94,400

 
(2) 

 
(3) 

 

 
2021
Bloomingdale
 
Bloomingdale, IL
 
BFS Retail & Commercial Operations, LLC
 
6/10/2015
 
7,450

(2) 
71,100

 
(2) 

 
(3) 

 

 
2018
Columbia
 
Columbia, MD
 
Leidos Holdings, Inc.
 
6/10/2015
 
58,130

(2) 
200,600

 
(2) 

 
(3) 

 

 
2019
Denver
 
Denver, CO
 
Jackson National Life Insurance Company
 
6/10/2015
 
35,000

(2) 
182,900

 
(2) 

 
(3) 

 

 
2027
Columbus
 
Dublin, OH
 
Qwest Communications Company, LLC
 
6/10/2015
 
27,600

(2) 
164,600

 
(2) 

 
(3) 

 

 
2022
Miramar
 
Miramar, FL
 
Humana Medical Plan Inc.
 
6/10/2015
 
24,600

(2) 
96,400

 
(2) 

 
(3) 

 

 
2023
Irving Carpenter
 
Irving, TX
 
NEC Corporation of America
 
6/10/2015
 
23,500

(2) 
119,600

 
(2) 

 
(3) 

 

 
2026
Frisco
 
Frisco, TX
 
T-Mobile West Corporation
 
6/10/2015
 
59,250

(2) 
284,200

 
(2) 

 
(3) 

 

 
2017
Houston Westway II
 
Houston, TX
 
VetcoGray, Inc.
(GE Oil & Gas, Inc.)
 
6/10/2015
 
82,500

(2) 
242,400

 
(2) 

 
(3) 

 

 
2022
Houston Westway I
 
Houston, TX
 
Cameron Solutions
 
6/10/2015
 
37,700

(2) 
144,000

 
(2) 

 
(3) 

 

 
2018
Atlanta Perimeter
 
Atlanta, GA
 
State Farm Mutual Automobile Insurance Company
 
6/10/2015
 
101,670

(2) 
584,800

 
(2) 

 
(3) 

 

 
2023
Herndon
 
Herndon, VA
 
Time Warner Cable Southeast, LLC
 
6/10/2015
 
87,300

(2) 
268,200

 
(2) 

 
(3) 

 

 
2019
Deerfield
 
Deerfield, IL
 
CF Industries Holdings, Inc.
 
6/10/2015
 
42,900

(2) 
171,900

 
(2) 

 
(3) 

 

 
2027
DreamWorks
 
Glendale, CA
 
DreamWorks Animation SKG, Inc.
 
7/21/2015
 
215,000

 
459,800

 
(4) 

 
205,000

 

 
2035
Restoration Hardware
 
Patterson, CA
 
Restoration Hardware, Inc.
 
8/15/2015
 
99,850

(5) 
1,501,400

 
2,965

(5) 

 

 
2030
Highway 94
 
Jefferson City, MO
 
ABB, Inc.
 
11/6/2015
 
31,940

 
660,000

 
958

 

 
19,033

(6) 
2024
DynCorp
 
Fort Worth, TX
 
DynCorp International, LLC
 
12/11/2015
 
16,650

 
119,000

 
499

 

 
11,162

(6) 
2018
Mercedes-Benz
 
Fort Worth, TX
 
Mercedes-Benz Financial Services USA
 
12/11/2015
 
29,000

 
164,300

 
870

 

 
18,945

(6) 
2018

F-19


Property
 
Location
 
Tenant/Major Lessee
 
Acquisition/
Merger
Date
 
Purchase
Price
 
Approx.
Square
Feet
 
Acquisition
Fees and
Reimbursable
Expenses
Paid to the
Advisor (1)
 
Unsecured Credit
Facility
 
Other Debt Financings
 
Year of
Lease
Expiration (for Major Lessee)
Samsonite
 
Jacksonville, FL
 
Samsonite, LLC
 
12/11/2015
 
48,000

 
817,700

 
1,440

 

 
24,561

(6) 
2024
 
 
 
 
 
 
 
 
$
1,190,540

 
6,982,600

 
$
11,022

 
$
331,100

 
$
73,701

 
 
(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 a property assumed through the SOR Merger. Purchase Price represents purchase price allocations based on real estate value of $607.1 million. In conjunction with the SOR Merger on June 10, 2015, the Advisor received acquisition fees equal to 2.5%, or approximately $15.2 million, of the real estate value of $607.1 million. In addition, the Advisor also received actual expense reimbursements of $2.8 million, which was paid on July 14, 2015.
(3)
In connection with the SOR Merger on June 10, 2015, the Company, through the Operating Partnership, borrowed $173.0 million from the Unsecured revolver (May 2014) to repay the outstanding SOR debt, as discussed in Note 5, Debt.
(4)
The Advisor received acquisition fees equal to 2.5%, or approximately $5.4 million, of the acquisition value of $215.0 million. In addition, the Advisor also received actual expense reimbursements of $0.8 million.
(5)
Represents a development project with WRRH Patterson, LLC, which was placed into service on August 15, 2015. The total acquisition fees and expense reimbursements payable to the Advisor were included in the basis of the property, as discussed in Note 4, Investments.
(6)
Represents the mortgage loans assumed in conjunction with the acquisitions of the Highway 94, DynCorp, Mercedes-Benz, and Samsonite properties. See Note 5, Debt.

The following summarizes the purchase price allocation of the 2015 acquisitions and SOR Merger:

F-20


Property
 
Land
 
Building and
improvements
 
Tenant origination
and absorption cost
 
In-place lease
valuation -
above/(below)
market
 
Debt discount/(premium)
 
Total
GE Aviation
 
$
4,400

 
$
52,211

 
$
9,470

 
$
(81
)
 
$

 
$
66,000

Westgate III
 
3,209

 
60,852

 
15,085

 
(2,146
)
 

 
77,000

DreamWorks 
 
26,387

 
148,163

 
42,642

 
(2,192
)
 

 
215,000

Highway 94 (1)
 
5,540

 
21,300

 
6,930

 
(4,080
)
 
2,250

 
31,940

DynCorp (1)
 
1,952

 
13,546

 
1,994

 
(842
)
 

 
16,650

Mercedes-Benz (1)
 
2,330

 
23,424

 
2,952

 
294

 

 
29,000

Samsonite (1)
 
5,040

 
37,152

 
5,338

 
1,971

 
(1,501
)
 
48,000

Total acquisitions
 
$
48,858

 
$
356,648

 
$
84,411

 
$
(7,076
)
 
$
749

 
$
483,590

Lisle
 
2,788

 
11,209

 
4,991

 
512

 

 
19,500

Bloomingdale
 
1,178

 
4,689

 
493

 
1,090

 

 
7,450

Columbia
 
6,989

 
42,690

 
4,185

 
4,266

 

 
58,130

Denver
 
9,948

 
22,714

 
1,174

 
1,164

 

 
35,000

Columbus
 
2,943

 
14,896

 
7,755

 
2,006

 

 
27,600

Miramar
 
4,488

 
18,211

 
1,768

 
133

 

 
24,600

Irving Carpenter
 
1,842

 
19,479

 
2,573

 
(394
)
 

 
23,500

Frisco
 
8,239

 
47,296

 
4,099

 
(384
)
 

 
59,250

Houston Westway II
 
3,961

 
67,484

 
11,184

 
(129
)
 

 
82,500

Houston Westway I
 
6,540

 
27,765

 
2,938

 
457

 

 
37,700

Atlanta Perimeter
 
8,607

 
63,247

 
33,472

 
(3,656
)
 

 
101,670

Herndon
 
9,667

 
66,303

 
7,794

 
3,536

 

 
87,300

Deerfield
 
4,339

 
30,367

 
6,931

 
1,263

 

 
42,900

Total SOR Merger
 
$
71,529

 
$
436,350


$
89,357

 
$
9,864

 
$

 
$
607,100

Total acquisitions and SOR Merger
 
$
120,387

 
$
792,998

 
$
173,768

 
$
2,788

 
$
749

 
$
1,090,690

(1)
As of December 31, 2015, the purchase price allocation for the Highway 94, DynCorp, Mercedes-Benz, and Samsonite properties had not been finalized.



F-21

Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

Pro Forma Financial Information (unaudited)
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 includes certain nonrecurring adjustments, such as acquisition fees and expenses incurred as a result of the assets acquired in the acquisitions:
 
Year Ended December 31,
 
2015
 
2014
Revenue
$
345,092

 
$
318,720

Net income
$
63,170

 
$
49,499

Net income attributable to noncontrolling interests
$
1,259

 
$
979

Distributions to redeemable noncontrolling interests attributable to common stockholders
$
(359
)
 
$
(355
)
Net income attributable to common stockholders (1)
$
42,402

 
$
29,154

Net income attributable to common stockholders per share, basic and diluted
$
0.24

 
$
0.19


(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 2016 to 2035, are shown in the table below:
2016
$
254,246

2017
253,976

2018
246,264

2019
215,126

2020
189,114

Thereafter
1,001,398

Total
$
2,160,124

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 or lease guarantors) 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 (or their parent companies or lease guarantors), and their underlying business and industry; and (4) monitoring the timeliness of rent collections.
Tenant security deposits as of December 31, 2015 and 2014, which were included in the accounts payable and other liabilities balance on the consolidated balance sheets, totaled $0.8 million and $0.2 million, net of tenant security deposits related to the real estate held for sale, respectively, 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 re-tenanting and restoration. Tenant receivables, which the Company deemed to be fully collectible, totaled $2.2 million and $0.3 million, net of tenant receivables related to the real estate held for sale, as of December 31, 2015 and 2014, respectively. Tenant receivables are included in other assets, net, on the consolidated balance sheets.
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 December 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 Property

F-22

Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

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 College Park 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 College Park property were deposited with a qualified intermediary. The funds were subsequently released upon the Company's acquisition of the GE Aviation property.
Sale of Will Partners Property
On August 7, 2015, the Company sold the Will Partners property located in Monee, Illinois, for total proceeds of $22.0 million, less closing costs and other closing credits of approximately $0.8 million. The carrying value of the Will Partners property on the closing date was approximately $17.1 million, which was primarily comprised of real estate assets, net, and other liabilities. Upon the sale of the property, the Company recognized a gain of approximately $4.1 million. In conjunction with the sale, the Advisor was paid a disposition fee of approximately $0.2 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.
Sale of LTI Property
On December 31, 2015, Life Technologies Corporation, the tenant previously occupying the LTI property, exercised its option to purchase the building located in Carlsbad, California, for total proceeds of $57.4 million, less closing costs of approximately $0.3 million. The carrying value of the LTI property on the closing date was approximately $51.0 million, which was comprised of $45.2 million of real estate assets, net, $1.6 million of deferred rent, and $4.2 million of other intangibles, such as tenant absorption costs and below market rent, net. Upon the sale of the property, the Company recognized a gain of approximately $6.1 million. In conjunction with the sale, the Advisor was paid a disposition fee of approximately $0.3 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.
Asset Held for Sale
As of December 31, 2015, one property, the One Century Place property located in Nashville, Tennessee, met the criteria to be classified as held for sale. Therefore, the Company classified the property as held for sale, net, on the consolidated balance sheets at the lower of its (i) carrying amount or (ii) fair value less costs to sell as of December 31, 2015. The summary includes the College Park, Will Partners, LTI and One Century Place properties as of December 31, 2014. Since the College Park and Will Partners properties were sold during 2015, the properties were not included in the current year balance sheet. The College Park, Will Partners, LTI and One Century Place properties are included in continuing operations in the consolidated statements of operations based on the Company's early adoption of ASU No. 2014-08, as it did not meet the prerequisite requirements to be classified as discontinued operations.
The following summary presents the major components of assets and liabilities related to the real estate held for sale as of December 31, 2015 and 2014:

F-23

Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

 
Balance
December 31, 2015
 
Balance
December 31, 2014
Restricted cash
$
561

 
$
1,450

Real Estate:
 
 
 
Land
8,025

 
10,256

Building
42,858

 
66,629

Tenant origination and absorption cost
20,003

 
21,400

Construction in progress
22

 
271

Total Real Estate
70,908

 
98,556

Less: accumulated depreciation and amortization
(7,034
)
 
(7,893
)
Total real estate, net
63,874

 
90,663

In-place lease valuation - above market
813

 
813

Deferred rent
2,716

 
2,135

Other assets
829

 
1,801

Total assets
$
68,793

 
$
96,862

Accounts payable and other liabilities
$
2,203

 
$
2,763

Due to affiliates
81

 
104

Restricted reserve
561

 
1,039

Total liabilities
$
2,845

 
$
3,906

The following is a summary of the income (loss) included in the Company's income from continuing operations for the years ended December 31, 2015, 2014, and 2013 from assets classified as held for sale subsequent to the Company's adoption of ASU No. 2014-08, which includes the College Park, Will Partners, and One Century Place properties:
 
Year Ended December 31,
 
2015
 
2014
 
2013
Total revenues
$
12,128

 
$
13,231

 
$
5,254

Operating expenses
(6,368
)
 
(8,306
)
 
(4,189
)
   Total revenues less operating expenses from assets classified as "held for sale," not qualifying as discontinued operations
5,760

 
4,925

 
1,065

Depreciation and amortization expense
(2,554
)
 
(8,156
)
 
(2,041
)
Interest expense

 
(907
)
 
(170
)
   Income (loss) from assets classified as "held for sale," not qualifying as discontinued operations
$
3,206

 
$
(4,138
)
 
$
(1,146
)
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 for the years ended December 31, 2015 and 2014. 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.

F-24

Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

 
Balance
December 31, 2015
 
Balance
December 31, 2014
In-place lease valuation (above market)
$
45,413

 
$
26,289

In-place lease valuation (above market) - accumulated amortization
(10,844
)
 
(4,896
)
In-place lease valuation (above market), net
34,569

 
21,393

Ground leasehold interest (below market)
2,254

 
2,254

Ground leasehold interest (below market) - accumulated amortization
(54
)
 
(26
)
Ground leasehold interest (below market), net
2,200

 
2,228

Intangible assets, net
$
36,769

 
$
23,621

In-place lease valuation (below market)
$
(55,774
)
 
$
(48,448
)
In-place lease valuation (below market) - accumulated amortization
14,068

 
8,054

In-place lease valuation (below market), net
$
(41,706
)
 
$
(40,394
)
Tenant origination and absorption cost
$
516,879

 
$
359,416

Tenant origination and absorption cost - accumulated amortization
(119,593
)
 
(58,679
)
Tenant origination and absorption cost, net
$
397,286

 
$
300,737

The intangible assets are amortized over the remaining lease term of each property, which on a weighted-average basis, was approximately 7.8 years and 7.9 years as of December 31, 2015 and 2014, respectively. The amortization of the intangible assets and other leasing costs for the respective periods is as follows:
 
Amortization (income) expense for the year ended December 31,
 
2015
 
2014
 
2013
In-place lease valuation
$
(3,785
)
 
$
(468
)
 
$
(546
)
Tenant origination and absorption cost
$
69,099

 
$
45,044

 
$
14,098

Ground leasehold amortization (below market)
$
28

 
$
26

 
$

Other leasing costs amortization
$
301

 
$
143

 
$

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 December 31, 2015 for the next five years:
Year
 
In-place lease valuation, net
 
Tenant origination and absorption costs
 
Ground leasehold improvements
 
Other leasing costs
2016
 
$
1,028

 
$
63,111

 
$
28

 
$
1,000

2017
 
$
495

 
$
60,293

 
$
28

 
$
1,229

2018
 
$
(226
)
 
$
53,948

 
$
28

 
$
1,481

2019
 
$
(1,990
)
 
$
44,201

 
$
28

 
$
1,481

2020
 
$
(1,228
)
 
$
35,109

 
$
28

 
$
1,457


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:

F-25

Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

 
Balance
December 31, 2014
 
Additions
 
Deductions
 
Balance
December 31, 2015
Tenant improvement reserves (1)
$
36,931

 
$
1,904

 
$
(25,942
)
 
$
12,893

Midland Mortgage loan repairs reserves (2)
453

 

 

 
453

Real estate tax reserve (Emporia Partners, TW Telecom, DynCorp, and Mercedes-Benz) (3)
1,074

 
2,601

 
(1,784
)
 
1,891

Property insurance reserve (Emporia Partners) (3)
251

 
494

 
(444
)
 
301

Restricted deposits
20

 

 

 
20

Midland Mortgage loan restricted lockbox (4)
2,023

 
2,044

 
(2,023
)
 
2,044

Restricted rent receipts (5)

 
6,585

 

 
6,585

 
$
40,752

 
$
13,628

 
$
(30,193
)
 
$
24,187

(1)
Additions represent tenant improvement reserves funded by the tenant and held by the lender. 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.
(3)
Additions represent monthly funding of real estate taxes and insurance by the tenants during the current period. Deductions represent reimbursements to the tenant for payment of real estate taxes and insurance premiums made during the current period.
(4)
As part of the terms of the Midland Mortgage loan, 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.
(5)
Addition represents rent and prepaid rent received from the DreamWorks property from August 2015 through January 2016, which is to be held in escrow pending a tax-deferred real estate exchange, as permitted by Section 1031 of the Internal Revenue Code, with the sale of the Will Partners and LTI properties. Such exchange was completed on January 12, 2016, thus, releasing any restrictions on the DreamWorks rent receipts.
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 tripe-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 the ability to exercise two exchange rights in which it can acquire additional beneficial interests in the DST at fair value. The initial exchange right, which may be exercised by the Operating Partnership 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 Units"). The secondary exchange right, which may not be exercised by the Operating Partnership until at least five years after the date of the agreement, allows each investor to either exchange their interest in the DST for units in the Operating Partnership or cash.
As of December 31, 2015, the Operating Partnership had exercised its initial exchange right. Approximately 73% of the beneficial owners of HealthSpring interests elected to exchange their interest in the DST for the Units, and the remaining 27% elected to be paid in cash. Until a contribution agreement is executed, the beneficial owners can change their contribution election or remain in the DST. The exchange is expected to be completed in the first quarter of 2016.
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 the Company's Public Offering. The gross acquisition value of the property was $187.5 million, plus closing costs, which was partially acquired 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 is approximately 132,300 square feet and 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 seven 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(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 approximately $(0.2) million, of other comprehensive loss for the year ended December 31, 2015.
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 operating agreements.
As of December 31, 2015, the balance of the investments totaled approximately $56.9 million as shown below:
 
HealthSpring DST
 
Digital Realty
Joint Venture
 
Total
Balance December 31, 2014
$
1,351

 
$
64,898

 
$
66,249

Other comprehensive loss

 
(189
)
 
(189
)
Net income (loss)
35

 
(1,510
)
 
(1,475
)
Distributions
(95
)
 
(7,627
)
 
(7,722
)
Balance December 31, 2015
$
1,291

 
$
55,572

 
$
56,863

Investments in Consolidated Entities
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 was subsequently constructed (the "Restoration Hardware property").
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. Concurrently, the land on which the property was to be constructed was purchased by WR Griffin for approximately $15.2 million, including closing costs.
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 commenced upon substantial completion of the project, which occurred on August 15, 2015.
During the construction of the Project, the business and affairs of WR Griffin were managed by the Managing Member. However, all major decisions, as provided in the operating agreement, were approved by both the Managing Member and Investor Member. Additionally, the Managing Member interest, pursuant to the purchase and sale agreement, has been assigned to the Investor Member in exchange for a mandatory redemption fee based on the fair value of the property at completion. As a result of the assignment, the Managing Member will transfer all membership interest to the Investor Member upon completion of certain terms included in the operating agreement, which is expected to occur in the first quarter in 2016.
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 December 31, 2015 and 2014:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

 
Balance
December 31, 2015
 
Balance
December 31, 2014
Cash on hand
$
4,711

 
$
6,985

Deferred rent
372

 

Other assets
59

 

Construction in progress - paid by the joint venture

 
34,739

Construction in progress - paid by the Company

 
70

Leasing commissions, net
731

 
375

Land
15,463

(1) 
15,185

Building
57,595

(1) 

Tenant improvements
18,040

(1) 

Accumulated depreciation
(1,314
)
 

Construction in progress payable

 
(13,423
)
Accounts payable and other liabilities
(21,979
)
 

Due to affiliates
(3,324
)
 

Noncontrolling interest

 
(7,656
)
   Total investment
$
70,354

 
$
36,275

(1)
Includes $3.0 million of acquisition fees and expense reimbursements, as discussed in Note 3, Real Estate.
Transfer of construction in progress to fixed assets
The Company is required to capitalize project costs, including pre-development costs, interest, property taxes, insurance, and other costs directly related and essential to the acquisition, development, redevelopment, or construction of a project. Capitalization of development, redevelopment, and construction costs is required while activities are ongoing to prepare an asset for its intended use. When construction activities are substantially complete, the asset is transferred out of construction in progress and classified as rental property. On August 15, 2015, the Project was substantially complete and ready for its intended use, at which time Restoration Hardware began to occupy the facility and the lease commenced. Concurrent with the property being delivered to Restoration Hardware, the Company allocated the construction in progress balance between building and tenant improvements and began to depreciate the assets over the estimated useful lives.
Mandatory redemption
As noted above, the Managing Member's interest pursuant to 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 satisfying certain terms included in the operating agreement, including the completion of the Project and payment of the mandatory redemption fee, which is based on the estimated fair value of the property at completion. As of December 31, 2015, the Company agreed to pay the mandatory redemption fee of approximately $18.1 million, thus, reclassifying the noncontrolling interest from temporary equity to a liability on the consolidated balance sheet. The redemption of the Managing Member's interest includes their initial contribution of approximately $7.7 million.
5.     Debt
As of December 31, 2015 and 2014, the Company’s debt consisted of the following:

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Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

 
 
Balance
December 31, 2015
 
Balance
December 31, 2014
 
Contractual
Interest Rate (1)
 
Payment Type
 
Loan
Maturity
 
Plainfield mortgage loan
$
19,295

 
$
19,638

 
6.650%
 
Principal and Interest
 
November 2017
 
Emporia Partners mortgage loan
3,753

 
4,108

 
5.880%
 
Principal and Interest
 
September 2023
 
LTI mortgage loan

 
32,128

 
5.800%
 
Principal and Interest
 
March 2016
 
LTI mortgage loan premium

 
102

 
 
 
 
TransDigm mortgage loan
6,432

 
6,576

 
5.980%
 
Principal and Interest
 
June 2016
 
TransDigm mortgage loan premium
22

 
75

 
 
 
 
Ace Hardware mortgage loan
23,294

 
23,648

 
5.588%
 
Principal and Interest
 
October 2024
 
Ace Hardware mortgage loan premium
1,508

 
1,681

 
 
 
 
Highway 94 mortgage loan
18,968

 

 
3.750%
 
Principal and Interest
 
August 2024
 
Highway 94 mortgage loan discount
(2,210
)
 

 
 
 
 
DynCorp mortgage loan
11,162

 

 
4.700%
 
Principal and Interest
 
July 2016
 
Mercedes-Benz mortgage loan
18,945

 

 
6.018%
 
Principal and Interest
 
November 2016
 
Samsonite mortgage loan
24,561

 

 
6.080%
 
Principal and Interest
 
September 2023
 
Samsonite mortgage loan premium
1,490

 

 
 
 
 
Midland Mortgage loan
105,600

 
105,600

 
3.940%
 
Interest Only through March 2017/Principal and Interest thereafter
 
April 2023
 
AIG loan
110,640

 
110,640

 
4.960%
 
Interest Only through January 2017/Principal and Interest thereafter
 
February 2029
 
TW Telecom loan
21,213

 
21,500

 
LIBO Rate +2.45%
(2) 
Interest Only through July 2015/Principal and Interest thereafter
 
August 2019
 
Mortgage Loan Total
364,673

 
325,696

 
 
 
 
 
 
 
Unsecured term loan (May 2014)

 
300,000

 
LIBO Rate +1.45%
 
Interest Only
 
May 2019
 
Term Loan (July 2015)
640,000

 

 
LIBO Rate +1.25%
(2) 
Interest Only
 
July 2020
 
Revolver Loan (July 2015)
481,653

 

 
LIBO Rate +1.30%
(2) 
Interest Only
 
July 2020
(3) 
Total
$
1,486,326

 
$
625,696

 
 
 
 
 
 
 
(1)
Including the effect of an interest rate swap agreement with a notional amount of $425.0 million, the weighted average interest rate as of December 31, 2015 was 2.8% for the Company's fixed-rate and variable-rate debt combined and approximately 3.8% for the Company's fixed-rate debt only.
(2)
The LIBO Rate as of December 31, 2015 was 0.30% (effective as of December 11, 2015).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

(3)
The Revolver Loan (July 2015) has an initial term of four years, maturing on July 20, 2019, and may be extended for a one-year period if certain conditions are met and upon payment of an extension fee. See discussion below.
Unsecured Credit Facility (July 2015)
On July 20, 2015, the Company, through the Operating Partnership, entered into a credit agreement (the "Unsecured Credit Agreement (July 2015)") with a syndicate of lenders, co-led by KeyBank, Bank of America, Fifth Third Bank ("Fifth Third"), and BMO Harris Bank, N.A. ("BMO Harris"), under which KeyBank serves as administrative agent and Bank of America, Fifth Third, and BMO Harris serve as co-syndication agents, and KeyBanc Capital Markets ("KeyBank Capital Markets"), Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Fifth Third, and BMO Capital Markets serve as joint bookrunners and joint lead arrangers. Pursuant to the Unsecured Credit Agreement (July 2015), the Company was provided with a $1.14 billion senior unsecured credit facility (the "Unsecured Credit Facility (July 2015)"), consisting of a $500.0 million senior unsecured revolver (the "Revolver Loan (July 2015)") and a $640.0 million senior unsecured term loan (the "Term Loan (July 2015)"). The Unsecured Credit Facility (July 2015) may be increased up to $860.0 million, in minimum increments of $50.0 million, for a maximum of $2.0 billion by increasing either the Revolver Loan (July 2015), the Term Loan (July 2015), or both. The Revolver Loan (July 2015) has an initial term of four years, maturing on July 20, 2019, and may be extended for a one year period if certain conditions are met and upon payment of an extension fee. The Term Loan (July 2015) has a term of five years, maturing on July 20, 2020.
The Unsecured Credit Facility (July 2015) has an interest rate calculated based on LIBO Rate plus the applicable LIBO Rate margin or Base Rate plus the applicable Base Rate margin, both as provided in the Unsecured Credit Agreement (July 2015). The applicable LIBO Rate margin and Base Rate margin are dependent on whether the interest rate is calculated prior to or after the Company has received an investment grade senior unsecured credit rating of BBB-/Baa3 from Standard & Poors, Moody's, or Fitch, and the Company has elected to utilize the investment grade pricing list, as provided in the Unsecured Credit Agreement (July 2015). Otherwise, the applicable LIBO Rate margin will be based on a leverage ratio computed in accordance with the Company's quarterly compliance package and communicated to KeyBank. 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 (July 2015) are interest only and are due on the first day of each quarter. In connection with the Unsecured Credit Agreement (July 2015), the Company incurred approximately $4.1 million of deferred financing costs, which are being amortized as a component of interest expense over the term of the agreement.
Highway 94 Mortgage Loan
As part of the acquisition of the Highway 94 property, the Company assumed a $19.0 million mortgage loan (the "Highway 94 mortgage loan") from Wells Fargo Bank Northwest, N.A., and Teachers Insurance and Annuity Association, as participating holder of the note. The Highway 94 mortgage loan matures on August 1, 2024, has a fixed interest rate of 3.75%, and requires monthly payments of principal and interest.
DynCorp Mortgage Loan, Mercedes-Benz Mortgage Loan, and Samsonite Mortgage Loan
On December 11, 2015, the Company, through three wholly-owned subsidiaries of the Operating Partnership, assumed the following property mortgage loans related to the acquisition of the following three properties:
DynCorp - Approximately $11.2 million, secured by the DynCorp property (the "DynCorp mortgage loan"). The DynCorp mortgage loan has a fixed interest rate of 4.70%, matures in July 2016, and requires monthly principal and interest payments.
Mercedes-Benz - Approximately $18.9 million, secured by the Mercedes-Benz property (the "Mercedes-Benz mortgage loan"). The Mercedes-Benz mortgage loan has a fixed interest rate of 6.018%, matures in November 2016, and requires monthly principal and interest payments.
Samsonite - Approximately $24.6 million, secured by the Samsonite property (the "Samsonite mortgage loan"). The Samsonite mortgage loan has a fixed interest rate of 6.08%, matures in September 2023, and requires monthly principal and interest payments.
Debt Covenant Compliance
Pursuant to the terms of the Midland Mortgage loan, AIG loan, TW Telecom loan, Unsecured Credit Facility (July 2015), DynCorp mortgage loan, and Mercedes-Benz mortgage loan, the Operating Partnership, in consolidation with the Company, is subject to certain loan compliance covenants. The Company was in compliance with all of its debt covenants for each quarter of 2015 and as of December 31, 2015.

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Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

 
The following summarizes the future principal repayments of all loans as of December 31, 2015 per the loan terms discussed above:
 
December 31, 2015

 
2016
$
40,078

(1) 
2017
22,237

(2) 
2018
7,077

 
2019
25,153

(3) 
2020
1,128,486

(4) 
Thereafter
262,485

(4) 
Total principal
1,485,516

  
Unamortized debt premium
810

  
Total
$
1,486,326

  

(1)
Amount includes payment of the balances of the TransDigm, DynCorp, and Mercedes-Benz property mortgage loans, which mature in 2016.
(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, which matures in 2019.
(4)
Amount includes payment of the balances of:
the Term Loan (July 2015), which matures in 2020,
the Revolver Loan (July 2015), which matures in 2020, assuming the one-year extension is exercised,
the Midland Mortgage, Emporia Partners, and Samsonite property mortgage loans, all of which mature in 2023,
the Ace Hardware and Highway 94 property mortgage loans, which mature in 2024, and
the AIG loan, which matures in 2029.
Principal repayments on the TransDigm, Ace Hardware, Highway 94, and Samsonite property mortgage loans do not include the unamortized valuation net premium of $0.8 million.

6.     Interest Rate Contracts
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both business operations and economic conditions. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of debt funding and the use of derivative financial instruments. Specifically, the Company entered into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The derivative financial instruments are used to manage differences in the amount, timing, and duration of known or expected cash payments principally related to borrowings.
Derivative Instruments
The objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, the Company uses interest rate swaps as part of interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company does not use derivatives for trading or speculative purposes.
On July 9, 2015, the Company executed three interest rate swap agreements to hedge the variable cash flows associated with certain existing LIBO Rate-based variable-rate debt, including the Company's Unsecured Credit Facility (July 2015). The first interest rate swap is effective for the period from July 9, 2015 to July 1, 2020 with a notional amount of $425.0 million. The two forward-starting interest rate swap transactions are effective for the periods from January 1, 2016 to July 1, 2018 and July 1, 2016 to July 1, 2018, and have notional amounts of $300.0 million and $100.0 million, respectively.
The effective portion of the change in fair value of derivatives designated and qualifying as cash flow hedges is initially recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments and accruals are made on our variable-rate debt. During the next twelve months, the Company estimates that an additional $6.5 million will be released from accumulated other comprehensive income (loss) into earnings.

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Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

During the year ended December 31, 2015, the amount of income (loss) into earnings under "interest expense" was approximately $3.1 million. The ineffective portion of the change in fair value of the derivatives is immediately recognized in earnings. During the year ended December 31, 2015, the Company recognized, in earnings, less than $0.1 million related to the ineffective portion of the interest rate swaps.
The following table sets forth a summary of the interest rate swaps at December 31, 2015:
 
 
 
 
Maturity
 
Interest
 
Fair value (2)
 
Current Notional Amount (3)
Derivative Instrument
 
Effective Date (1)
 
Date
 
Strike Rate
 
December 31, 2015
 
December 31, 2015
Liabilities:
 
 
 
 
 
 
 
 
 
 
Interest Rate Swap
 
7/9/2015
 
7/1/2020
 
1.687%
 
$
(4,305
)
 
$
425,000

Interest Rate Swap
 
1/1/2016
 
7/1/2018
 
1.320%
 
$
(1,605
)
 
$

Interest Rate Swap
 
7/1/2016
 
7/1/2018
 
1.495%
 
$
(484
)
 
$

(1)
The Company entered into all interest rate swap agreements in 2015. Thus, no prior period information is available.
(2)
The Company records all derivative instruments on a gross basis on the consolidated balance sheets, and accordingly, there are no offsetting amounts that net assets against liabilities. As of December 31, 2015, all of the derivatives were in a liability position, and as such, the fair value is included in the line item "Interest rate swap liability" on the consolidated balance sheets.
(3)
Represents the notional amount of swaps that are effective as of the balance sheet date of December 31, 2015.
Certain agreements with the derivative counterparties contain a provision where if the Company defaults on any of the Company's indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender within a specified time period, then the Company could also be declared in default on its derivative obligations.
As of December 31, 2015, the fair value of interest rate swaps in a net liability position, which excludes any adjustment for nonperformance risk related to these agreements, was approximately $6.4 million. As of December 31, 2015, the Company had not posted any collateral related to these agreements.
7.     Fair Value Measurements
The Company is required to disclose fair value information about all financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate fair value. The Company measures and discloses the estimated fair value of financial assets and liabilities utilizing a fair value hierarchy that distinguishes between data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. This hierarchy consists of three broad levels, as follows: (i) quoted prices in active markets for identical assets or liabilities, (ii) "significant other observable inputs," and (iii) "significant unobservable inputs." "Significant other observable inputs" can include quoted prices for similar assets or liabilities in active markets, as well as inputs that are observable for the asset or liability, such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. "Significant unobservable inputs" are typically based on an entity’s own assumptions, since there is little, if any, related market activity. In instances in which the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level of input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. There were no transfers between the levels in the fair value hierarchy during the years ended December 31, 2015 and 2014.
The following tables set forth the liabilities that the Company measures at fair value on a recurring basis by level within the fair value hierarchy as of December 31, 2015:
Liabilities
Total Fair Value
Quoted Prices in Active Markets for Identical Assets and Liabilities
Significant Other Observable Inputs
Significant Unobservable Inputs
Interest Rate Swaps at (1):
 
 
 
 
December 31, 2015
$
(6,394
)
$

$
(6,394
)
$

(1)
The Company entered into all interest rate swap agreements in 2015. Thus, no prior period information is available.
Financial Instruments Disclosed at Fair Value

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

Financial instruments as of December 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 December 31, 2015 and 2014. The fair value of the 11 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 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.
 
December 31, 2015
 
December 31, 2014
 
Fair Value
 
Carrying Value (1)
 
Fair Value
 
Carrying Value (1)
Plainfield mortgage loan
$
20,240

 
$
19,295

 
$
20,994

 
$
19,638

Emporia Partners mortgage loan
3,742

 
3,753

 
4,434

 
4,108

LTI mortgage loan

 

 
32,742

 
32,128

TransDigm mortgage loan
6,432

 
6,432

 
6,748

 
6,576

Ace Hardware mortgage loan
23,778

 
23,294

 
26,424

 
23,648

Midland Mortgage loan
107,154

 
105,600

 
105,155

 
105,600

AIG loan
114,747

 
110,640

 
122,062

 
110,640

Highway 94 mortgage loan
17,658

 
18,968

 

 

DynCorp mortgage loan (2)
11,162

 
11,162

 

 

Mercedes-Benz mortgage loan (2)
18,945

 
18,945

 

 

Samsonite mortgage loan
26,044

 
24,561

 

 

(1)
The carrying value of the TransDigm, Ace Hardware, Highway 94, and Samsonite property mortgage loans do not include the net debt premium of $0.8 million and $1.9 million as of December 31, 2015 and 2014, respectively. See Note 5, Debt, for details.
(2)
The fair value is identical to the carrying value as of December 31, 2015 since all three property mortgage loans mature in 2016.
8.     Equity
Preferred Equity
On November 5, 2013, in connection with the acquisition of the Investment Grade Portfolio, a portfolio of 18 properties, 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. Pursuant to the terms of the purchase agreement, on May 14, 2015 and November 5, 2015, the Company, through the Operating Partnership, exercised its right to redeem the Preferred Units for $191.6 million and $64.1 million, respectively, including a liquidation preference and all accumulated and unpaid distributions. Effective November 5, 2015, the preferred equity investment was terminated.
Common Equity
As of December 31, 2015, the Company had received aggregate gross offering proceeds of approximately $1.4 billion from the sale of shares in the Private Offering, the Public Offerings, and the DRP Offerings, as discussed in Note 1, Organization. There were 175,184,519 shares outstanding at December 31, 2015, including shares issued pursuant to the DRP, less shares redeemed pursuant to the share redemption plan discussed below.
On October 22, 2015, the Company's board of directors, at the recommendation of the nominating and corporate governance committee comprised solely of independent directors, approved an estimated value per share of the Company's common stock of $10.40 (unaudited) based on the estimated value of the Company's assets less the estimated value of the Company's liabilities, or net asset value, divided by the number of shares outstanding on a fully diluted basis (the "NAV"), calculated as of September 30, 2015. The Company is providing this estimated value per share to assist broker dealers in connection with their obligations under applicable Financial Industry Regulatory Authority rules with respect to customer account statements. This valuation was performed in accordance with the provisions of Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs, issued by the IPA in April 2013, in addition to guidance from the SEC.

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Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

The Company’s par value calculation and related additional paid in capital ("APIC") allocation from the inception of the offering was determined to be calculated incorrectly. The Company assessed the cumulative impact of the reclassification between the par value and APIC from inception and recorded a reduction to the par value of $1.2 million and a corresponding increase to APIC for the same amount to correct the balances as of December 31, 2015. In accordance with SEC Staff Accounting Bulletin (“SAB”) No. 99, Materiality and SAB No. 108 (“SAB 108”), Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company assessed the materiality of this correction on its consolidated financial statements for the year ended December 31, 2015, using both the roll-over method and iron-curtain method as defined in SAB 108. The Company concluded the effect was not material to its consolidated financial statements for any prior period and, as such, those financial statements are not materially misstated. The Company also concluded that recording the correction in 2015 did not have a material effect on its consolidated financial statements for the year ended December 31, 2015.
Distribution Reinvestment Plan (DRP)
The Company has adopted the DRP, which allows stockholders to have dividends and other distributions otherwise distributable to them invested in additional shares of common stock. No sales commissions or dealer manager fee will be paid on shares sold through the DRP. The Company may amend or terminate the DRP for any reason at any time upon 10 days' prior written notice to stockholders.
As of December 31, 2015 and 2014, $110.2 million and $57.7 million in shares of common stock, respectively, had been issued under the DRP, pursuant to the Private Offering, the Public Offerings, and the DRP Offerings.
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:
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 or about 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 and through December 31, 2015, the Company had redeemed 1,753,700 shares of common stock for approximately $17.3 million at a weighted average price per share of $9.88 pursuant to the SRP. As of December 31, 2015, there were 638,483 shares totaling $6.3 million subject to redemption requests. 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

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Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

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 December 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 5.5 million limited partnership units to affiliated parties and unaffiliated third parties in exchange for certain properties and 0.1 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.
The limited partners of the Operating Partnership, other than those related to the Will Partners REIT, LLC (Will Partners property) contribution, 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 years ended December 31, 2015 and 2014.
The following summarizes the activity for noncontrolling interests recorded as equity for the years ended December 31, 2015, 2014, and 2013:
 
Year Ended December 31,
 
2015
 
2014
 
2013
Beginning balance
$
17,478

 
$
19,736

 
$
17,512

Contribution/issuance of noncontrolling interests
7,282

 
1,504

 
8,095

Distributions to noncontrolling interests
(3,150
)
 
(3,050
)
 
(2,730
)
Allocated distributions to noncontrolling interests subject to redemption
(10
)
 
(14
)
 
(49
)
Net loss
(138
)
 
(698
)
 
(3,092
)
Other comprehensive loss
(144
)
 

 

Ending balance
$
21,318

 
$
17,478

 
$
19,736

Noncontrolling interests subject to redemption
Operating partnership units issued pursuant to the Will Partners REIT, LLC 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.
At December 31, 2014, noncontrolling interests subject to redemption include Weeks Robinson's interest in the joint venture, the real estate developer engaged to develop and construct the Restoration Hardware property. 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. Since the Project was substantially completed in 2015, and the Company agreed to pay

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Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

the mandatory redemption fee, the Company reclassified the noncontrolling interest from temporary equity to a liability as of December 31, 2015. See Note 4, Investments.
9.     Related Party Transactions
The following table summarizes the related party costs and fees incurred, paid and due to affiliates as of December 31, 2015 and 2014:
 

As of
December 31, 2014
 
Year Ended December 31, 2015
 
 
Payable
 
Incurred
 
Paid
 
Payable
Advisor and Property Manager fees
 
 
 
 
 
 
 
 
Acquisition fees and expenses
 

 
35,210

(1) 
32,245

 
2,965

Operating expenses/leasing commissions
 
202

 
3,713

 
1,738

 
2,177

Asset management fees
 
1,189

 
18,753

 
17,818

 
2,124

Property management fees
 
460

 
7,149

 
6,411

 
1,198

Disposition fees (2)
 

 
640

 
353

 
287

Costs advanced by the Advisor
 

 
53

 
47

 
6

Total, net of real estate assets held for sale
 
1,851

 
65,518

 
58,612

 
8,757

Asset management fees related to real estate held for sale (3)
 
65

 
636

 
657

 
44

Property management fees related to real estate held for sale (3)
 
39

 
473

 
475

 
37

Total
 
$
1,955

(1) 
$
66,627

 
$
59,744

 
$
8,838

(1)     Includes approximately $3.0 million of acquisition fees and expense reimbursements related to the Restoration Hardware property, as discussed in Note
3, Real Estate, which are also included in the basis of the property.
(2)     The disposition expense represents fees incurred from the sale of the College Park, Will Partners, and LTI properties.
(3)     Represents asset management fees and property management fees for the College Park, Will Partners, and One Century Place properties.
Mortgage Receivable from Affiliate
On October 9, 2015, the Company entered into a mortgage receivable for approximately $26.0 million related to a 127,246 square foot, single-story office building located in Emeryville, CA. The borrower is an affiliated tenant-in-common private program or LLC, each with the Sponsor as the asset manager. The mortgage receivable had a rate of 8% per annum and was funded with proceeds from the Unsecured Credit Facility (July 2015). The mortgage receivable was paid in full on January 15, 2016.
Advisory Agreement
The Company currently does not have nor does it 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 for the Public Offerings. 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 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

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Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

The following table summarizes the compensation and fees the Company has paid or may pay to the Advisor, the Property Manager, and the Sponsor and other affiliates, including amounts to reimburse costs for providing services.
Type of Compensation
(Recipient)
  
Determination of Amount
Acquisition Fees and Expenses
(Advisor)
  
Under the Advisory Agreement, the Advisor receives acquisition fees equal to 2.5%, and reimbursement for actual acquisition related expenses 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.
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 (2) 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 years ended December 31, 2015 and 2014, approximately $1.6 million and $1.0 million, respectively, 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.

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Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

Type of Compensation
(Recipient)
  
Determination of Amount
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.
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.

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Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

Type of Compensation
(Recipient)
  
Determination of Amount
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.
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 or co-sponsors to some or all of 11 other real estate programs affiliated with the Sponsor, including Griffin Capital Essential Asset REIT II, Inc. ("GCEAR II") and Griffin-American Healthcare REIT III, Inc. ("GAHR III"), both of which are publicly-registered, non-traded real estate investment trusts, Griffin-American Healthcare REIT IV, Inc. ("GAHR IV"), a non-traded real estate investment trust in registration as of December 31, 2015, 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 certain investment opportunities should be recommended to the Company or another program sponsored or co-sponsored by 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 as to the allocation of acquisition opportunities among the Company and GCEAR II, which is 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

F-39

Table of Contents          GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Dollars in thousands unless otherwise noted)

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;
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.
10.     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 rent expense of approximately $0.4 million during the years ended December 31, 2015 and 2014, related to the ground lease. As of December 31, 2015, the remaining required payments under the terms of the ground lease are as follows:
 
December 31, 2015
2016
$
180

2017
198

2018
198

2019
198

2020
198

Thereafter
34,048

Total
$
35,020

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.
11.     Declaration of Distributions
During the quarter ended December 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 October 1, 2015 through December 31, 2015. Such distributions were paid on a monthly basis, on or about the first day of the month, for the month then-ended.
On December 16, 2015, the Company’s board of directors declared distributions in the amount of $0.001895902 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, 2016 through March 31, 2016. 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.
12.     Selected Quarterly Financial Data (Unaudited)

F-40


Presented below is a summary of the unaudited quarterly financial information for the years ended December 31, 2015 and 2014:
 
2015
 
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
Total revenue
$
55,213

 
$
61,563

 
$
82,849

 
$
90,470

Net income (loss)
$
11,101

 
$
(11,655
)
 
$
4,005

 
$
12,170

Net income (loss) attributable to common stockholders
$
6,116

 
$
(21,409
)
 
$
1,544

 
$
9,999

Net loss per share
$
0.05

 
$
(0.15
)
 
$
0.01

 
$
0.06

 
 
2014
 
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
Total revenue
$
47,992

 
$
47,285

 
$
52,631

 
$
54,486

Net income (loss)
$
2,740

 
$
(7,990
)
 
$
381

 
$
4,883

Net loss attributable to common stockholders
$
(1,920
)
 
$
(12,378
)
 
$
(4,354
)
 
$
(2
)
Net loss per share
$
(0.03
)
 
$
(0.10
)
 
$
(0.03
)
 
$
(0.01
)
13.     Subsequent Events
Offering Status
As of March 4, 2016, the Company had issued approximately 9,414,932 shares of the Company’s common stock pursuant to the DRP Offerings for approximately $96.0 million.
Declaration of Distributions
On March 1, 2016, the Company’s board of directors declared distributions in the amount of $0.001895902 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, 2016 through June 30, 2016. 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.










F-41


GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
 
 
 
 
 
 
 
 
 
Initial Cost to Company
 
Cost 
Capitalized Subsequent to
Acquisition
 
Gross Carrying Amount at
December 31, 2015
 
 
 
 
 
 
 
Life on
which
depreciation
in latest
income
statement is
computed
Property
 
Property
Type
 
ST
 
Encumbrances
 
Land
 
Building and
Improve-ments
 
Building and
Improve-ments
 
Land
 
Building and
Improve-ments
 
Total
 
Accumulated
Depreciation
 
Date of
Construction
 
Date of
Acquisition
 
Plainfield
 
Office/Laboratory
 
IL
 
$
19,295

 
$
3,709

 
$
27,335

 
$
2,217

 
$
3,709

 
$
29,552

 
$
33,261

 
$
8,750

 
N/A
 
6/18/2009
 
5-40 years
Renfro
 
Warehouse/Distribution
 
SC
 
13,500

 
1,400

 
18,804

 
1,390

 
1,400

 
20,194

 
21,594

 
5,394

 
N/A
 
6/18/2009
 
5-40 years
Emporia Partners
 
Office/Industrial/Distribution
 
KS
 
3,753

 
274

 
7,567

 

 
274

 
7,567

 
7,841

 
1,731

 
N/A
 
8/27/2010
 
5-40 years
ITT
 
Office
 
CA
 
4,600

 
2,877

 
4,222

 
17

 
2,877

 
4,239

 
7,116

 
1,444

 
N/A
 
9/23/2010
 
5-40 years
Quad/Graphics
 
Industrial/Office
 
CO
 
7,500

 
1,950

 
10,236

 
272

 
1,950

 
10,508

 
12,458

 
1,931

 
N/A
 
12/30/2010
 
5-40 years
AT&T
 
Office/ Data Center
 
WA
 
26,000

 
6,770

 
32,420

 
461

 
6,770

 
32,881

 
39,651

 
5,786

 
N/A
 
1/31/2012
 
5-40 years
Westinghouse
 
Engineering Facility
 
PA
 
22,000

 
2,650

 
29,096

 

 
2,650

 
29,096

 
31,746

 
4,022

 
N/A
 
3/22/2012
 
5-40 years
TransDigm
 
Assembly/Manufacturing
 
NJ
 
6,432

 
3,773

 
9,030

 

 
3,773

 
9,030

 
12,803

 
1,505

 
N/A
 
5/31/2012
 
5-40 years
Travelers
 
Office
 
CO
 
9,500

 
2,600

 
13,500

 
468

 
2,600

 
13,968

 
16,568

 
2,138

 
N/A
 
6/29/2012
 
5-40 years
Zeller
 
Manufacturing
 
IL
 
9,000

 
2,674

 
13,229

 
651

 
2,674

 
13,880

 
16,554

 
1,597

 
N/A
 
11/8/2012
 
5-40 years
Northrop
 
Office
 
OH
 
10,800

 
1,300

 
16,188

 

 
1,300

 
16,188

 
17,488

 
3,082

 
N/A
 
11/13/2012
 
5-40 years
Health Net
 
Office
 
CA
 
13,500

 
4,182

 
18,072

 

 
4,182

 
18,072

 
22,254

 
3,327

 
N/A
 
12/18/2012
 
5-40 years
Comcast
 
Office
 
CO
 

 
3,146

 
22,826

 
174

 
3,146

 
23,000

 
26,146

 
3,957

 
N/A
 
1/11/2013
 
5-40 years
Boeing
 
Office
 
WA
 

 
3,000

 
9,000

 
102

 
3,000

 
9,102

 
12,102

 
2,732

 
N/A
 
2/15/2013
 
5-40 years
Schlumberger
 
Office
 
TX
 
30,060

 
2,800

 
47,752

 
145

 
2,800

 
47,897

 
50,697

 
4,612

 
N/A
 
5/1/2013
 
5-40 years
UTC
 
Office
 
NC
 
23,760

 
1,330

 
37,858

 

 
1,330

 
37,858

 
39,188

 
3,987

 
N/A
 
5/3/2013
 
5-40 years
Avnet
 
Research & Development/Flex Facility
 
AZ
 
19,860

 
1,860

 
31,481

 

 
1,860

 
31,481

 
33,341

 
3,230

 
N/A
 
5/29/2013
 
5-40 years
Cigna
 
Office
 
AZ
 

 
8,600

 
48,102

 

 
8,600

 
48,102

 
56,702

 
4,922

 
N/A
 
6/20/2013
 
5-40 years
Nokia
 
Office
 
IL
 

 
7,697

 
21,843

 

 
7,697

 
21,843

 
29,540

 
1,828

 
N/A
 
8/13/2013
 
5-40 years
Verizon
 
Office
 
NJ
 
26,160

 
5,300

 
36,768

 
1,472

 
5,300

 
38,240

 
43,540

 
5,082

 
N/A
 
10/3/2013
 
5-40 years
Fox Head
 
Office
 
CA
 

 
3,672

 
23,230

 

 
3,672

 
23,230

 
26,902

 
1,792

 
N/A
 
10/29/2013
 
5-40 years
Coca-Cola Refreshments
 
Office
 
GA
 

 
5,000

 
50,227

 
40

 
5,000

 
50,267

 
55,267

 
5,483

 
N/A
 
11/5/2013
 
5-40 years

S-1


 
 
 
 
 
 
 
 
Initial Cost to Company
 
Cost 
Capitalized Subsequent to
Acquisition
 
Gross Carrying Amount at
December 31, 2015
 
 
 
 
 
 
 
Life on
which
depreciation
in latest
income
statement is
computed
Property
 
Property
Type
 
ST
 
Encumbrances
 
Land
 
Building and
Improve-ments
 
Building and
Improve-ments
 
Land
 
Building and
Improve-ments
 
Total
 
Accumulated
Depreciation
 
Date of
Construction
 
Date of
Acquisition
 
General Electric
 
Office
 
GA
 

 
5,050

 
51,396

 
114

 
5,050

 
51,510

 
56,560

 
3,832

 
N/A
 
11/5/2013
 
5-40 years
Atlanta Wildwood
 
Office
 
GA
 

 
4,189

 
23,414

 
114

 
4,189

 
23,528

 
27,717

 
3,155

 
N/A
 
11/5/2013
 
5-40 years
Community Insurance
 
Office
 
OH
 

 
1,177

 
22,323

 

 
1,177

 
22,323

 
23,500

 
2,013

 
N/A
 
11/5/2013
 
5-40 years
Anthem
 
Office
 
OH
 

 
850

 
8,892

 

 
850

 
8,892

 
9,742

 
1,074

 
N/A
 
11/5/2013
 
5-40 years
JPMorgan Chase
 
Office
 
OH
 

 
5,500

 
39,000

 

 
5,500

 
39,000

 
44,500

 
3,386

 
N/A
 
11/5/2013
 
5-40 years
IBM
 
Office
 
OH
 

 
4,750

 
32,769

 
341

 
4,750

 
33,110

 
37,860

 
4,153

 
N/A
 
11/5/2013
 
5-40 years
Aetna
 
Office
 
TX
 

 
3,000

 
12,330

 
185

 
3,000

 
12,515

 
15,515

 
1,671

 
N/A
 
11/5/2013
 
5-40 years
CHRISTUS Health
 
Office
 
TX
 

 
1,950

 
46,922

 
37

 
1,950

 
46,959

 
48,909

 
4,738

 
N/A
 
11/5/2013
 
5-40 years
Roush Industries
 
Office
 
MI
 

 
875

 
11,375

 
534

 
875

 
11,909

 
12,784

 
2,326

 
N/A
 
11/5/2013
 
5-40 years
Wells Fargo
 
Office
 
WI
 

 
3,100

 
26,348

 
359

 
3,100

 
26,707

 
29,807

 
10,430

 
N/A
 
11/5/2013
 
5-40 years
Shire Pharmaceuticals
 
Office
 
PA
 

 
2,925

 
18,935

 
25

 
2,925

 
18,960

 
21,885

 
3,669

 
N/A
 
11/5/2013
 
5-40 years
United HealthCare
 
Office
 
MO
 

 
2,920

 
23,510

 
44

 
2,920

 
23,554

 
26,474

 
3,576

 
N/A
 
11/5/2013
 
5-40 years
Northpointe Corporate Center II
 
Office
 
WA
 

 
1,109

 
6,066

 
4,575

 
1,109

 
10,641

 
11,750

 
784

 
N/A
 
11/5/2013
 
5-40 years
Comcast (Northpointe Corporate Center I)
 
Office
 
WA
 

 
2,292

 
16,930

 

 
2,292

 
16,930

 
19,222

 
2,189

 
N/A
 
11/5/2013
 
5-40 years
Farmers
 
Office
 
KS
 

 
2,750

 
17,106

 
51

 
2,750

 
17,157

 
19,907

 
1,758

 
N/A
 
12/27/2013
 
5-40 years
Caterpillar
 
Industrial
 
IL
 

 
6,000

 
46,511

 

 
6,000

 
46,511

 
52,511

 
5,333

 
N/A
 
1/7/2014
 
5-40 years
DigitalGlobe
 
Office
 
CO
 

 
8,600

 
83,400

 

 
8,600

 
83,400

 
92,000

 
6,285

 
N/A
 
1/14/2014
 
5-40 years
Waste Management
 
Office
 
AZ
 

 

 
16,515

 
10

 

 
16,525

 
16,525

 
1,511

 
N/A
 
1/16/2014
 
5-40 years
BT Infonet
 
Office
 
CA
 

 
9,800

 
41,483

 

 
9,800

 
41,483

 
51,283

 
3,394

 
N/A
 
2/27/2014
 
5-40 years
Wyndham Worldwide
 
Office
 
NJ
 

 
6,200

 
91,153

 

 
6,200

 
91,153

 
97,353

 
4,860

 
N/A
 
4/23/2014
 
5-40 years
Ace Hardware
 
Office
 
IL
 
23,294

 
6,900

 
33,945

 

 
6,900

 
33,945

 
40,845

 
2,195

 
N/A
 
4/24/2014
 
5-40 years
Equifax I
 
Office
 
MO
 

 
1,850

 
12,709

 

 
1,850

 
12,709

 
14,559

 
1,119

 
N/A
 
5/20/2014
 
5-40 years
American Express
 
Office
 
AZ
 

 
15,000

 
45,893

 

 
15,000

 
45,893

 
60,893

 
5,262

 
N/A
 
5/22/2014
 
5-40 years
SoftBank
 
Office
 
CA
 

 
22,789

 
68,950

 

 
22,789

 
68,950

 
91,739

 
11,744

 
N/A
 
5/28/2014
 
5-40 years
Vanguard
 
Office
 
NC
 

 
2,230

 
31,062

 

 
2,230

 
31,062

 
33,292

 
1,984

 
N/A
 
6/19/2014
 
5-40 years

S-2


 
 
 
 
 
 
 
 
Initial Cost to Company
 
Cost 
Capitalized Subsequent to
Acquisition
 
Gross Carrying Amount at
December 31, 2015
 
 
 
 
 
 
 
Life on
which
depreciation
in latest
income
statement is
computed
Property
 
Property
Type
 
ST
 
Encumbrances
 
Land
 
Building and
Improve-ments
 
Building and
Improve-ments
 
Land
 
Building and
Improve-ments
 
Total
 
Accumulated
Depreciation
 
Date of
Construction
 
Date of
Acquisition
 
Parallon
 
Office
 
FL
 

 
1,000

 
16,772

 

 
1,000

 
16,772

 
17,772

 
1,054

 
N/A
 
6/25/2014
 
5-40 years
TW Telecom
 
Office
 
CO
 
21,213

 
11,097

 
35,817

 
583

 
11,097

 
36,400

 
47,497

 
2,329

 
N/A
 
8/1/2014
 
5-40 years
Equifax II
 
Office
 
MO
 

 
2,200

 
12,755

 

 
2,200

 
12,755

 
14,955

 
775

 
N/A
 
10/1/2014
 
5-40 years
Mason I
 
Office
 
OH
 

 
4,777

 
18,489

 

 
4,777

 
18,489

 
23,266

 
532

 
N/A
 
11/7/2014
 
5-40 years
Wells Fargo
 
Office
 
NC
 

 
2,150

 
40,806

 

 
2,150

 
40,806

 
42,956

 
1,683

 
N/A
 
12/15/2014
 
5-40 years
GE Aviation
 
Office
 
OH
 

 
4,400

 
61,681

 

 
4,400

 
61,681

 
66,081

 
2,730

 
N/A
 
2/19/2015
 
5-40 years
Westgate III
 
Office
 
TX
 

 
3,209

 
75,937

 

 
3,209

 
75,937

 
79,146

 
2,112

 
N/A
 
4/1/2015
 
5-40 years
Lisle
 
Office
 
IL
 

 
2,788

 
16,200

 
33

 
2,788

 
16,233

 
19,021

 
626

 
N/A
 
6/10/2015
 
5-40 years
Bloomingdale
 
Office
 
IL
 

 
1,178

 
5,182

 

 
1,178

 
5,182

 
6,360

 
145

 
N/A
 
6/10/2015
 
5-40 years
Columbia
 
Office
 
MD
 

 
6,989

 
46,875

 

 
6,989

 
46,875

 
53,864

 
1,166

 
N/A
 
6/10/2015
 
5-40 years
Denver
 
Office
 
CO
 

 
9,948

 
23,888

 

 
9,948

 
23,888

 
33,836

 
682

 
N/A
 
6/10/2015
 
5-40 years
Columbus
 
Office
 
OH
 

 
2,943

 
22,651

 

 
2,943

 
22,651

 
25,594

 
833

 
N/A
 
6/10/2015
 
5-40 years
Miramar
 
Office
 
FL
 

 
4,488

 
19,979

 

 
4,488

 
19,979

 
24,467

 
643

 
N/A
 
6/10/2015
 
5-40 years
Irving Carpenter
 
Office
 
TX
 

 
1,842

 
22,052

 
1,995

 
1,842

 
24,047

 
25,889

 
294

 
N/A
 
6/10/2015
 
5-40 years
Frisco
 
Office
 
TX
 

 
8,239

 
51,395

 
1,104

 
8,239

 
52,499

 
60,738

 
1,300

 
N/A
 
6/10/2015
 
5-40 years
Houston Westway II
 
Office
 
TX
 

 
3,961

 
78,668

 

 
3,961

 
78,668

 
82,629

 
2,363

 
N/A
 
6/10/2015
 
5-40 years
Houston Westway I
 
Office
 
TX
 

 
6,540

 
30,703

 

 
6,540

 
30,703

 
37,243

 
1,068

 
N/A
 
6/10/2015
 
5-40 years
Atlanta Perimeter
 
Office
 
GA
 

 
8,607

 
96,718

 
278

 
8,607

 
96,996

 
105,603

 
3,394

 
N/A
 
6/10/2015
 
5-40 years
Herndon
 
Office
 
VA
 

 
9,666

 
74,098

 

 
9,666

 
74,098

 
83,764

 
1,987

 
N/A
 
6/10/2015
 
5-40 years
Deerfield
 
Office
 
IL
 

 
4,339

 
37,298

 

 
4,339

 
37,298

 
41,637

 
1,164

 
N/A
 
6/10/2015
 
5-40 years
DreamWorks
 
Office
 
CA
 

 
26,387

 
190,805

 

 
26,387

 
190,805

 
217,192

 
2,640

 
N/A
 
7/21/2015
 
5-40 years
Highway 94
 
Office
 
 MO
 
18,968

 
5,540

 
28,230

 

 
5,540

 
28,230

 
33,770

 
202

 
N/A
 
11/6/2015
 
5-40 years
DynCorp
 
Office
 
TX
 
11,162

 
1,952

 
15,540

 

 
1,952

 
15,540

 
17,492

 
57

 
N/A
 
12/11/2015
 
5-40 years
Mercedes-Benz
 
Office
 
TX
 
18,945

 
2,330

 
26,376

 

 
2,330

 
26,376

 
28,706

 
94

 
N/A
 
12/11/2015
 
5-40 years
Samsonite
 
Office
 
 FL
 
24,561

 
5,040

 
42,490

 

 
5,040

 
42,490

 
47,530

 
88

 
N/A
 
12/11/2015
 
5-40 years
Total Operating Properties
 
 
 
 
 
$
363,863

 
$
339,980

 
$
2,449,128

 
$
17,791

 
$
339,980

 
$
2,466,919

 
$
2,806,899

 
$
200,734

 
 
 
 
 
 
Restoration Hardware
 
Industrial
 
CA
 

 
15,463

 

 
75,712

 
15,463

 
75,712

 
91,175

 
1,314

 
8/15/2015
 
6/20/2014
 
5-40 years
Total All Properties
 
 
 
 
 
$
363,863

(1) 
$
355,443

 
$
2,449,128

 
$
93,503

 
$
355,443

 
$
2,542,631

 
$
2,898,074

 
$
202,048

 
 
 
 
 
 
 

S-3


(1)
Amount does not include the net loan valuation premium of $0.8 million related to the debt assumed in the TransDigm, Ace Hardware, Highway 94, and Samsonite property acquisitions, the Term Loan (July 2015) of $640.0 million, and the Revolver Loan (July 2015) of approximately $481.7 million.

  
Activity for the years ended December 31,
 
2015
 
2014
 
2013
Real estate facilities
 
 
 
 
 
Balance at beginning of year
$
1,823,895

  
$
1,175,423

 
$
328,342

Acquisitions
1,087,153

  
712,036

 
854,218

Improvements
7,381

  
2,826

 
256

Construction-in-progress
45,067

 
35,831

 
7

Real estate assets held for sale

 
(91,074
)
 
(7,400
)
Write off of tenant origination and absorption costs

 
(4,762
)
 

Sale of real estate assets
(65,422
)
 
(6,385
)
 

Balance at end of year
$
2,898,074

 
$
1,823,895

 
$
1,175,423

Accumulated depreciation
 
 
 
 
 
Balance at beginning of year
$
102,883

  
$
42,806

 
$
18,898

Depreciation expense
112,748

 
72,907

 
24,191

Less: Non-real estate assets depreciation expense
(328
)
 
(170
)
 

Less: Real estate assets held for sale depreciation expense
(2,265
)
 
(7,520
)
 
(283
)
Less: Write off of tenant origination and absorption costs amortization expense

 
(4,762
)
 

Less: Sale of real estate assets depreciation expense
(10,990
)
 
(378
)
 

Balance at end of year
$
202,048

  
$
102,883

 
$
42,806

Real estate facilities, net
$
2,696,026

  
$
1,721,012

 
$
1,132,617

 



S-4