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EX-10.1 - EXHIBIT 10.1 - Griffin Capital Essential Asset REIT, Inc.gcear-increaseagreementexh.htm
EX-31.1 - EXHIBIT 31.1 - Griffin Capital Essential Asset REIT, Inc.gcear03312016exhibit311.htm
EX-31.2 - EXHIBIT 31.2 - Griffin Capital Essential Asset REIT, Inc.gcear03312016exhibit312.htm
EX-32.1 - EXHIBIT 32.1 - Griffin Capital Essential Asset REIT, Inc.gcear03312016exhibit321.htm
EX-32.2 - EXHIBIT 32.2 - Griffin Capital Essential Asset REIT, Inc.gcear03312016exhibit322.htm

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

FORM 10-Q
____________________________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission File Number: 000-54377
_______________________________________________
Griffin Capital Essential Asset REIT, Inc.
(Exact name of Registrant as specified in its charter)
________________________________________________
Maryland
 
26-3335705
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)

Griffin Capital Plaza
1520 E. Grand Ave

El Segundo, California 90245
(Address of principal executive offices)
(310) 469-6100
(Registrant’s telephone number)

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

1


Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 9, 2016: 175,235,791 shares of common stock, $0.001 par value per share.

2


FORM 10-Q
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
TABLE OF CONTENTS
 
 
Page No.
 
 
Item 1.
Financial Statements:
 
 
Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015 (unaudited)
 
Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015 (unaudited)
 
Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2016 and 2015 (unaudited)
 
Consolidated Statements of Equity for the Year Ended December 31, 2015 and the Three Months Ended March 31, 2016 (unaudited)
 
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 (unaudited)
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

3


PART I. FINANCIAL INFORMATION
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q of Griffin Capital Essential Asset REIT, Inc., other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements include, in particular, statements about our plans, strategies, and prospects and are subject to risks, uncertainties, and other factors. Such statements are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations and provide distributions to stockholders, our ability to find suitable investment properties, and our ability to be in compliance with certain debt covenants, may be significantly hindered. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the Securities and Exchange Commission ("SEC"). We cannot guarantee the accuracy of any such forward-looking statements contained in this Form 10-Q, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
See the risk factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2015 as filed with the SEC for a discussion of some, although not all, of the risks and uncertainties that could cause actual results to differ materially from those presented in our forward-looking statements.

4


GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except share amounts)
 
March 31,
2016
 
December 31,
2015
ASSETS
 
 
 
Cash and cash equivalents
$
31,101

 
$
21,944

Restricted cash
18,910

 
24,187

Restricted cash - real estate funds held for exchange

 
47,031

Real estate:
 
 
 
Land
358,406

 
355,443

Building and improvements
2,017,932

 
2,020,947

Tenant origination and absorption cost
516,637

 
516,879

Construction in progress
7,106

 
4,805

Total real estate
2,900,081

 
2,898,074

Less: accumulated depreciation and amortization
(233,015
)
 
(202,048
)
Total real estate, net
2,667,066

 
2,696,026

Real estate assets and other assets held for sale, net
70,709

 
68,792

Investments in unconsolidated entities
53,927

 
56,863

Intangible assets, net
34,412

 
36,769

Deferred rent
31,104

 
26,432

Mortgage receivable from affiliate

 
24,513

Other assets, net
28,597

 
34,833

Total assets
$
2,935,826

 
$
3,037,390

LIABILITIES AND EQUITY
 
 
 
Debt:
 
 
 
Mortgages payable, plus unamortized premium of $1,680 and $810, respectively
$
361,595

 
$
361,746

Term Loan (July 2015)
709,532

 
634,922

Revolver Loan (July 2015)
354,873

 
476,759

Total debt
1,426,000

 
1,473,427

Restricted reserves
11,008

 
11,286

Interest rate swap liability
21,339

 
6,394

Mandatory redemption of noncontrolling interest
500

 
18,129

Accounts payable and other liabilities
59,799

 
68,168

Distributions payable
6,182

 
6,147

Due to affiliates
3,364

 
8,757

Below market leases, net
36,390

 
41,706

Liabilities of real estate assets held for sale
1,761

 
2,845

Total liabilities
1,566,343

 
1,636,859

Commitments and contingencies (Note 10)

 

Noncontrolling interests subject to redemption, 531,000 units eligible towards redemption as of March 31, 2016 and December 31, 2015
4,887

 
4,887

Common stock subject to redemption
89,913

 
86,557

Stockholders’ equity:
 
 
 
Preferred Stock, $0.001 par value; 200,000,000 shares authorized; no shares outstanding as of March 31, 2016 and December 31, 2015

 

Common Stock, $0.001 par value; 700,000,000 shares authorized; 175,811,683 and 175,184,519 shares outstanding, as of March 31, 2016 and December 31, 2015
176

 
175

Additional paid-in capital
1,561,501

 
1,561,499

Cumulative distributions
(242,269
)
 
(212,031
)
Accumulated deficit
(43,144
)
 
(55,035
)
Accumulated other comprehensive loss
(21,902
)
 
(6,839
)
Total stockholders’ equity
1,254,362

 
1,287,769

Noncontrolling interests
20,321

 
21,318

Total equity
1,274,683

 
1,309,087

Total liabilities and equity
$
2,935,826

 
$
3,037,390

See accompanying notes.

5


GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except share and per share amounts)
 
Three Months Ended
 
March 31,
 
2016
 
2015
Revenue:
 
 
 
Rental income
$
66,850

 
$
44,715

Property expense recoveries
18,952

 
10,498

Total revenue
85,802

 
55,213

Expenses:
 
 
 
Asset management fees to affiliates
5,789

 
3,787

Property management fees to affiliates
2,370

 
1,474

Property operating expense
10,939

 
6,899

Property tax expense
11,126

 
6,878

Acquisition fees and expenses to non-affiliates
110

 
402

Acquisition fees and expenses to affiliates

 
1,980

General and administrative expenses
1,289

 
1,126

Depreciation and amortization
31,206

 
19,465

Total expenses
62,829

 
42,011

Income from operations
22,973

 
13,202

Other income (expense):
 
 
 
Interest expense
(12,029
)
 
(5,428
)
Interest income
1,826

 
106

Loss from investment in unconsolidated entities
(384
)
 
(392
)
Gain from sale of depreciable operating property

 
3,613

Net income
12,386

 
11,101

Distributions to redeemable preferred unit holders

 
(4,687
)
Less: Net income attributable to noncontrolling interests
(406
)
 
(210
)
Net income attributable to controlling interest
11,980

 
6,204

Distributions to redeemable noncontrolling interests attributable to common stockholders
(89
)
 
(88
)
Net income attributable to common stockholders
$
11,891

 
$
6,116

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

 
$
0.05

Weighted average number of common shares outstanding, basic and diluted
175,192,167

 
130,106,364

Distributions declared per common share
$
0.17

 
$
0.17

See accompanying notes.

6


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

 
Three Months Ended
 
March 31,
 
2016
 
2015
Net income
$
12,386

 
$
11,101

Other comprehensive loss:
 
 
 
Equity in other comprehensive loss of unconsolidated joint venture
(632
)
 
(418
)
Change in fair value of swap agreement
(14,942
)
 

Total comprehensive (loss) income
(3,188
)
 
10,683

   Distributions to redeemable preferred unit holders

 
(4,687
)
Preferred units redemption premium

 

Distributions to redeemable noncontrolling interests attributable to common stockholders
(89
)
 
(88
)
Less: comprehensive income (loss) attributable to noncontrolling interests
105

 
(210
)
Comprehensive (loss) income attributable to common stockholders
$
(3,172
)
 
$
5,698

See accompanying notes.




7


GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF EQUITY
For the Year Ended December 31, 2015 and the Three Months Ended March 31, 2016 (unaudited)
(In thousands, except share data)
 
 
 
 
 
 
 
 
 
 
 
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, 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

Stock-based compensation

 

 
3

 

 

 

 
3

 

 
3

Distributions to common stockholders

 

 

 
(17,076
)
 

 

 
(17,076
)
 

 
(17,076
)
Issuance of shares for distribution reinvestment plan
1,265,647

 
1

 
13,161

 
(13,162
)
 

 

 

 

 

Repurchase of common stock
(638,483
)
 

 
(6,335
)
 

 

 

 
(6,335
)
 

 
(6,335
)
Additions to common stock subject to redemption

 

 
(6,827
)
 

 

 

 
(6,827
)
 

 
(6,827
)
Distributions to noncontrolling interests

 

 

 

 

 

 

 
(889
)
 
(889
)
Distributions to noncontrolling interests subject to redemption

 

 

 

 

 

 

 
(3
)
 
(3
)
Net income

 

 

 

 
11,891

 

 
11,891

 
406

 
12,297

Other comprehensive loss

 

 

 

 

 
(15,063
)
 
(15,063
)
 
(511
)
 
(15,574
)
BALANCE March 31, 2016
175,811,683

 
$
176

 
$
1,561,501

 
$
(242,269
)
 
$
(43,144
)
 
$
(21,902
)
 
$
1,254,362

 
$
20,321

 
$
1,274,683

See accompanying notes.

8


GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
 
Three Months Ended
 
March 31,
 
2016
 
2015
Operating Activities:
 
 
 
Net income
$
12,386

 
$
11,101

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of building and building improvements
13,217

 
8,017

Amortization of leasing costs and intangibles, including ground leasehold interests
17,989

 
11,448

Amortization of above and below market leases, net
842

 
(551
)
Amortization of deferred financing costs
628

 
562

Amortization of debt premium
(85
)
 
(80
)
Amortization of deferred revenue
(1,228
)
 

Deferred rent
(4,884
)
 
(3,185
)
Gain from sale of depreciable operating property

 
(3,613
)
Unrealized loss on interest rate swaps
2

 

Loss from investment in unconsolidated entities
384

 
392

Stock-based compensation
3

 
2

Change in operating assets and liabilities:
 
 
 
Other assets
5,832

 
(949
)
Restricted cash
5,050

 
(1,180
)
Accounts payable and other liabilities
(12,925
)
 
(3,459
)
Due to affiliates, net
(5,474
)
 

Net cash provided by operating activities
31,737

 
18,505

Investing Activities:
 
 
 
Acquisition of properties, net
(2,782
)
 
(66,000
)
Proceeds from disposition of properties

 
11,809

Real estate acquisition deposits

 
(1,000
)
Real estate funds held for exchange
47,031

 
10,105

Reserves for tenant improvements
(51
)
 
13

Improvements to real estate
(1,101
)
 
(115
)
Payments for construction in progress, net
(2,426
)
 
(765
)
Real estate development, net of unpaid construction costs

 
(17,299
)
Mortgage receivable from affiliate
25,741

 

Distributions of capital from investment in unconsolidated entities
1,920

 
1,938

Net cash provided by (used in) investing activities
68,332

 
(61,314
)
Financing Activities:
 
 
 
Proceeds from borrowings - Unsecured Revolver (May 2014)

 
50,000

Proceeds from borrowings - Term Loan (July 2015)
75,000

 

Proceeds from borrowings - Revolver Loan (July 2015)
17,200

 

Principal payoff of secured indebtedness - Unsecured Term Loan (May 2014)
(139,344
)
 

Principal amortization payments on secured indebtedness
(1,101
)
 
(488
)
Deferred financing costs
(680
)
 

Offering costs

 
(49
)
Purchase of noncontrolling interest
(17,629
)
 

Repurchase of common stock
(6,336
)
 
(1,240
)
Distributions paid on preferred units subject to redemption

 
(4,687
)
Distributions to noncontrolling interests
(981
)
 
(849
)
Distributions to common stockholders
(17,041
)
 
(9,282
)
Net cash (used in) provided by financing activities
(90,912
)
 
33,405

Net increase (decrease) in cash and cash equivalents
9,157

 
(9,404
)
Cash and cash equivalents at the beginning of the period
21,944

 
68,915

Cash and cash equivalents at the end of the period
$
31,101

 
$
59,511

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid for interest
$
10,285

 
$
4,867

Supplemental Disclosures of Non-cash Transactions:
 
 
 
Change in fair value of interest rate swap agreements
$
(15,574
)
 
$
(418
)
Construction in progress costs - real estate development
$

 
$
(27,593
)
Unpaid construction in progress costs - real estate development
$

 
$
10,294

Increase in distributions payable to common stockholders
$
35

 
$
79

Distributions to redeemable noncontrolling interests attributable to common stockholders as reflected on the consolidated statements of operations
$
89

 
$
88

Common stock issued pursuant to the distribution reinvestment plan
$
13,162

 
$
12,896

Common stock redemptions funded subsequent to period-end
$
9,807

 
$
1,716

See accompanying notes.

9

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

 
1.
Organization
Griffin Capital Essential Asset REIT, Inc., a Maryland corporation (the "Company"), was formed on August 28, 2008 under the Maryland General Corporation Law. The Company was organized primarily with the purpose of acquiring single tenant properties that are essential to the tenant’s business and used a substantial amount of the net proceeds from the Public Offerings (as defined below) to invest in these properties. The Company satisfied requisite financial and non-financial requirements and elected to be taxed as a REIT for each taxable year ended since December 31, 2010 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. From 2009 to 2014, the Company offered shares of common stock, pursuant to a private placement offering to accredited investors (the "Private Offering") and two public offerings, consisting of an initial public offering and a follow-on offering (together, the "Public Offerings"), which included shares for sale, pursuant to the distribution reinvestment plan ("DRP"). The Company issued 126,592,885 total shares of its common stock for gross proceeds of approximately $1.3 billion, pursuant to the Private Offering and Public Offerings.
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 9,845,346 shares of the Company's common stock for gross proceeds of approximately $100.4 million through March 31, 2016. The 2015 DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders.
As of March 31, 2016, 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 175,811,683 shares outstanding at March 31, 2016, including shares issued pursuant to the DRP, less shares redeemed pursuant to the share redemption program. As of March 31, 2016 and December 31, 2015, the Company had issued $123.4 million and $110.2 million, respectively, in shares pursuant to the DRP, which are classified on the consolidated balance sheets as common stock subject to redemption, net of redemptions paid of $23.7 million and $17.3 million, respectively, and redemptions payable totaling approximately $9.8 million and $6.3 million, respectively, which are included in accounts payable and other liabilities on the consolidated balance sheets. See Note 8, Equity — Share Redemption Program. Since inception and through March 31, 2016, the Company had redeemed 2,392,183 shares of common stock for approximately $23.7 million pursuant to the share redemption program.
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

10

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

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. (See the Company's Current Report on Form 8-K filed with the SEC on October 28, 2015 for a description of the methodologies and assumptions used to determine, and the limitations of the estimated value per share.)
Griffin Capital Essential Asset Operating Partnership, L.P., a Delaware limited partnership (the "Operating Partnership"), was formed on August 29, 2008. The Operating Partnership owns, directly or indirectly, all of the properties that the Company has acquired. The Advisor purchased an initial 99% limited partnership interest in the Operating Partnership for $200,000, and the Company contributed the initial $1,000 capital contribution, received from the Advisor, to the Operating Partnership in exchange for a 1% general partner interest. As of March 31, 2016, 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 unaffiliated third parties. No limited partnership units of the Operating Partnership have been redeemed during the three months ended March 31, 2016 and year ended December 31, 2015. The Operating Partnership may conduct certain activities through the Company’s taxable REIT subsidiary, Griffin Capital Essential Asset TRS, Inc., a Delaware corporation (the "TRS") formed on September 2, 2008, which is a wholly-owned subsidiary of the Operating Partnership. The TRS had no activity as of March 31, 2016.
The Company’s property manager is Griffin Capital Essential Asset Property Management, LLC, a Delaware limited liability company (the “Property Manager”), which was formed on August 28, 2008 to manage the Company’s properties. The Property Manager derives substantially all of its income from the property management services it performs for the Company.

2.
Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements of the Company are prepared by management on the accrual basis of accounting and in accordance with principles generally accepted in the United States (“GAAP”) for interim financial information as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), and in conjunction with rules and regulations of the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited consolidated financial statements include accounts and related adjustments, which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim period. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The unaudited consolidated financial statements include accounts and related adjustments of the Company, the Operating Partnership and the TRS, if applicable, which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of the Company’s financial position for the interim period. 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 March 31, 2016. 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.

11

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments that are readily convertible to cash with a maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents may include cash and short-term investments. Short-term investments are stated at cost, which approximates fair value. There were no restrictions on the use of the Company’s operating cash balance as of March 31, 2016 and December 31, 2015.
The Company maintains cash accounts with major financial institutions. The cash balances consist of business checking accounts and money market accounts. These accounts are insured by the Federal Deposit Insurance Corporation up to $250,000 at each institution. At times, the balances in these accounts may exceed the insured amounts. The Company considers balances in excess of the insured amounts to potentially be a concentration of credit risk. However, the Company has not experienced any losses with respect to cash balances in excess of government-provided insurance and does not anticipate any losses in the future.
Restricted Cash
In conjunction with the contribution of certain assets, as required by certain lease provisions or certain lenders in conjunction with an acquisition or debt financing, or credits received by the seller of certain assets, the Company assumed or funded reserves for specific property improvements and deferred maintenance, rent abatement, re-leasing costs, and taxes and insurance (see Note 3, Real Estate). As of March 31, 2016 and December 31, 2015, the balance of these reserves, included in the consolidated balance sheets as restricted cash, was $18.9 million and $24.2 million, respectively. The balance as of March 31, 2016 includes $2.9 million in rent collections from the eight properties which serve as collateral under the Midland Mortgage loan and the DynCorp and Mercedes-Benz property loans, $13.4 million designated for deferred maintenance and re-leasing costs, and $2.6 million of taxes and insurance reserves to be applied to future amounts incurred.
During the three months ended March 31, 2016, proceeds of approximately $47.0 million from the sale of the Will Partners and LTI properties were released by the qualified intermediary, which held the funds as both properties were treated as a tax-deferred exchange.
Real Estate
Purchase Price Allocation
The Company applies the provisions in ASC 805-10, Business Combinations, to account for the acquisition of real estate, or real estate related assets, in which a lease, or other contract, is in place representing an active revenue stream, as a business combination. In accordance with the provisions of ASC 805-10, the Company recognizes the assets acquired, the liabilities assumed and any noncontrolling interest in the acquired entity at their fair values as of the acquisition date, on an “as if vacant” basis. Further, the Company recognizes the fair value of assets acquired, liabilities assumed, and any noncontrolling interest in acquisitions of less than a 100% interest when the acquisition constitutes a change in control of the acquired entity. The accounting provisions have also established that acquisition-related costs and restructuring costs are considered separate and not a component of a business combination and, therefore, are expensed as incurred. Acquisition-related costs for the three months ended March 31, 2016 and 2015 totaled $0.1 million and $2.4 million, respectively.
Acquired in-place leases are valued as above-market or below-market as of the date of acquisition. The valuation is measured based on the present value (using an interest rate, which reflects the risks associated with the leases acquired) of the difference between (a) the contractual amounts to be paid pursuant to the in-place leases and (b) management’s estimate of fair market lease rates for the corresponding in-place leases over a period equal to the remaining non-cancelable term of the lease for above-market leases, taking into consideration below-market extension options for below-market leases. In addition, renewal options are considered and will be included in the valuation of in-place leases if (1) it is likely that the tenant will exercise the option, and (2) the renewal rent is considered to be sufficiently below a fair market rental rate at the time of renewal. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities and amortized as an adjustment to rental income over the remaining terms of the respective leases.
The aggregate fair value of in-place leases includes direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals, which are avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated 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

12

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

balance sheets. The intangible lease assets are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid, including real estate taxes, insurance, and other operating expenses, pursuant to the in-place leases over a market lease-up period for a similar lease. Customer relationships are valued based on management’s evaluation of certain characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics management will consider in allocating these values include the nature and extent of the Company’s existing business relationships with tenants, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors. These intangibles are included in intangible lease assets on the consolidated balance sheets and are amortized to expense over the remaining term of the respective leases.
 
The determination of the fair values of the assets and liabilities acquired requires the use of significant assumptions about current market rental rates, rental growth rates, discount rates, and other variables.
Depreciation and Amortization
The purchase price of real estate acquired and costs related to development, construction, and property improvements are capitalized. Repairs and maintenance costs include all costs that do not extend the useful life of the real estate asset and are expensed as incurred. The Company considers the period of future benefit of an asset to determine the appropriate useful life. The Company anticipates the estimated useful lives of its assets by class to be generally as follows:
Buildings
25-40 years
Building Improvements
5-20 years
Land Improvements
15-25 years
Tenant Improvements
Shorter of estimated useful life or remaining contractual lease term
Tenant origination and absorption cost
Remaining contractual lease term
In-place lease valuation
Remaining contractual lease term with consideration as to below-market extension options for below-market leases
Depreciation expense for buildings and improvements for the three months ended March 31, 2016 and 2015 was approximately $13.2 million and $8.0 million, respectively. Amortization expense for intangibles, including but not limited to, tenant origination and absorption costs for the three months ended March 31, 2016 and 2015 was approximately $18.0 million and $11.4 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, 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 and ASC Topic 360, 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, and 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 held for sale ceases to be depreciated. As of March 31, 2016, 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 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

13

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of real estate and related intangible assets may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, management assesses whether the carrying value of the assets will be recovered through the future undiscounted operating cash flows expected from the use of the assets and the eventual disposition. If, based on this analysis, the Company does not believe that it will be able to recover the carrying value of the asset, the Company will record an impairment charge to the extent the carrying value exceeds the net present value of the estimated future cash flows of the asset.
Projections of expected future undiscounted cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to re-lease the property and the number of years the property is held for investment. As of March 31, 2016 and December 31, 2015, the Company did not record any impairment charges related to its real estate assets or intangible assets.
Intangible Assets and Liabilities Arising from In-Place Leases Where the Company is the Lessee
In-place ground leases where the Company is the lessee may have value associated with effective contractual rental rates that are above or below market rates. Such values are calculated based on the present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place lease and (ii) management's estimate of fair market lease rates for the corresponding in-place lease, measured over a period equal to the remaining terms of the lease. The capitalized above-market and below-market in-place lease values are recorded as intangible lease assets and liabilities, respectively, and are amortized as an adjustment to property operating expense over the remaining term of the respective lease.
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.
Revenue Recognition
Leases associated with the acquisition and contribution of certain real estate assets (see Note 3, Real Estate) have net minimum rent payment increases during the term of the lease and are recorded to rental revenue on a straight-line basis, commencing as of the contribution or acquisition date. If a lease provides for contingent rental income, the Company will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved.
During the three months ended March 31, 2016 and 2015, the Company recognized deferred rent from tenants of approximately $4.9 million and $3.2 million, respectively. As of March 31, 2016 and December 31, 2015, the cumulative deferred rent balance for assets not held for sale was $31.1 million and $26.4 million, respectively, and is included in deferred rent on the consolidated balance sheets.
Tenant reimbursement revenue, which is comprised of additional amounts collected from tenants for the recovery of 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

14

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

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. The over collection of $2.3 million has been, and will continue to be, refunded to the tenants either by a credit to contractual rent payments or as a disbursement from operating cash flow.
Deferred Financing Costs
Deferred financing costs represent commitment fees, loan fees, legal fees and other third-party costs associated with obtaining financing. These costs are capitalized and netted against outstanding debt and amortized to, and included as a component of, interest expense over the terms of the respective financing agreements (see Note 2, Recently Issued Accounting Pronouncements, for changes to deferred financing cost presentation). Amortization expense for the three months ended March 31, 2016 and 2015 was approximately $0.6 million for each period. As of March 31, 2016 and December 31, 2015, the Company’s deferred financing costs, net of accumulated amortization, were approximately $13.0 million and $12.9 million, respectively. See Note 5, Debt.
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 $4.6 million termination fee, as a result of the lease termination with World Kitchen, LLC, the former tenant at the Will Partners property, on January 24, 2014. 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 $13.4 million and $13.2 million as of March 31, 2016 and December 31, 2015, 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 issuances or redemptions 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

15

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

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 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 Swap.
Fair Value Measurements
The fair value of financial and non-financial 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

16

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

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 qualification is lost unless the IRS grants the Company relief under certain statutory provisions. Such an event could materially adversely affect net income and net cash available for distribution to stockholders. As of March 31, 2016, the Company satisfied the REIT requirements and distributed all of its taxable income. 
Pursuant to the Code, the Company has elected to treat its corporate subsidiary as a taxable REIT subsidiary (“TRS”). In general, the TRS may perform non-customary services for the Company’s tenants and may engage in any real estate or non real estate-related business. The TRS will be subject to corporate federal and state income tax. As of March 31, 2016, the TRS had not commenced operations.
Per Share Data
The Company reports earnings per share for the period as (1) basic earnings per share computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period, and (2) diluted earnings per share computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding, including common stock equivalents. As of March 31, 2016 and December 31, 2015, there were no common stock equivalents that would have a dilutive effect on earnings (loss) per share for common stockholders.
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 review 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"). 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 2015-16, Simplifying the Accounting for Measurement Period Adjustments (“ASU 2015-16”). In a business combination, ASU 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

17

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

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.
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30) (“ASU 2015-03”) to amend the accounting guidance for the presentation of debt issuance costs. The standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for public business entities for fiscal years beginning after December 15, 2015 and retrospective application is required. Early adoption of the guidance is permitted. The Company has elected to adopt ASU 2015-03, beginning with the quarter ended March 31, 2016. As a result of the adoption of ASU 2015-03, the Company reclassified approximately $13.0 million of net debt issuance costs from an asset (previously recorded in the line item “Deferred financing costs, net” in the consolidated balance sheets) to a reduction in the carrying amount of the Company's debt as of March 31, 2016. ASU 2015-03 also expands disclosure requirements to include the face amount of the debt liability and the effective interest rate in the notes to the consolidated financial statements. See Note 5, Debt.
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 adopted ASU No. 2015-02, beginning with the quarter ended March 31, 2016. There was no change to the Company's consolidated financial statements or notes as a result of adoption.
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.

3.
Real Estate
As of March 31, 2016, the Company’s real estate portfolio consisted of 74 properties in 20 states consisting substantially of office, warehouse, and manufacturing facilities and two land parcels held for future development with a combined acquisition value of approximately $3.0 billion, including the allocation of the purchase price to above and below-market lease valuation.
2016 Acquisitions

18

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

During the three months ended March 31, 2016, the Company acquired two land parcels to be held for future development from an unaffiliated party. The aggregate purchase price of the acquisitions was approximately $2.8 million, as shown below:
Land Parcel
 
Location
 
Acquisition
Date
 
Purchase
Price
 
Acquisition
Fees and
Reimbursable
Expenses
Paid to the
Advisor (1)
Lynnwood III
 
Lynnwood, WA
 
3/17/2016
 
$
1,538

 
$
46

Lynnwood IV
 
Lynnwood, WA
 
3/17/2016
 
1,244

 
37

 
 
 
 
 
 
$
2,782

 
$
83

(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 payable to the Advisor was included in the basis of the land parcels acquired.
The purchase price allocation of the Highway 94 property, acquired during the year ended December 31, 2015, was finalized during the three months ended March 31, 2016, as shown below:
Property
 
Land
 
Building and improvements
 
Tenant origination and absorption costs
 
In-place lease valuation - below market
 
Debt discount
 
Total
Highway 94
 
$
5,637

 
$
18,592

 
$
6,688

 
$
(272
)
 
$
1,295

 
$
31,940

Future Minimum Contractual Rent Payments
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:
Remaining 2016
$
191,754

2017
254,227

2018
246,523

2019
215,392

2020
189,387

Thereafter
1,002,216

Total
$
2,099,499


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 March 31, 2016 and December 31, 2015, which were included in the accounts payable and other liabilities balance on the consolidated balance sheets, totaled $0.8 million, net of tenant security deposits related to the real estate held for sale, for both periods presented, 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 $1.1 million and $2.2 million, net of tenant receivables related to the real estate held for sale, as of March 31, 2016 and December 31, 2015, 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

19

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

disposal of the contributed asset, for a time period specified in the tax protection agreement. As of March 31, 2016, the Company has not been obligated to any contributor for a tax liability incurred as a result of an asset disposition.
Asset Held for Sale
As of March 31, 2016, 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 March 31, 2016. The One Century Place property is included in continuing operations in the consolidated statements of operations in accordance with 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 March 31, 2016 and December 31, 2015:
 
Balance as of
 March 31, 2016
 
Balance as of
December 31, 2015
Restricted cash
$
561

 
$
561

Real estate:
 
 
 
Land
8,025

 
8,025

Building and improvements
43,924

 
42,858

Tenant origination and absorption costs
20,003

 
20,003

Construction in progress
490

 
22

Total real estate
72,442

 
70,908

Less: accumulated depreciation and amortization
(7,034
)
 
(7,034
)
Total real estate, net
65,408

 
63,874

In-place lease valuation (above market)
813

 
813

Deferred rent
2,928

 
2,716

Other assets
999

 
828

Total assets
$
70,709

 
$
68,792

 
 
 
 
Accounts payable and other liabilities
$
1,117

 
$
2,203

Due to affiliates
83

 
81

Restricted reserves
561

 
561

Total liabilities
$
1,761

 
$
2,845

The following is a summary of the income included in the Company's income from continuing operations for the three months ended March 31, 2016 and 2015, from assets classified as held for sale subsequent to the Company's adoption of ASU No. 2014-08, which includes the Will Partners and One Century Place properties:
 
Three Months Ended
 
March 31,
 
2016
 
2015
Total revenues
$
3,291

 
$
2,883

Operating expenses
(1,259
)
 
(1,597
)
   Total revenues less operating expenses from assets classified
     as "held for sale," not qualifying as discontinued operations
2,032

 
1,286

Depreciation and amortization expense

 
(878
)
   Income from assets classified as "held for sale," not
     qualifying as discontinued operations
$
2,032

 
$
408


20

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

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 as of March 31, 2016 and December 31, 2015. 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.
 
Balance as of
March 31, 2016
 
Balance as of
December 31, 2015
In-place lease valuation (above market)
$
45,413

 
$
45,413

In-place lease valuation (above market) - accumulated amortization
(13,194
)
 
(10,844
)
In-place lease valuation (above market), net
32,219

 
34,569

Ground leasehold interest (below market)
2,254

 
2,254

Ground leasehold interest (below market) - accumulated amortization
(61
)
 
(54
)
Ground leasehold interest (below market), net
2,193

 
2,200

Intangible assets, net
$
34,412

 
$
36,769

In-place lease valuation (below market)
$
(51,966
)
 
$
(55,774
)
In-place lease valuation (below market) - accumulated amortization
15,576

 
14,068

In-place lease valuation (below market), net
$
(36,390
)
 
$
(41,706
)
Tenant origination and absorption cost
$
516,637

 
$
516,879

Tenant origination and absorption cost - accumulated amortization
(137,343
)
 
(119,593
)
Tenant origination and absorption cost, net
$
379,294

 
$
397,286

The intangible assets are amortized over the remaining lease term of each property, which on a weighted-average basis, was approximately 7.6 years and 7.8 years as of March 31, 2016 and December 31, 2015, respectively. The amortization of the intangible assets and other leasing costs for the respective periods is as follows:
 
Amortization (income) expense for the three months ended March 31,
 
2016
 
2015
In-place lease valuation, net
$
842

 
$
(551
)
Tenant origination and absorption cost
$
17,750

 
$
11,387

Ground leasehold amortization (below market)
$
7

 
$
7

Other leasing costs amortization
$
232

 
$
54

The following table sets forth the estimated annual amortization (income) expense for in-place lease valuation, net, tenant origination and absorption costs, ground leasehold improvements, and other leasing costs as of March 31, 2016 for the next five years:
Year
 
In-place lease valuation, net
 
Tenant origination and absorption costs
 
Ground leasehold improvements
 
Other leasing costs
 Remaining 2016
 
$
1,508

 
$
49,924

 
$
21

 
$
643

2017
 
$
870

 
$
60,601

 
$
28

 
$
1,219

2018
 
$
141

 
$
54,171

 
$
28

 
$
1,506

2019
 
$
(1,559
)
 
$
43,950

 
$
28

 
$
1,506

2020
 
$
(797
)
 
$
34,859

 
$
28

 
$
1,481

Restricted Cash

21

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

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: 
Description
Balance as of
December 31, 2015
 
Additions
 
Deductions
 
Balance as of
March 31, 2016
Tenant improvement reserves (1)
$
12,893

 
$
90

 
$
(14
)
 
$
12,969

Midland Mortgage loan repairs reserves (2)
453

 

 

 
453

Real estate tax reserve (Emporia Partners, TW Telecom, DynCorp, and Mercedes-Benz) (3)
1,891

 
647

 
(424
)
 
2,114

Property insurance reserve (Emporia Partners) (3)
301

 
150

 

 
451

Restricted deposits
20

 
25

 

 
45

Midland Mortgage loan restricted lockbox (4)
2,044

 
1,903

 
(2,044
)
 
1,903

Restricted rent receipts (5)
6,585

 
975

 
(6,585
)
 
975

Total
$
24,187

 
$
3,790

 
$
(9,067
)
 
$
18,910

(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 collections from the DynCorp and Mercedes-Benz properties related to March 2016 and April 2016, which are to be held in a designated cash collateral account which is controlled by the lender until the designated payment date, as defined in the respective loan agreements, and the excess cash is transferred to the respective operating accounts.
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 consisted of mortgage debt of $23.6 million and an equity contribution of $16.0 million. The HealthSpring property is leased in its entirety pursuant to a triple-net lease to HealthSpring, Inc. (“HealthSpring”), obligating HealthSpring to all costs and expenses to operate and maintain the property, including certain capital expenditures. On the acquisition date, the remaining term was approximately nine years. On April 12, 2013, the Company, through the Operating Partnership, acquired a 10% beneficial ownership interest in the DST, net of a 10% discount associated with offering expenses. Pursuant to the private placement memorandum, the Operating Partnership was provided exchange rights in which it would be able to acquire additional beneficial interests in the DST at fair value. A notice was sent to investors of the Company's intent to exercise its right to acquire the remaining interest in July 2015. On April 27, 2016, approximately 73% of the beneficial owners of HealthSpring interests elected to exchange their interest in the DST for Operating Partnership units, and the remaining 27% elected to be paid in cash. See Note 12, Subsequent Events.
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 Offerings. The gross acquisition value of the property was $187.5 million, plus closing costs, which was partially financed with debt of $102.0 million. The joint venture was created for purposes of directly or indirectly acquiring, owning, financing, operating and maintaining a data center facility located in Ashburn, Virginia (the "Property"). The Property 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.

22

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

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 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 $(0.6) million, of other comprehensive loss for the three months ended March 31, 2016.
The interests discussed above are deemed to be a variable interest in a VIE, and, based on an evaluation of the variable interest against the criteria for consolidation, the Company determined that it is not the primary beneficiary of the investments, as the Company does not have power to direct the activities of the entity that most significantly affect its performance. As such, the interests in the VIEs are recorded using the equity method of accounting in the accompanying consolidated financial statements. Under the equity method, the investments in the unconsolidated entities are stated at cost and adjusted for the Company’s share of net earnings or losses and reduced by distributions. Equity in earnings of real estate ventures is generally recognized based on the allocation of cash distributions upon liquidation of the investment at book value in accordance with the joint venture agreements.
As of March 31, 2016, the balance of the investments totaled approximately $53.9 million as shown below:
 

HealthSpring DST
 
Digital Realty
Joint Venture
 

Total
Balance December 31, 2015
$
1,291

 
$
55,572

 
$
56,863

Other comprehensive loss

 
(632
)
 
(632
)
Net income (loss)
11

 
(395
)
 
(384
)
Distributions
(26
)
 
(1,894
)
 
(1,920
)
Balance March 31, 2016
$
1,276

 
$
52,651

 
$
53,927

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. On June 20, 2014, 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. The Project was deemed complete during the three months ended March 31, 2016, at which point the Company paid $17.6 million of the $18.1 million mandatory redemption fee to the Managing Member. Upon payment and completion of the Project, the Managing Member transferred all membership interest to the Investor Member, pursuant to the operating agreement. As of March 31, 2016, the Managing Member had no further interest in WR Griffin or any of its assets and had no further obligations.
 

23

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

5.    Debt
As of March 31, 2016 and December 31, 2015, the Company’s debt consisted of the following:
 
March 31, 2016
 
December 31, 2015
 
 
 
 
 
 
 
Principal Amount
 
Deferred Financing Costs
 
Premiums/
(Discounts)
 
Net Balance
 
Principal Amount
 
Deferred Financing Costs
 
Premiums/
(Discounts)
 
Net Balance
 
Contractual
Interest 
Rate (1)
 
Loan
Maturity
 
Effective Interest Rate (2)
Plainfield mortgage loan
$
19,205

 
$

 
$

 
$
19,205

 
$
19,295

 
$

 
$

 
$
19,295

 
6.65%
 
Nov
2017
 
6.74%
Emporia Partners mortgage loan
3,661

 

 

 
3,661

 
3,753

 

 

 
3,753

 
5.88%
 
Sep
2023
 
5.96%
TransDigm mortgage loan
6,395

 

 
9

 
6,404

 
6,432

 

 
22

 
6,454

 
5.98%
 
Jun
2016
 
5.16%
Ace Hardware mortgage loan
23,201

 
(117
)
 
1,465

 
24,549

 
23,294

 
(120
)
 
1,508

 
24,682

 
5.59%
 
Oct
2024
 
4.73%
Highway 94 mortgage loan
18,773

 

 
(1,235
)
 
17,538

 
18,968

 

 
(2,210
)
 
16,758

 
3.75%
 
Aug
2024
 
5.04%
DynCorp mortgage loan
11,083

 

 

 
11,083

 
11,162

 

 

 
11,162

 
4.70%
 
Jul
2016
 
4.77%
Mercedes-Benz mortgage loan
18,835

 

 

 
18,835

 
18,945

 

 

 
18,945

 
6.02%
 
Nov
2016
 
6.10%
Samsonite mortgage loan
24,372

 

 
1,441

 
25,813

 
24,561

 

 
1,490

 
26,051

 
6.08%
 
Sep
2023
 
4.97%
Midland Mortgage loan
105,600

 
(1,000
)
 

 
104,600

 
105,600

 
(1,035
)
 

 
104,565

 
3.94%
 
Apr
2023
 
4.05%
AIG loan
110,640

 
(1,615
)
 

 
109,025

 
110,640

 
(1,647
)
 

 
108,993

 
4.96%
 
Feb
2029
 
5.14%
TW Telecom loan
20,998

 
(116
)
 
 
 
20,882

 
21,213

 
(125
)
 
 
 
21,088

 
LIBO Rate +2.45% (3)
 
Aug
2019
 
3.11%
Mortgage Loan Total
362,763

 
(2,848
)
 
1,680

 
361,595

 
363,863

 
(2,927
)
 
810

 
361,746

 
 
 
 
 
 
Term Loan
(July 2015)
715,000

 
(5,468
)
 

 
709,532

 
640,000

 
(5,078
)
 

 
634,922

 
LIBO Rate +1.40% (3)
 
Jul
2020
 
2.02%
Revolver Loan
(July 2015)
359,509

 
(4,636
)
 

 
354,873

 
481,653

 
(4,894
)
 

 
476,759

 
LIBO Rate +1.45% (3)
 
Jul
2020 (4)
 
2.23%
Total
$
1,437,272

 
$
(12,952
)
 
$
1,680

 
$
1,426,000

 
$
1,485,516

 
$
(12,899
)
 
$
810

 
$
1,473,427

 
 
 
 
 
 
(1)
Including the effect of an interest rate swap agreement with a notional amount of $725.0 million, the weighted average interest rate as of March 31, 2016 was 3.20% for the Company’s fixed-rate and variable-rate debt combined and 3.62% for the Company’s fixed-rate debt only.
(2)
Reflects the effective interest rate as of March 31, 2016 and includes the effect of amortization of discounts/premiums and deferred financing costs.
(3)
The LIBO Rate as of March 31, 2016 was 0.44%.
(4)
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

24

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

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.
On March 29, 2016, the Company exercised its right to increase the total commitments, pursuant to the Unsecured Credit Agreement (July 2015), by entering into the Increase Agreement. As a result, the total commitments on the Term Loan (July 2015) increased from $640.0 million to $715.0 million.
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 as of March 31, 2016.
The following summarizes the future principal repayments of all loans as of March 31, 2016 per the loan terms discussed above:
 
March 31, 2016
 
Remaining 2016
$
38,978

(1) 
2017
22,237

(2) 
2018
7,077

 
2019
25,153

(3) 
2020
1,081,342

(4) 
Thereafter
262,485

(4) 
Total principal
1,437,272

  
Unamortized debt premium
1,680

  
Unamortized deferred loan costs
(12,952
)
 
Total
$
1,426,000

  
(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 approximately $1.7 million.

25

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)


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 or forecasted LIBO Rate-based variable-rate debt, including the Company's Unsecured Credit Facility (July 2015). The first and second interest rate swaps are effective for the periods from July 9, 2015 to July 1, 2020 and January 1, 2016 to July 1, 2018, and have notional amounts of $425.0 million and $300.0 million, respectively. The third, forward-starting interest rate swap is effective for the period from July 1, 2016 to July 1, 2018 with a notional amount of $100.0 million.
On March 24, 2016, the Company executed an interest rate swap agreement to hedge interest risk related to a forecasted fixed-rate debt issuance. The forward-starting interest rate swap with a notional amount of $200.0 million becomes effective May 2016 and has a term of 10 years.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2016, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt and forecasted issuances of debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2016, the Company recognized approximately $2.0 million of loss into earnings under "interest expense."
During the next twelve months, the Company estimates that an additional $9.4 million will be released from accumulated other comprehensive income (loss) into earnings.
The following table sets forth a summary of the interest rate swaps at March 31, 2016 and December 31, 2015:
 
 
 
 
 
 
 
 
Fair Value (1)
 
Current Notional Amount (2)
Derivative Instrument
 
Effective Date
 
Maturity Date
 
Interest Strike Rate
 
March 31,
2016
 
December 31,
2015
 
March 31,
2016
 
December 31,
2015
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Swap
 
7/9/2015
 
7/1/2020
 
1.687%
 
$
(13,129
)
 
$
(4,305
)
 
$
425,000

 
$
425,000

Interest Rate Swap
 
1/1/2016
 
7/1/2018
 
1.320%
 
(4,108
)
 
(1,605
)
 
300,000

 

Interest Rate Swap
 
7/1/2016
 
7/1/2018
 
1.495%
 
(1,496
)
 
(484
)
 

 

Interest Rate Swap
 
5/31/2016
 
5/31/2026
 
1.811%
 
(2,606
)
 

 

 

Total
 
 
 
 
 
 
 
$
(21,339
)
 
$
(6,394
)
 
$
725,000

 
$
425,000

(1)
The Company records all derivative instruments on a gross basis in the consolidated balance sheets, and accordingly, there are no offsetting amounts that
net assets against liabilities. As of March 31, 2016, 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" in the consolidated balance sheets.
(2)
Represents the notional amount of swaps that are effective as of the balance sheet date of March 31, 2016 and 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.

26

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

As of March 31, 2016 and 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 $21.3 million and $6.4 million, respectively. As of March 31, 2016 and 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 three months ended March 31, 2016 and year ended December 31, 2015.
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 March 31, 2016 and 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:
 
 
 
 
March 31, 2016
$
(21,339
)
$

$
(21,339
)
$

December 31, 2015
$
(6,394
)
$

$
(6,394
)
$

Financial Instruments Disclosed at Fair Value
Financial instruments as of March 31, 2016 and 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 March 31, 2016 and December 31, 2015. The fair value of the 10 mortgage loans in the table below is estimated by discounting each loan’s principal balance over the remaining term of the mortgage using current borrowing rates available to the Company for debt instruments with similar terms and maturities. The Company determined that the mortgage debt valuation in its entirety is classified in Level 2 of the fair value hierarchy, as the fair value is based on current pricing for debt with similar terms as the in-place debt.

27

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

 
March 31, 2016
 
December 31, 2015
 
Fair Value
 
Carrying Value (1)
 
Fair Value
 
Carrying Value (1)
Plainfield mortgage loan
$
20,061

 
$
19,205

 
$
20,240

 
$
19,295

Emporia Partners mortgage loan
3,631

 
3,661

 
3,742

 
3,753

TransDigm mortgage loan
6,395

 
6,395

 
6,432

 
6,432

Ace Hardware mortgage loan
23,621

 
23,201

 
23,778

 
23,294

Midland mortgage loan
109,020

 
105,600

 
107,154

 
105,600

AIG loan
117,754

 
110,640

 
114,747

 
110,640

Highway 94 mortgage loan
17,810

 
18,773

 
17,658

 
18,968

DynCorp mortgage loan
11,083

 
11,083

 
11,162

 
11,162

Mercedes-Benz mortgage loan
18,835

 
18,835

 
18,945

 
18,945

Samsonite mortgage loan
26,294

 
24,372

 
26,044

 
24,561

(1)
The carrying value of the TransDigm, Ace Hardware, Highway 94, and Samsonite property mortgage loans does not include the net debt premium of approximately $1.7 million and $0.8 million as of March 31, 2016 and December 31, 2015, respectively. See Note 5, Debt, for details.

8.    Equity
Common Equity
As of March 31, 2016, 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 175,811,683 shares outstanding at March 31, 2016, including shares issued pursuant to the DRP, less shares redeemed pursuant to the share redemption program discussed below.
Distribution Reinvestment Plan (DRP)
The Company has adopted a DRP, which allows stockholders to have distributions otherwise distributable to them invested in additional shares of common stock. No sales commissions or dealer manager fees are 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 March 31, 2016 and December 31, 2015, the Company had issued $123.4 million and $110.2 million in shares of common stock, respectively, 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% 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

28

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

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 March 31, 2016, the Company had redeemed 2,392,183 shares of common stock for approximately $23.7 million at a weighted average price per share of $9.89 pursuant to the SRP. As of March 31, 2016, there were 989,669 shares totaling $9.8 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 initial capitalization of the Operating Partnership, and limited partnership units were issued in conjunction with management's contribution of certain assets, as discussed in Note 1, Organization.
As of March 31, 2016, 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 three months ended March 31, 2016 and year ended December 31, 2015. 
The following summarizes the activity for noncontrolling interests recorded as equity for the three months ended March 31, 2016 and year ended December 31, 2015:
 
Three Months Ended
March 31, 2016
 
Year Ended December 31, 2015
Beginning balance
$
21,318

 
$
17,478

Contribution/issuance of noncontrolling interests

 
7,282

Distributions to noncontrolling interests
(889
)
 
(3,150
)
Allocated distributions to noncontrolling interests subject to redemption
(3
)
 
(10
)
Net income (loss)
406

 
(138
)
Other comprehensive loss
(511
)
 
(144
)
Ending balance
$
20,321

 
$
21,318

Noncontrolling interests subject to redemption

29

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

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.

9.
Related Party Transactions
The following table summarizes the related party costs and fees incurred, paid and due to affiliates as of March 31, 2016 and December 31, 2015:
 
 As of December 31, 2015
 
Three Months Ended March 31, 2016
 
Payable
 
Incurred
 
Paid
 
Payable
Advisor and Property Manager fees
 
 
 
 
 
 
 
Acquisition fees and expenses
$
2,965

 
$
83

(1) 
$
2,965

 
$
83

Operating expenses
2,177

 
265

 
2,177

 
265

Asset management fees
2,124

 
5,653

 
5,801

 
1,976

Property management fees
1,198

 
2,254

 
2,416

 
1,036

Disposition fees 
287

 

 
287

 

Costs advanced by the Advisor
6

 
4

 
6

 
4

Total, net of real estate assets held for sale
8,757

 
8,259

 
13,652

 
3,364

Asset management fees related to real estate held for sale (2)
44

 
136

 
134

 
46

Property management fees related to real estate held for sale (2)
37

 
116

 
116

 
37

Total
$
8,838

 
$
8,511

 
$
13,902

 
$
3,447


(1)
Represents acquisition fees and expense reimbursements related to the Lynnwood III and Lynnwood IV land parcels, as discussed in Note 3, Real Estate, which are included in the basis of the land parcels.
(2)
Represents asset management fees and property management fees for the One Century Place property.
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 Offering. The Advisory Agreement entitles the Advisor to specified fees and incentives upon the provision of certain services with regard to the Public Offerings and investment of funds in real estate properties, among other services, as well as reimbursement for organizational 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.
Management Compensation
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

30

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

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.
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.

31

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

Subordinated Share of Net Sale Proceeds (Advisor) (1)
 
Payable to the Advisor in cash upon the sale of a property after the Company's stockholders receive a return of capital plus a 6% cumulative, non-compounded return. The share of net proceeds from the sale of property is 5% if stockholders are paid a return of capital plus 6% to 8% annual cumulative non-compounding return, 10% if stockholders are paid a return of capital plus 8% to 10% annual cumulative non-compounding return, or 15% if stockholders are paid a return of capital plus 10% or more annual cumulative non-compounding return.
Subordinated Incentive Listing Distribution (Advisor) (1)
 
Payable to the Advisor no earlier than 7 months and no later than 19 months following a listing of the shares on a national securities exchange, based upon the market value of the Company's shares during a period of 30 trading days commencing after the first day of the 6th month, but no later than the last day of the 18th month following a listing, the commencement date of which shall be chosen by the Advisor in its sole discretion, and after the Company's stockholders receive a return of capital plus a 6% cumulative, non-compounded return. The distribution share is 5% if stockholders are paid a return of capital plus 6% to 8% annual cumulative non-compounding return, 10% if stockholders are paid a return of capital plus 8% to 10% annual cumulative non-compounding return, or 15% if stockholders are paid a return of capital plus 10% or more annual cumulative non-compounding return, and is payable in cash, shares of the Company's stock, units of limited partnership interest in the Operating Partnership, or a combination thereof.
Subordinated Distribution Due Upon Termination
(Advisor)

 
Payable to the Advisor (in cash, shares of the Company's stock, units of limited partnership interest in the Operating Partnership, or a combination thereof), 1/3rd within 30 days of the date of involuntary termination of the Advisory Agreement, 1/3rd upon the one year anniversary of such date, and 1/3rd upon the two year anniversary of such date. Calculated based upon appraised value of properties less the fair value of the underlying debt, and plus or minus net current assets or net current liabilities, respectively, and payable after the Company's stockholders receive a return of capital plus a 6% cumulative, non-compounded return. The distribution share is 5% if stockholders are paid a return of capital plus 6% to 8% annual cumulative non-compounding return, 10% if stockholders are paid a return of capital plus 8% to 10% annual cumulative non-compounding return, or 15% if stockholders are paid a return of capital plus 10% or more annual cumulative non-compounding return.
Upon a voluntary termination of the Advisory Agreement, the Advisor will not be entitled to receive the Subordinated Distribution Due Upon Termination but instead will be entitled to receive at the time of the applicable liquidity event a distribution equal to the applicable Subordinated Share of Net Sale Proceeds, Subordinated Incentive Listing Distribution, or Subordinated Distribution Due Upon Extraordinary Transaction.
Subordinated Distribution Due Upon Extraordinary Transaction
(Advisor) (1)

 
Payable to the Advisor upon the closing date of an Extraordinary Transaction (as defined in the Operating Partnership Agreement); payable in cash, shares of the Company's stock, units of limited partnership in the Operating Partnership, or a combination thereof after the Company's stockholders receive a return of capital plus a 6% cumulative, non-compounded return. The distribution share is 5% if stockholders are paid a return of capital plus 6% to 8% annual cumulative non-compounding return, 10% if stockholders are paid a return of capital plus 8% to 10% annual cumulative non-compounding return, or 15% if stockholders are paid a return of capital plus 10% or more annual cumulative non-compounding return.
Sponsor Break-Even Amount
(Sponsor)

 
In the event of a merger of the Advisor into the Company or one of its affiliates in anticipation of listing or a merger with an already-listed entity, any merger consideration paid to the Company's sponsor or its affiliates in excess of unreturned and unreimbursed capital invested by the Company's sponsor and its affiliates into the Company, the Advisor, the Company's dealer manager, or affiliates, relating in any way to the business organization of the Company, the Operating Partnership, or any offering of the Company, shall be subordinated to the return of stockholders' invested capital. Such excess merger consideration shall be paid in stock that may not be traded for one year from the date of receipt, and such stock shall be held in escrow pending the occurrence of certain conditions outlined further in the Operating Partnership Agreement.

(1)
The Advisor cannot earn more than one incentive distribution. Any receipt by the Advisor of subordinated share of net sale proceeds (for anything other than a sale of the entire portfolio) will reduce the amount of the subordinated distribution due upon termination, the subordinated incentive listing distribution and the subordinated distribution due upon extraordinary transaction.
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

32

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

programs affiliated with the Sponsor, including Griffin Capital Essential Asset REIT II, Inc. ("GCEAR II"), Griffin-American Healthcare REIT III, Inc. ("GAHR III"), and Griffin-American Healthcare REIT IV, Inc. ("GAHR IV") which became effective on March 24, 2016, each of which are publicly-registered, non-traded real estate investment trusts, 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.
In the event all acquisition allocation factors have been exhausted and an investment opportunity remains equally suitable for the Company and GCEAR II, the Sponsor will offer the investment opportunity to the REIT that has had the longest period of time elapse since it was offered an investment opportunity.
If the Sponsor no longer sponsors the Company, then, in the event that an investment opportunity becomes available that is suitable, under all of the factors considered by the Advisor, for both GCEAR II and one or more other entities affiliated with the Sponsor, the Sponsor has agreed to present such investment opportunities to GCEAR II first, prior to presenting such opportunities to any other programs sponsored by or affiliated with the Sponsor. In determining whether or not an investment opportunity is suitable for more than one program, the Advisor, subject to approval by the board of directors, shall examine, among others, the following factors:
anticipated cash flow of the property to be acquired and the cash requirements of each program;
effect of the acquisition on diversification of each program’s investments;
policy of each program relating to leverage of properties;
income tax effects of the purchase to each program;
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.


33

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

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 $0.1 million for the three months ended March 31, 2016 and 2015, related to the ground lease. As of March 31, 2016, the remaining required payments under the terms of the ground lease are as follows:
 
March 31, 2016
Remaining 2016
$
135

2017
198

2018
198

2019
198

2020
198

Thereafter
34,048

Total
$
34,975

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 March 31, 2016, the Company paid 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 were paid on a monthly basis, on or about the first day of the month, for the month then-ended.
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.

12.    Subsequent Events
Offering Status
As of May 9, 2016, the Company had issued approximately 10,259,130 shares of the Company’s common stock pursuant to the DRP Offerings for approximately $104.7 million.
Acquisition of HealthSpring, DST
On April 27, 2016, the Company, through the Operating Partnership, acquired the remaining 90% beneficial ownership interest in the HealthSpring property for $41.3 million. Approximately 73% of the beneficial owners of HealthSpring interests elected to exchange their interest in the DST for Operating Partnership units, and the remaining 27% elected to be paid in cash. The HealthSpring property is a two-building, single-story office campus located in Nashville, Tennessee. The HealthSpring property is leased in its entirety, pursuant to a triple-net lease terminating on May 14, 2022, to HealthSpring, Inc.

34


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the Company’s consolidated financial statements and the notes thereto contained in Part I of this Quarterly Report on Form 10-Q, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations, Consolidated Financial Statements, and the notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. See also “Cautionary Note Regarding Forward Looking Statements” preceding Part I. As used herein, “we,” “us,” and “our” refer to Griffin Capital Essential Asset REIT, Inc.
Overview
We are a public, non-traded REIT that invests primarily in business essential properties significantly occupied by a single tenant, diversified by corporate credit, physical geography, product type and lease duration. As described in more detail in Item 1 of this report, we were formed on August 28, 2008 and commenced operations on May 6, 2009. We have no employees and are externally advised and managed by an affiliate, Griffin Capital Essential Asset Advisor, LLC, our Advisor.
On August 28, 2008, our Advisor purchased 100 shares of common stock for $1,000 and became our initial stockholder. From 2009 to 2014, we offered shares of common stock, pursuant to a private placement offering to accredited investors (the "Private Offering") and two public offerings, consisting of an initial public offering and a follow-on offering (together, the "Public Offerings"), which included shares for sale, pursuant to the distribution reinvestment plan ("DRP"). We issued 126,592,885 total shares of our common stock for gross proceeds of approximately $1.3 billion, pursuant to the Private Offering and Public Offerings.
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 the DRP Offerings, we had issued 9,845,346 shares of our common stock for gross proceeds of approximately $100.4 million through March 31, 2016. The 2015 DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders.
    




35

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

Revenue Concentration
No lessee or property, based on annualized net rent for the 12-month period subsequent to March 31, 2016, pursuant to the respective in-place leases, was greater than 6% as of March 31, 2016.
The percentage of annualized net rent for the 12-month period subsequent to March 31, 2016, 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
 
$
35,768

 
7

 
15.4
%
Texas
 
32,341

 
10

 
13.9
%
Ohio
 
21,311

 
8

 
9.2
%
Illinois
 
20,983

 
8

 
9.0
%
Georgia
 
20,179

 
4

 
8.7
%
Colorado
 
18,416

 
6

 
7.9
%
Arizona
 
11,909

 
4

 
5.1
%
All others (1)
 
71,596

 
27

 
30.8
%
Total
 
$
232,503

 
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 March 31, 2016, by industry, based on the respective in-place leases, is as follows (dollars in thousands): 
Industry (1)
 
Annualized
Net Rent
(unaudited)
 
Number of
Lessees
 
Percentage of
Annualized
Net Rent
Manufacturing
 
$
62,045

 
25

 
26.7
%
Finance & Insurance
 
53,687

 
26

 
23.1
%
Information (2)
 
46,093

 
11

 
19.8
%
Professional, Scientific and Technical Services (3)
 
26,614

 
8

 
11.4
%
Retail Trade
 
12,723

 
5

 
5.5
%
All others (4)
 
31,341

 
18

 
13.5
%
Total
 
$
232,503

 
93

 
100.0
%
(1)     Industry classification based on the 2012 North American Industry Classification System.
(2)     Includes Telecommunications.
(3)     Includes, but is not limited to: Scientific Research and Development Services; Architectural, Engineering, and Related Services; and Legal Services.
(4)     All others account for less than 4% of total annualized net rent on an individual basis.

36

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)


The tenant lease expirations by year based on annualized net rent for the 12-month period subsequent to March 31, 2016 are as follows (dollars in thousands):
Year of Lease Expiration
 
Annualized
Net Rent
 
Number of
Lessees
 
Approx. Square Feet
 
Percentage of
Annualized
Net Rent
2016
 
$
484

 
1

 
69,800

 
0.2
%
2017
 
9,680

 
6

 
560,900

 
4.2
%
2018
 
24,187

 
11

 
2,523,100

 
10.4
%
2019
 
27,329

 
9

 
1,556,900

 
11.7
%
2020
 
19,631

 
10

 
1,668,000

 
8.4
%
2021
 
11,300

 
7

 
1,106,500

 
4.9
%
2022
 
15,969

 
9

 
1,315,300

 
6.9
%
2023
 
17,993

 
7

 
1,278,200

 
7.7
%
Thereafter
 
105,930

 
33

 
8,553,200

 
45.6
%
Total
 
$
232,503

 
93

 
18,631,900

 
100.0
%


37

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

Acquisition Indebtedness
For a discussion of our acquisition indebtedness, see Note 3, Real Estate, and Note 5, Debt, to the consolidated financial statements.
Significant Accounting Policies and Estimates
We have established accounting policies which conform to generally accepted accounting principles (“GAAP”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”). The preparation of our consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different estimates would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may use different estimates and assumptions that may impact the comparability of our financial condition and results of operations to those companies.
We believe the accounting policies listed below are the most critical in the preparation of our consolidated financial statements. These policies are described in greater detail in Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to the consolidated financial statements:
Real Estate - Valuation and Purchase Price Allocation;
Impairment of Real Estate and Related Intangible Assets and Liabilities; and
Revenue Recognition.
Recently Issued Accounting Pronouncements
See Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to the consolidated financial statements.
Results of Operations
We are not aware of any material trends or uncertainties, other than national economic conditions affecting real estate in general, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition, management and operations of properties other than those listed in Part I, Item 1A. Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2015.
Same Store Analysis
Comparison of the Three Months Ended March 31, 2016 and 2015
For the quarter ended March 31, 2016, our "Same Store" portfolio consisted of 53 properties, encompassing approximately 11.6 million square feet and an acquisition value of $1.8 billion. Our "Same Store" portfolio includes properties which were held for a full period for the periods presented. The following table provides a comparative summary of the results of operations for the 53 properties for the three months ended March 31, 2016 and 2015 (dollars in thousands):
 
Three Months Ended March 31,
 
Increase/(Decrease)
 
Percentage
Change
 
2016
 
2015
 
Rental income
$
42,154

 
$
42,499

 
$
(345
)
 
1
%
Property expense recoveries
11,989

 
10,195

 
1,794

 
18
%
Asset management fees to affiliates
3,328

 
3,302

 
26

 
1
%
Property management fees to affiliates
1,448

 
1,428

 
20

 
1
%
Property operating expense
6,517

 
6,460

 
57

 
1
%
Property tax expense
7,636

 
6,470

 
1,166

 
18
%
Property Expense Recoveries
The increase in property expense recoveries is primarily due to an increase of property tax expenses.

Property Tax Expense

38

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

The increase in property tax expense of approximately $1.2 million is primarily related to a reassessment of value at one property, which increased our tax bill in the current year.
Portfolio Analysis
As of March 31, 2016, we owned 74 properties encompassing approximately 18.6 million rentable square feet and an 80% interest in an unconsolidated joint venture. As of March 31, 2016, we have completed the offering stage of our life cycle, and continue to acquire assets that adhere to our investment criteria with draws from our Unsecured Credit Facility (July 2015) and funds from operations. Therefore, our results of operations for our entire portfolio for the three months ended March 31, 2016 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 Three Months Ended March 31, 2016 and 2015
The following table provides summary information about our results of operations for the three months ended March 31, 2016 and 2015 (dollars in thousands):
 
Three Months Ended March 31,
 
Increase/(Decrease)
 
Percentage
Change
 
2016
 
2015
 
Rental income
$
66,850

 
$
44,715

 
$
22,135

 
50
%
Property expense recoveries
18,952

 
10,498

 
8,454

 
81
%
Asset management fees to affiliates
5,789

 
3,787

 
2,002

 
53
%
Property management fees to affiliates
2,370

 
1,474

 
896

 
61
%
Property operating expense
10,939

 
6,899

 
4,040

 
59
%
Property tax expense
11,126

 
6,878

 
4,248

 
62
%
Acquisition fees and expenses to non-affiliates
110

 
402

 
(292
)
 
73
%
Acquisition fees and expenses to affiliates

 
1,980

 
(1,980
)
 
100
%
General and administrative expenses
1,289

 
1,126

 
163

 
14
%
Depreciation and amortization
31,206

 
19,465

 
11,741

 
60
%
Interest expense
12,029

 
5,428

 
6,601

 
122
%
Rental Income
Rental income for the three months ended March 31, 2016 is comprised of base rent of $62.8 million and adjustments to straight-line contractual rent of $4.9 million, offset by in-place lease valuation amortization, net, of $0.8 million. Rental income for the three months ended March 31, 2016 increased by $22.1 million compared to the same period a year ago primarily as a result of (1) approximately $24.3 million of additional rental income related to the real estate acquired in the prior year, which includes a full quarter of activity for the three months ended March 31, 2016; less (2) $1.4 million of decreased rental income due to the sale of two properties in the prior year.
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 approximately $8.5 million compared to the same period in the prior year primarily as a result of (1) $3.4 million in property tax recoveries due to increases in property tax expense, of which $1.6 million is related to taxes for properties acquired in the prior year, subsequent to March 31, 2015; and (2) $5.0 million in other recoverable property operating expense consisting of (A) $5.1 million for the properties acquired in the prior year, which includes a full quarter of activity for the three months ended March 31, 2016; and (B) $0.3 million related to an increase in common area recoveries for properties acquired prior to 2015; offset by (C) approximately $0.6 million in net over collections, which resulted from tenant reimbursement reconciliations, compared to the prior year.
Management Fees (Asset and Property)
Asset management and property management fees include expenses to manage and monitor the performance of our investments. The total increase of $2.9 million compared to the same period a year ago is primarily a result of $3.0 million of additional fees related to the real estate acquired in the prior year, which includes a full quarter of activity for the three months ended March 31, 2016, offset by $0.2 million of decreased fees due to the sale of three properties in the prior year.
Property Operating Expense

39

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

Property operating expenses include insurance, repairs and maintenance, security, janitorial, landscaping, and other administrative expenses incurred to operate our properties. The total increase of $4.0 million compared to the same period a year ago is primarily a result of $4.2 million in additional property operating expenses related to the properties acquired in the prior year, which includes a full quarter of activity for the three months ended March 31, 2016, offset by $0.2 million of decreased operating expenses due to the sale of three properties in the prior year.
Property Tax Expense
The total increase of $4.2 million compared to the same period a year ago is primarily a result of (1) $3.5 million in additional property tax expense related to real estate acquired in the prior year, which includes a full period of activity for the three months ended March 31, 2016; and (2) a $1.1 million increase related to property tax reassessments; offset by (3) a $0.4 million decrease related to the three properties sold in the prior year.
Acquisition Fees and Expenses
Real estate acquisition fees and expenses to non-affiliates and affiliates, which totaled $0.1 million for the three months ended March 31, 2016, decreased by $2.3 million compared to the three months ended March 31, 2015 due to decreased acquisition activity in the current period.
Depreciation and Amortization Expense
Depreciation and amortization expense for the three months ended March 31, 2016 consisted of depreciation of building and building improvements of our properties of $13.2 million and amortization of the contributed and acquired values allocated to tenant origination and absorption costs of $18.0 million. The increase of $11.7 million as compared to the three months ended March 31, 2015, is primarily the result of additional depreciation and amortization of (1) $11.6 million related to the acquisitions made during the year ended December 31, 2015, which includes a full period of activity for the three months ended March 31, 2016; and (2) $1.8 million in additional amortization of absorption costs as a result of an early lease termination; less (3) $1.7 million in decreased depreciation and amortization related to two properties sold, one lease expiration, and two lease terminations in prior year.
Interest Expense
Interest expense for the three months ended March 31, 2016 increased by $6.6 million compared to the same period in 2015 primarily due to (1) a $3.8 million increase in interest expense related to our credit facility; (2) $2.0 million in interest expense related to our interest rate swaps; and (3) a $0.5 million increase related to our mortgage debt.
Funds from Operations and Modified Funds from Operations to Common Stockholders
Our management believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient. Additionally, publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start-up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases.
In order to provide a more complete understanding of the operating performance of a REIT, the National Association of Real Estate Investment Trusts (“NAREIT”) promulgated a measure known as funds from operations (“FFO”). FFO is defined as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, adding back asset impairment write-downs, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships, joint ventures and preferred distributions. Because FFO calculations exclude such items as depreciation and amortization of real estate assets and gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. It should be noted, however, that other REITs may not define FFO in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently than we do, making comparisons less meaningful.

40

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

The Investment Program Association (“IPA”) issued Practice Guideline 2010-01 (the “IPA MFFO Guideline”) on November 2, 2010, which extended financial measures to include modified funds from operations (“MFFO”). In computing MFFO, FFO is adjusted for certain non-operating cash items such as acquisition fees and expenses and certain non-cash items such as straight-line rent, amortization of in-place lease valuations, amortization of discounts and premiums on debt investments, nonrecurring impairments of real estate-related investments, mark-to-market adjustments included in net income (loss), and nonrecurring gains or losses included in net income (loss) from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Management is responsible for managing interest rate, hedge and foreign exchange risk. To achieve our objectives, we may borrow at fixed rates or variable rates. In order to mitigate our interest rate risk on certain financial instruments, if any, we may enter into interest rate cap agreements or other hedge instruments and in order to mitigate our risk to foreign currency exposure, if any, we may enter into foreign currency hedges. We view fair value adjustments of derivatives, impairment charges and gains and losses from dispositions of assets as non-recurring items or items which are unrealized and may not ultimately be realized, and which are not reflective of on-going operations and are therefore typically adjusted for when assessing operating performance. Additionally, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations, assessments regarding general market conditions, and the specific performance of properties owned, which can change over time. No less frequently than annually, we evaluate events and changes in circumstances that could indicate that the carrying amounts of real estate and related intangible assets may not be recoverable. When indicators of potential impairment are present, we assess whether the carrying value of the assets will be recovered through the future undiscounted operating cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) expected from the use of the assets and the eventual disposition. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of MFFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges through operational net revenues or cash flows prior to any liquidity event.
We adopted the IPA MFFO Guideline as management believes that MFFO is a beneficial indicator of our on-going portfolio performance and ability to sustain our current distribution level. More specifically, MFFO isolates the financial results of the REIT’s operations. MFFO, however, is not considered an appropriate measure of historical earnings as it excludes certain significant costs that are otherwise included in reported earnings. Further, since the measure is based on historical financial information, MFFO for the period presented may not be indicative of future results or our future ability to pay our dividends. By providing FFO and MFFO, we present information that assists investors in aligning their analysis with management’s analysis of long-term operating activities. MFFO also allows for a comparison of the performance of our portfolio with other REITs that are not currently engaging in acquisitions, as well as a comparison of our performance with that of other non-traded REITs, as MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes. As explained below, management’s evaluation of our operating performance excludes items considered in the calculation of MFFO based on the following economic considerations:
Straight-line rent. Most of our leases provide for periodic minimum rent payment increases throughout the term of the lease. In accordance with GAAP, these periodic minimum rent payment increases during the term of a lease are recorded to rental revenue on a straight-line basis in order to reconcile the difference between accrual and cash basis accounting. As straight-line rent is a GAAP non-cash adjustment and is included in historical earnings, FFO is adjusted for the effect of straight-line rent to arrive at MFFO as a means of determining operating results of our portfolio.
Amortization of in-place lease valuation. Acquired in-place leases are valued as above-market or below-market as of the date of acquisition based on the present value of the difference between (a) the contractual amounts to be paid pursuant to the in-place leases and (b) management's estimate of fair market lease rates for the corresponding in-place leases over a period equal to the remaining non-cancelable term of the lease for above-market leases. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities and amortized as an adjustment to rental income over the remaining terms of the respective leases. As this item is a non-cash adjustment and is included in historical earnings, FFO is adjusted for the effect of the amortization of in-place lease valuation to arrive at MFFO as a means of determining operating results of our portfolio.
Acquisition-related costs. We were organized primarily with the purpose of acquiring or investing in income-producing real property in order to generate operational income and cash flow that will allow us to provide regular cash distributions to our stockholders. In the process, we incur non-reimbursable affiliated and non-affiliated

41

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

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.
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.

42

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

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.
Our calculation of FFO and MFFO is presented in the following table for the three months ended March 31, 2016 and 2015 (in thousands):
 
Three Months Ended March 31,
 
2016
 
2015
Net income
$
12,386

 
$
11,101

Adjustments:
 
 
 
Depreciation of building and improvements
13,217

 
8,017

Amortization of leasing costs and intangibles
17,982

 
11,441

Equity interest of depreciation of building and improvements - unconsolidated entities
629

 
613

Equity interest of amortization of intangible assets - unconsolidated entities
1,199

 
1,200

Gain from sale of depreciable operating property

 
(3,613
)
FFO
$
45,413

 
$
28,759

Distributions to redeemable preferred unit holders

 
(4,687
)
Distributions to noncontrolling interests
(981
)
 
(849
)
FFO, adjusted for redeemable preferred and noncontrolling interest distributions
$
44,432

 
$
23,223

Reconciliation of FFO to MFFO:
 
 
 
Adjusted FFO
$
44,432

 
$
23,223

Adjustments:
 
 
 
Acquisition fees and expenses to non-affiliates
110

 
402

Acquisition fees and expenses to affiliates

 
1,980

Revenues in excess of cash received (straight-line rents)
(4,884
)
 
(3,185
)
Amortization of above/(below) market rent
842

 
(551
)
Amortization of ground leasehold interests (below market)
7

 
7

Revenues in excess of cash received (financed termination fee)
(202
)
 

Financed termination fee payments received
274

 
260

Equity interest of revenues in excess of cash received (straight-line rents) - unconsolidated entities
(244
)
 
(346
)
Equity interest of amortization of above/(below) market rent - unconsolidated entities
750

 
750

MFFO
$
41,085

 
$
22,540



43


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. Generally, cash needs for items, other than property acquisitions, will be met from operations and 2015 DRP offering. 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 (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 LIBOR plus the applicable LIBOR margin or Base Rate plus the applicable Base Rate margin, both as provided in the Unsecured Credit Agreement (July 2015). The applicable LIBOR 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 LIBOR 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.
On March 29, 2016, the Company exercised its right to increase the total commitments, pursuant to the Unsecured Credit Agreement (July 2015), by entering into the Increase Agreement. As a result, the total commitments on the Term Loan (July 2015) increased from $640.0 million to $715.0 million.
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, income from operations.
Contractual Commitments and Contingencies
The following is a summary of our contractual obligations as of March 31, 2016 (in thousands):

44


 
Payments Due During the Years Ending December 31,
 
 
Total
 
2016
 
2017-2018
 
2019-2020
 
Thereafter
 
Outstanding debt obligations (1)
$
1,437,272

 
$
38,978

(4) 
$
29,314

(5) 
$
1,106,495

(6) 
$
262,485

(7) 
Interest on outstanding debt obligations (2)
214,253

  
27,768

 
68,840

 
60,637

 
57,008

 
Interest rate swaps (3)
59,877

 
8,163

 
22,282

 
14,107

 
15,325

 
Ground lease obligations
34,975

 
135

 
396

 
396

 
34,048

 
Total
$
1,746,377

  
$
75,044

 
$
120,832

 
$
1,181,635

 
$
368,866

 
(1)
Amounts only include principal payments. The payments on our mortgage debt do not include the premium or debt financing costs.
(2)
Projected interest payments are based on the outstanding principal amounts at March 31, 2016. Projected interest payments on the Revolver Loan (July 2015) and Term Loan (July 2015) are based on the contractual interest rate in effect at March 31, 2016.
(3)
The interest rate swaps contractual commitment was calculated based on the swap rate less the LIBOR.
(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 remaining proceeds raised in our 2015 DRP Offering, operating cash flows generated from our properties, and draws from our credit facility. 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 increased by approximately $9.2 million during the three months ended March 31, 2016 and were primarily used in or provided by the following:
Operating Activities. Cash flows provided by operating activities are primarily dependent on the occupancy level, the rental rates of our leases, the collectability of rent and recovery of operating expenses from our tenants, and the timing of acquisitions. During the three months ended March 31, 2016, we generated $31.7 million compared to $18.5 million for the three months ended March 31, 2015. Net cash provided by operating activities before changes in operating assets and liabilities for the three months ended March 31, 2016 increased by approximately $15.2 million to $39.3 million compared to $24.1 million for the three months ended March 31, 2015. The increase is primarily related to the acquisition of 21 properties subsequent to January 1, 2015, partially offset by the sale of three non-strategic properties over the same period.
Investing Activities. During the three months ended March 31, 2016, we generated $68.3 million in cash for investing activities compared to $61.3 million used during the same period in 2015. The $129.6 million increase in cash provided in investing activities is primarily related to the following:
$63.2 million decrease in cash paid for property acquisitions;
$36.9 million related to the release of proceeds that were held by a third party intermediary from the sale of two properties upon the completion of the tax-deferred real estate exchange, as permitted by Section 1031 of the Internal Revenue Code;
$25.7 million repayment of a mortgage loan receivable from an affiliated party;
$14.7 million decrease in payments for construction-in-progress and tenant improvements, mainly related to the Restoration Hardware project; offset by
$11.8 million decrease in proceeds related to the sale of one property during the three months ended March 31, 2015 for which there were none in the current period.
Financing Activities. During the three months ended March 31, 2016, we used $90.9 million in financing activities compared to $33.4 million generated during the same period in 2015, a decrease in cash provided by financing activities of $124.3 million which is comprised primarily of the following:
$139.3 million increase in principal repayments on the KeyBank Revolver Loan (July 2015);

45


$50.0 million decrease in proceeds from borrowings on the prior year unsecured revolver;
$17.6 million increase in payments made to purchase the noncontrolling interest related to the Restoration Hardware project;
$5.1 million increase in repurchases of common stock;
$7.9 million increase in distribution payments to common stockholders and noncontrolling interests due to an increase in shares issued; offset by
$92.2 million in proceeds from borrowings on the Unsecured Credit Facility (July 2015); and
$4.7 million decrease in distributions paid on preferred units as a result of the full redemption 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;
our ability to keep our properties occupied;
our ability to maintain or increase rental rates;
tenant improvements, capital expenditures and reserves for such expenditures;
the issuance of additional shares; and
financings and refinancings.
Distributions may be funded with operating cash flow, offering proceeds raised in our Offerings, or a combination thereof. Through March 31, 2016, we funded 91% of our cash distributions from cash flow provided by operating activities and 9% 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 paid during the three months ended March 31, 2016 (dollars in thousands, except share data):
 
 
 
 
 
 
Distributions Paid (1)
 
 
Period
 
Distributions Declared (2) (4)
 
Distributions Declared Per Common Share (2)(3)
 
Cash
 
Reinvested
 
Total
 
Cash Flow from Operating Activities
First Quarter 2016
 
$
31,219

 
$
0.17

 
$
18,021

 
$
13,162

 
$
31,183

 
31,737

(1)
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.
(2)
Distributions for the period from January 1, 2016 through March 31, 2016 were based on daily record dates and were calculated at a rate of$0.001895902 per share per day.
(3)
Assumes shares were issued and outstanding each day during the period presented.
(4)
Includes distributions declared/paid to noncontrolling interests.
For the three months ended March 31, 2016, we paid and declared distributions of approximately $30.2 million to common stockholders including shares issued pursuant to the DRP and approximately $1.0 million to the limited partners of our Operating Partnership, as compared to FFO, adjusted for noncontrolling interest distributions and MFFO for the three months ended March 31, 2016 of $44.4 million and approximately $41.1 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 March 31, 2016, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.
Subsequent Events

46


See Note 12, Subsequent Events, to the consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risks include risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market-sensitive instruments. We expect that the primary market risk to which we will be exposed is interest rate risk, including the risk of changes in the underlying rates on our variable rate debt.
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 effect of a 1% increase in interest rates, assuming a LIBO Rate floor of 0%, on our variable-rate debt, including our unsecured credit facility and our mortgage loan, after considering the effect of our interest rate swap agreements would decrease our future earnings and cash flows by approximately $3.8 million annually.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, management, with the participation of our principal executive and principal financial officers, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Securities and Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the first quarter of 2016, there were no sales of unregistered securities.


47

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
(a)
During the quarter ended March 31, 2016, there was no information required to be disclosed in a report on Form 8-K which was not disclosed in a report on Form 8-K.
(b)
During the quarter ended March 31, 2016, there were no material changes to the procedures by which security holders may recommend nominees to our board of directors.
ITEM 6. EXHIBITS
The exhibits required to be filed with this report are set forth on the Exhibit Index hereto and incorporated by reference herein.
EXHIBIT INDEX
The following exhibits are included in this Quarterly Report on Form 10-Q for the period ended March 31, 2016 (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
 
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*
 
Increase Agreement between Griffin Capital Essential Asset Operating Partnership, L.P., KeyBank, Bank of America, Fifth Third Bank, Suntrust Bank, and BMO Harris Bank
31.1*
  
Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
  
Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
  
Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
  
Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002
101*
  
The following Griffin Capital Essential Asset REIT, Inc. financial information for the period ended March 31, 2016 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Comprehensive loss (unaudited), (iii) Consolidated Statements of Equity (unaudited), (iv) Consolidated Statements of Cash Flows (unaudited) and (v) Notes to Consolidated Financial Statements (unaudited).

*
Filed herewith.

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited; dollars in thousands unless otherwise noted)

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

Dated:
May 13, 2016
By:
 
/s/ Joseph E. Miller
 
 
 
 
Joseph E. Miller
 
 
 
 
On behalf of the Registrant and as Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

49