Griffin Capital Essential Asset REIT, Inc. - FORM 10-Q - August 8, 2014

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

FORM 10-Q
____________________________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
¨
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 Grand Ave
El Segundo, California 90245
(Address of principal executive offices)
(310) 469-6100
(Registrant’s telephone number)

2121 Rosecrans Avenue, Suite 3321
El Segundo, California 90245
(Former name, former address and former fiscal year, if changed since last report)
__________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large accelerated filer
 
¨
 
Accelerated filer
 
¨
Non-accelerated filer
 
x  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x


Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 8, 2014: 127,667,650 $0.001 par value per share.


FORM 10-Q
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
TABLE OF CONTENTS
 
 
Page No.
 
 
Item 1.
Financial Statements:
 
 
Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013
 
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)
 
Consolidated Statements of Equity for the Year Ended December 31, 2013 and the Six Months Ended June 30, 2014 (unaudited)
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013 (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, 2013 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
 
 
June 30,
2014
 
December 31,
2013
 
(unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
247,069,697

 
$
10,407,283

Restricted cash
44,985,591

 
25,460,996

Real estate:
 
 
 
Land
241,091,684

 
145,922,555

Building and improvements
1,162,087,914

 
790,383,837

Tenant origination and absorption cost
365,895,346

 
246,516,745

Total real estate
1,769,074,944

 
1,182,823,137

Less: accumulated depreciation and amortization
(75,138,884
)
 
(43,088,577
)
Total real estate, net
1,693,936,060

 
1,139,734,560

Investment in unconsolidated entity
1,389,193

 
1,421,443

Intangible assets, net
26,261,995

 
16,710,157

Deferred rent
11,450,496

 
6,384,431

Deferred financing costs, net
12,756,625

 
8,955,188

Real estate acquisition deposits
—

 
4,100,000

Other assets, net
11,204,954

 
12,222,400

Total assets
$
2,049,054,611

 
$
1,225,396,458

LIABILITIES AND EQUITY
 
 
 
Debt:
 
 
 
Mortgages payable, plus unamortized premium of $2,011,794 and $313,583, respectively
$
305,266,632

 
$
169,847,544

KeyBank Credit Facility
—

 
44,499,848

KeyBank Term Loan
—

 
282,000,000

Unsecured Term Loan
300,000,000

 
—

Total debt
605,266,632

 
496,347,392

Restricted reserves
41,056,316

 
20,742,364

Accounts payable and other liabilities
21,711,084

 
16,536,360

Distributions payable
4,860,425

 
3,150,309

Due to affiliates
1,827,920

 
3,139,383

Below market leases, net
36,811,449

 
23,551,458

Total liabilities
711,533,826

 
563,467,266

Commitments and contingencies (Note 8)

 

Preferred units subject to redemption, 24,319,066 units eligible towards redemption as of June 30, 2014 and December 31, 2013
250,000,000

 
250,000,000

Noncontrolling interests subject to redemption, 531,000 units eligible towards redemption as of June 30, 2014 and December 31, 2013
12,542,737

 
4,886,686

Common stock subject to redemption
30,741,619

 
12,469,155

Stockholders’ equity:
 
 
 
Preferred Stock, $0.001 par value; 200,000,000 shares authorized; no shares outstanding, as of June 30, 2014 and December 31, 2013
—

 
—

Common Stock, $0.001 par value; 700,000,000 shares authorized; 127,295,023 and 49,893,502 shares outstanding as of June 30, 2014 and December 31, 2013, respectively
1,302,100

 
507,502

Additional paid-in capital
1,130,234,036

 
433,644,356

Cumulative distributions
(59,549,092
)
 
(26,683,182
)
Accumulated deficit
(46,928,839
)
 
(32,631,271
)
Total stockholders’ equity
1,025,058,205

 
374,837,405

Noncontrolling interests
19,178,224

 
19,735,946

Total equity
1,044,236,429

 
394,573,351

Total liabilities and equity
$
2,049,054,611

 
$
1,225,396,458

See accompanying notes.

5

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Revenue:
 
 
 
 
 
 
 
Rental income
$
38,149,346

 
$
9,865,904

 
$
77,618,011

 
$
18,045,149

Property expense recoveries
9,135,488

 
2,452,744

 
17,659,028

 
4,120,059

Total revenue
47,284,834

 
12,318,648

 
95,277,039

 
22,165,208

Expenses:
 
 
 
 
 
 
 
Asset management fees to affiliates
2,940,449

 
825,577

 
5,462,504

 
1,492,077

Property management fees to affiliates
1,328,129

 
358,686

 
2,539,882

 
624,863

Property operating expense
6,916,196

 
1,121,643

 
13,784,145

 
1,888,850

Property tax expense
5,781,737

 
1,220,930

 
11,006,250

 
2,190,985

Acquisition fees and expenses to non-affiliates
2,171,266

 
609,218

 
2,885,962

 
864,997

Acquisition fees and expenses to affiliates
10,180,050

 
5,247,003

 
16,914,855

 
6,417,003

General and administrative expenses
1,978,826

 
784,822

 
3,194,374

 
1,373,790

Depreciation and amortization
16,885,109

 
4,417,791

 
32,086,416

 
7,964,002

Total expenses
48,181,762

 
14,585,670

 
87,874,388

 
22,816,567

Income (loss) from operations
(896,928
)
 
(2,267,022
)
 
7,402,651

 
(651,359
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(7,291,805
)
 
(3,140,998
)
 
(12,864,292
)
 
(5,849,792
)
Interest income
192,445

 
359

 
192,751

 
533

Gain on investment in unconsolidated entity
—

 
160,000

 
—

 
160,000

Gain (loss) from investment in unconsolidated entity
6,372

 
(21,419
)
 
19,765

 
(21,419
)
Net loss
(7,989,916
)
 
(5,269,080
)
 
(5,249,125
)
 
(6,362,037
)
Distributions to redeemable preferred unit holders
(4,739,583
)
 
—

 
(9,427,083
)
 
—

Less: Net loss attributable to noncontrolling interests
440,441

 
832,515

 
553,544

 
1,027,826

Net loss attributable to controlling interest
(12,289,058
)
 
(4,436,565
)
 
(14,122,664
)
 
(5,334,211
)
Distributions to redeemable noncontrolling interests attributable to common stockholders
(88,720
)
 
(77,383
)
 
(174,904
)
 
(151,192
)
Net loss attributable to common stockholders
$
(12,377,778
)
 
$
(4,513,948
)
 
$
(14,297,568
)
 
$
(5,485,403
)
Net loss attributable to common stockholders per share, basic and diluted
$
(0.10
)
 
$
(0.23
)
 
$
(0.15
)
 
$
(0.31
)
Weighted average number of common shares outstanding, basic and diluted
122,833,322

 
19,954,131

 
96,130,980

 
17,918,600

See accompanying notes.

6

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF EQUITY
 
Common Stock
 
Additional
Paid-In
Capital
 
Cumulative
Distributions
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Non-
controlling
Interests
 
Total
Equity
 
Shares
 
Amount
 
BALANCE December 31, 2012
13,376,868

 
$
133,565

 
$
112,794,444

 
$
(9,192,318
)
 
$
(7,966,871
)
 
$
95,768,820

 
$
17,511,838

 
$
113,280,658

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

 
365,650

 
365,284,546

 
—

 
—

 
365,650,196

 
—

 
365,650,196

Discount on issuance of common stock
—

 
—

 
(909,983
)
 
—

 
—

 
(909,983
)
 
—

 
(909,983
)
Offering costs including dealer manager fees to affiliates
—

 
—

 
(37,761,110
)
 
—

 
—

 
(37,761,110
)
 
—

 
(37,761,110
)
Distributions to common stockholders
—

 
—

 
—

 
(8,589,245
)
 
—

 
(8,589,245
)
 
—

 
(8,589,245
)
Issuance of shares for distribution reinvestment plan
912,214

 
8,902

 
8,892,717

 
(8,901,619
)
 
—

 
—

 
—

 
—

Repurchase of common stock
(62,460
)
 
(615
)
 
(613,913
)
 
—

 
—

 
(614,528
)
 
—

 
(614,528
)
Repurchase of noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Additions to common stock subject to redemption
—

 
—

 
(8,901,619
)
 
—

 
—

 
(8,901,619
)
 
—

 
(8,901,619
)
Contribution from noncontrolling interest
—

 
—

 
239,268

 
 
 
 
 
239,268

 
8,095,303

 
8,334,571

Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
(2,730,432
)
 
(2,730,432
)
Distributions to noncontrolling interests subject to redemption
—

 
—

 
—

 
—

 
—

 
—

 
(49,245
)
 
(49,245
)
Offering costs on preferred equity
—

 
—

 
(5,379,994
)
 
—

 
—

 
(5,379,994
)
 
—

 
(5,379,994
)
Net loss
—

 
—

 
—

 
—

 
(24,664,400
)
 
(24,664,400
)
 
(3,091,518
)
 
(27,755,918
)
BALANCE December 31, 2013
49,893,502

 
$
507,502

 
$
433,644,356

 
$
(26,683,182
)
 
$
(32,631,271
)
 
$
374,837,405

 
$
19,735,946

 
$
394,573,351

Gross proceeds from issuance of common stock
75,547,044

 
776,624

 
775,846,979

 
—

 
—

 
776,623,603

 
—

 
776,623,603

Issuance of vested restricted common stock
10,000

 
102

 
102,698

 
—

 
—

 
102,800

 
—

 
102,800

Amortization of restricted common stock compensation
—

 
2

 
1,710

 
—

 
—

 
1,712

 
—

 
1,712

Discount on issuance of common stock
—

 
—

 
(1,888,919
)
 
—

 
—

 
(1,888,919
)
 
—

 
(1,888,919
)
Offering costs including dealer manager fees to affiliates
—

 
—

 
(76,563,783
)
 
—

 
—

 
(76,563,783
)
 
—

 
(76,563,783
)
Distributions to common stockholders
—

 
—

 
—

 
(14,076,756
)
 
—

 
(14,076,756
)
 
—

 
(14,076,756
)
Issuance of shares for distribution reinvestment plan
1,923,148

 
18,621

 
18,770,533

 
(18,789,154
)
 
—

 
—

 
—

 
—

Repurchase of common stock
(78,671
)
 
(751
)
 
(749,737
)
 
—

 
—

 
(750,488
)
 
—

 
(750,488
)
Additions to common stock subject to redemption
—

 
—

 
(18,789,154
)
 
—

 
—

 
(18,789,154
)
 
—

 
(18,789,154
)
Issuance of limited partnership units
—

 
—

 
(140,647
)
 
—

 
—

 
(140,647
)
 
1,504,376

 
1,363,729

Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
(1,500,661
)
 
(1,500,661
)
Distributions to noncontrolling interests subject to redemption
—

 
—

 
—

 
—

 
—

 
—

 
(7,893
)
 
(7,893
)
Net loss
—

 
—

 
—

 
—

 
(14,297,568
)
 
(14,297,568
)
 
(553,544
)
 
(14,851,112
)
BALANCE June 30, 2014
127,295,023

 
$
1,302,100

 
$
1,130,234,036

 
$
(59,549,092
)
 
$
(46,928,839
)
 
$
1,025,058,205

 
$
19,178,224

 
$
1,044,236,429

See accompanying notes.

7

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
Six Months Ended June 30,
 
2014
 
2013
Operating Activities:
 
 
 
Net loss
$
(5,249,125
)
 
$
(6,362,037
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation of building and building improvements
12,305,475

 
3,463,912

Amortization of leasing costs and intangibles, including ground leasehold interests
19,793,442

 
4,500,090

Amortization of above and below market leases
785,201

 
(137,192
)
Amortization of deferred financing costs
2,704,270

 
909,479

Amortization of debt premium
(101,215
)
 
(69,133
)
Deferred rent
(5,066,065
)
 
(1,000,779
)
Income (loss) from investment in unconsolidated entity
(19,765
)
 
21,419

Stock-based compensation
104,512

 
—

Distributions of income from investment in unconsolidated entity
19,765

 
11,664

Gain on investment in unconsolidated entity
—

 
(160,000
)
Change in operating assets and liabilities:
 
 
 
Other assets
5,122,346

 
(93,788
)
Termination fee revenue receivable from tenant, net
(6,446,309
)
 
—

Rent collections received in restricted cash collateral account
494,168

 
(2,189,287
)
Operating reserves
2,702,707

 
19,211

Restricted reserves for tenant improvements
(2,407,518
)
 
—

Accounts payable and other liabilities
3,057,364

 
2,478,372

Due to affiliates, net
(1,311,463
)
 
753,179

Net cash provided by operating activities
26,487,790

 
2,145,110

Investing Activities:
 
 
 
Acquisition of properties, net
(539,956,694
)
 
(205,165,529
)
Real estate acquisition deposits
4,100,000

 
250,000

Improvements to real estate
(337,231
)
 
(11,926
)
Payments for construction-in-progress
(518,110
)
 
—

Construction-in-progress costs- real estate development
(1,657,809
)
 
—

Construction-in-progress costs to be paid- real estate development
1,600,670

 
—

Land acquisition- real estate development
(15,200,279
)
 
—

Noncontrolling interest- real estate development
7,656,051

 
 
Investment in unconsolidated entity
—

 
(1,440,000
)
Distributions of capital from investment in unconsolidated entity
32,250

 
—

Net cash used in investing activities
(544,281,152
)
 
(206,367,455
)
Financing Activities:
 
 
 
Proceeds from borrowings - KeyBank Credit Facility
148,900,000

 
129,200,000

Proceeds from borrowings - Mortgage Debt
110,640,000

 
105,600,000

Proceeds from borrowings - Unsecured Term Loan
300,000,000

 
—

Principal payoff of secured indebtedness - KeyBank Credit Facility
(193,399,848
)
 
(103,630,152
)
Principal payoff of secured indebtedness - KeyBank Term Loan
(282,000,000
)
 
—

Principal amortization payments on secured indebtedness
(790,930
)
 
(692,882
)
Deferred financing costs
(6,505,707
)
 
(3,271,488
)
Financing deposits
2,305,300

 
—

Issuance of common stock, net
698,170,901

 
78,810,212

Issuance of noncontrolling interests, net of offering costs
1,363,729

 
—

Repurchase of common stock
(750,488
)
 
(479,687
)
Dividends paid on preferred units subject to redemption
(9,479,166
)
 
—

Distributions to noncontrolling interests
(1,684,292
)
 
(1,361,467
)
Distributions to common stockholders
(12,313,723
)
 
(2,914,630
)
Net cash provided by financing activities
754,455,776

 
201,259,906

Net increase in cash and cash equivalents
236,662,414

 
(2,962,439
)
Cash and cash equivalents at the beginning of the period
10,407,283

 
5,672,611

Cash and cash equivalents at the end of the period
$
247,069,697

 
$
2,710,172

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid for interest
$
9,655,246

 
$
3,968,557

Restricted cash- assumed upon acquisition of real estate assets
21,500,000

 
3,139,420

Supplemental Disclosures of Non-cash Transactions:
 
 
 
Mortgage debt assumed in conjunction with the acquisition of real estate assets plus a premium of $1,799,426 and $0, respectively
$
23,842,505

 
$
—

Noncontrolling interest in real estate development
$
7,656,051

 
$
—

Increase (decrease) in distributions payable to noncontrolling interests
$
(833
)
 
$
51,774

Increase in distributions payable to common stockholders
$
1,763,033

 
$
223,043

Distributions to redeemable noncontrolling interests attributable to common stockholders as reflected on the consolidated statements of operations
$
174,904

 
$
151,192

Common stock issued pursuant to the distribution reinvestment plan
$
18,789,154

 
$
2,968,921

Common stock redemptions funded subsequent to period-end
$
761,164

 
$
56,617

See accompanying notes.

8
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)


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 expects to use a substantial amount of the net proceeds from the Public Offerings (as defined below) to invest in these properties. The Company satisfied requisite financial and non-financial requirements and elected to be taxed as a REIT for each taxable year ended since December 31, 2010. The Company’s year end is December 31.
Griffin Capital Corporation, a California corporation (the “Sponsor”), has sponsored the Company’s Public Offerings. The Company’s Sponsor began operations in 1995, and was incorporated in 1996, to engage principally in acquiring and developing office and industrial properties. Kevin A. Shields, the Company's Chief Executive Officer and Chairman, is the sole shareholder of Griffin Capital Corporation.
Griffin Capital Essential Asset Advisor, LLC, a Delaware limited liability company (the “Advisor”), was formed on August 27, 2008. The Sponsor is the sole member of the Advisor. The Company has entered into an advisory agreement for the Public Offerings (as amended and restated, the “Advisory Agreement”), which states that the Advisor is responsible for managing the Company’s affairs on a day-to-day basis and identifying and making acquisitions and investments on behalf of the Company. The officers of the Advisor are also officers of the Sponsor. The Advisory Agreement has a one-year term, and it may be renewed for an unlimited number of successive one-year periods by the Company’s board of directors.
On August 28, 2008, the Advisor purchased 100 shares of common stock for $1,000 and became the Company’s initial stockholder. On February 20, 2009, the Company began to offer shares of common stock, pursuant to a private placement offering to accredited investors (collectively, the “Private Offering”), which included shares for sale pursuant to the distribution reinvestment plan (“DRP”). On November 6, 2009, the Company began to offer, in a public offering, a maximum of 82,500,000 shares of common stock, consisting of 75,000,000 shares at $10.00 per share (the “Primary Public Offering”) and 7,500,000 shares pursuant to the DRP at $9.50 per share (together with the Primary Public Offering, the “Initial Public Offering”) and terminated the Private Offering.
On February 15, 2013, the Company announced the revised share offering price under the Initial Public Offering of $10.28 per share, and a revised price under the DRP equal to 95% of the revised share offering price, which is approximately $9.77 per share. The revised share price was primarily based on the net asset value (“NAV”) per share of the Company’s stock as of December 31, 2012 of $9.56, which was grossed up for sales commissions. An independent, third-party real estate valuation and advisory firm with extensive experience in the valuation of real estate was engaged to appraise each of the properties owned by the Company as of December 31, 2012, in order to determine a gross asset value (the “GAV”). The GAV less management’s estimated fair market value of the in-place debt as of December 31, 2012 resulted in the NAV. The valuation methodologies used to determine the NAV involved subjective judgments, assumptions and opinions, which have not been audited. For additional information regarding the methodology used in calculating NAV, please see the Company's Annual Report on Form 10-K for the year ended December 31, 2013.
On April 25, 2013, the Company terminated its Initial Public Offering having issued 19,200,570 shares of the Company’s common stock for gross proceeds of approximately $191.5 million, including shares issued pursuant to the DRP. On April 26, 2013, the Company began to offer, in a follow-on offering, up to $1.0 billion in shares of common stock, consisting of approximately 97.2 million shares at $10.28 per share (the “Primary Follow-On Offering” and together with the Primary Public Offering, the “Primary Public Offerings”) and $100 million in shares of common stock, consisting of approximately 10.2 million shares pursuant to the DRP, at a price equal to 95% of the share price, which is approximately $9.77 per share (together with the Primary Follow-On Offering, the “Follow-On Offering” and, collectively with the Initial Public Offering, the “Public Offerings”). On April 22, 2014, the Company announced that it was no longer accepting subscriptions in the Follow-On Offering, as the maximum amount of offering proceeds was expected to have been reached. On May 9, 2014 the transfer agent completed the reconciliation of the subscriptions concluding that the Company had issued 108,022,106 shares of the Company’s common stock for gross proceeds of approximately $1.1 billion from April 26, 2013 through April 22, 2014, including shares issued pursuant to the DRP.
As of June 30, 2014, the Company had received aggregate gross offering proceeds of approximately $1.3 billion from the sale of shares in the Private Offering and the Public Offerings. There were 127,295,023 shares outstanding at June 30, 2014, including shares issued pursuant to the DRP, less shares redeemed pursuant to the share redemption plan. As of June 30, 2014

9
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

and December 31, 2013, the Company had issued $31.5 million and $12.7 million, respectively, in shares pursuant to the DRP, which are classified on the consolidated balance sheets as common stock subject to redemption, net of redemptions payable totaling approximately $0.8 million and $0.2 million, respectively, which is included in accounts payable and other liabilities on the consolidated balance sheets. See Note 6, Equity — Share Redemption Program. Since inception, the Company had redeemed $1.7 million of common stock pursuant to the share redemption plan as of June 30, 2014.
On May 7, 2014, the Company filed a Registration Statement on Form S-3 with the SEC for the registration of $75.0 million in shares for sale pursuant to the DRP (the “DRP Offering”). The DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders.
Griffin Capital Securities, Inc. (the “Dealer Manager”) is an affiliate of the Sponsor, and on November 1, 2013 became a wholly-owned subsidiary of the Sponsor. The Dealer Manager was responsible for marketing the Company’s shares being offered pursuant to the Public Offerings. The dealer manager agreement was terminated in accordance with its terms upon the termination of the Follow-On Offering.
Griffin Capital Essential Asset Operating Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”), was formed on August 29, 2008. The Operating Partnership owns, directly or indirectly, all of the properties that the Company has acquired. The Advisor purchased an initial 99% limited partnership interest in the Operating Partnership for $200,000, and the Company contributed the initial $1,000 capital contribution, received from the Advisor, to the Operating Partnership in exchange for a 1% general partner interest. As of June 30, 2014, the Company owned approximately 81% of the limited partnership units of the Operating Partnership (approximately 96% of the common units), and, as a result of the contribution of five properties to the Company, the Sponsor and certain of its affiliates, including the Company’s Chief Executive Officer and Chairman, Kevin A. Shields, and certain officers of the Company, owned approximately 2% of the limited partnership units of the Operating Partnership. The remaining approximately 17% of the limited partnership units were owned by third parties, of which approximately 16% represented the preferred unit investment as discussed in Note 6, Equity. No limited partnership units of the Operating Partnership have been redeemed during the six months ended June 30, 2014 and year ended December 31, 2013. 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 June 30, 2014.
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 and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. 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, 2013. The unaudited consolidated financial statements include accounts of the Company, the Operating Partnership and the TRS. All significant intercompany accounts and transactions have been eliminated in consolidation.


10
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statement and accompanying notes. Actual results could materially differ from those estimates.
 
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 June 30, 2014 and December 31, 2013.
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, or as required by certain lease provisions or certain lenders in conjunction with an acquisition or debt financing, the Company assumed or funded, respectively, reserves for specific property improvements and deferred maintenance, rent abatement, releasing costs, and taxes and insurance (see Note 3, Real Estate). As of June 30, 2014 and December 31, 2013, the balance of these reserves, included in the consolidated balance sheets as restricted cash, was $45.0 million and $25.5 million, respectively. The balance as of June 30, 2014 includes $1.2 million in rent collections from the eight properties which serve as collateral under the Midland Mortgage Loan and certain rent abatement and re-tenanting costs associated with the Investment Grade Portfolio as discussed in Note 3, Real Estate.
Real Estate
Purchase Price Allocation
The Company applies the provisions in ASC 805-10, Business Combinations, to account for the acquisition of real estate, or real estate related assets, in which a lease, or other contract, is in place representing an active revenue stream, as a business combination. In accordance with the provisions of ASC 805-10, the Company recognizes the assets acquired, the liabilities assumed and any noncontrolling interest in the acquired entity at their fair values as of the acquisition date, on an “as if vacant” basis. Further, the Company recognizes the fair value of assets acquired, liabilities assumed and any noncontrolling interest in acquisitions of less than a 100% interest when the acquisition constitutes a change in control of the acquired entity. The accounting provisions have also established that acquisition-related costs and restructuring costs are considered separate and not a component of a business combination and, therefore, are expensed as incurred. Acquisition-related costs for the three and six months ended June 30, 2014 totaled $12.4 million and $19.8 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

11
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

lease. These direct costs are considered intangible lease assets and are included with real estate assets on the consolidated balance sheets. The intangible lease assets are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid, including real estate taxes, insurance, and other operating expenses, pursuant to the in-place leases over a market lease-up period for a similar lease. Customer relationships are valued based on management’s evaluation of certain characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics management will consider in allocating these values include the nature and extent of the Company’s existing business relationships with tenants, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors. These intangibles are included in intangible lease assets on the consolidated balance sheets and are amortized to expense over the remaining term of the respective leases.
 
The determination of the fair values of the assets and liabilities acquired requires the use of significant assumptions about current market rental rates, rental growth rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the purchase price allocations, which could impact the amount of the Company’s reported net income. As of June 30, 2014, there were certain acquisitions made during the six months ended June 30, 2014 in which the purchase price allocation was not finalized and was accordingly booked based upon an estimate and is subject to finalization in a future period not to exceed one year from the date of acquisitions.
Depreciation
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
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 and six months ended June 30, 2014 were $6.7 million and $12.3 million, respectively, and for the three and six months ended June 30, 2013 were $2.0 million, and $3.5 million, respectively.
Impairment of Real Estate and Related Intangible Assets
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of real estate and related intangible assets may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, management assesses whether the carrying value of the assets will be recovered through the future undiscounted operating cash flows expected from the use of the assets and the eventual disposition. If, based on this analysis, the Company does not believe that it will be able to recover the carrying value of the asset, the Company will record an impairment charge to the extent the carrying value exceeds the net present value of the estimated future cash flows of the asset.

Projections of expected future undiscounted cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to re-lease the property and the number of years the property is held for investment. As of June 30, 2014 and December 31, 2013, the Company did not record any impairment charges related to its real estate assets or intangible assets.

12
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

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 or liabilities and amortized as an adjustment to property operating expense over the remaining term of the respective lease.
The Operating Partnership, through a single purpose entity, assumed a ground lease with the acquisition of the Waste Management property on January 16, 2014. The ground lease has a remaining term of 82 years, expiring on December 31, 2095. See Note 3, Real Estate.

Investments
ASC 810-10, Consolidation, provides a framework for identifying variable interest entities (“VIEs”) and determining when a company should include the assets, liabilities, noncontrolling interests, and results of activities of the VIE in its consolidated financial statements. In general, a VIE is an entity or other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. Generally, a VIE should be consolidated if a party with an ownership, contractual, or other financial interest in the VIE (a variable interest holder) has the power to direct the VIE’s most significant activities and the obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must record all of the VIE’s assets, liabilities, and noncontrolling interest at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. If the variable interest holder is not the primary beneficiary, the interest in the VIE is recorded under the equity method of accounting.
 
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 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 9 years. On April 12, 2013, the Company, through the Operating Partnership, acquired a 10% beneficial ownership interest in the DST. The Operating Partnership has two exchange rights in which it can acquire additional beneficial interests in the DST in the future, one which it may exercise at any point after the beneficial owners have held their interest in the DST for at least one year. Upon the Operating Partnership's exercise of the exchange right, the beneficial owner will have the right to exchange their interest in the DST for units of the Operating Partnership or cash. If a beneficial owner elects to contribute their beneficial interest in the DST for limited partnership units of the Operating Partnership such exchange will be dilutive to the existing limited partnership unit holders. The Operating Partnership has not exercised the exchange right effective with the completion of the required one year hold period. As of June 30, 2014, the investment balance totaled approximately $1.4 million. See Note 4, Investments.
The interest in the DST discussed above is deemed to be a variable interest in a VIE and based on an evaluation of the variable interest against the criteria for consolidation, the Company determined that it is not the primary beneficiary of the investment. As such, the interest in the VIE is recorded using the equity method of accounting in the accompanying consolidated financial statements. Under the equity method, the investment in the unconsolidated entity is 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 in accordance with the joint venture agreements.

13
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)


Investments in Joint Ventures

Effective June 16, 2014, WRRH Patterson, LLC (an affiliate of Weeks Robinson Properties) and Griffin Capital JVII Patterson, LLC, a wholly-owned special purpose entity ("SPE") of the Operating Partnership, entered into an operating agreement as Managing Member and Investor Member, respectively, for purposes of forming WR Griffin Patterson, LLC ("WR Griffin"). WR Griffin's purpose is to acquire, own, develop, construct, and otherwise invest and manage a development project located in Patterson, California (the "Project") in which a warehouse and distribution facility consisting of approximately 1.5 million square feet will be developed and constructed (the "Restoration Hardware" property). The Restoration Hardware property is leased to Restoration Hardware, Inc. and Restoration Hardware Holdings, Inc. as co-tenants (collectively, "Restoration Hardware") pursuant to a 15-year triple-net lease, obligating Restoration Hardware to all costs and expenses to operate and maintain the property, including certain capital expenditures. The lease term commences upon completion of the project, which is expected to occur in the first half of 2015. The business and affairs of WR Griffin will be managed by the Managing Member. However, all major decisions, as provided in the operating agreement, must be approved by both the Managing Member and Investor Member. Additionally, upon completion of the Project, the membership interest of the Managing Member will be purchased by the Investor Member.

On June 20, 2014, the Company, through WR Griffin, entered into a real estate development agreement with Weeks Robinson Development & Management, LLC, ("Weeks Robinson") to develop and construct the Restoration Hardware property. On June 20, 2014, the land on which the property will be constructed was purchased by WR Griffin for approximately $15.0 million, including closing costs. The Company determined that control of the joint venture lies with its wholly-owned SPE. As such, the Company consolidated the interest and included the following balances on its consolidated balance sheet as of June 30, 2014. See Note 3, Real Estate.

 
June 30, 2014
Cash on hand
$
54,684

Construction in progress paid
1,657,809

Construction in progress payable
(1,600,670
)
Land
15,200,279

Noncontrolling interest
(7,656,051
)
Total investment
$
7,656,051


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. As of June 30, 2014, there were certain leases that provide for contingent rental income, which made up $0.01 million and $0.02 million of total rental income for the three and six months ended June 30, 2014, respectively.
During the three and six months ended June 30, 2014, the Company recognized deferred rent from tenants of $2.9 million and $5.1 million, respectively, and during the three and six months ended June 30, 2013, $0.5 million and $1.0 million, respectively. As of June 30, 2014 and December 31, 2013, the cumulative deferred rent balance was $11.5 million and $6.4 million, respectively, and is included in deferred rent on the consolidated balance sheets.

Tenant reimbursement revenue, which is comprised of additional rents received from certain tenants to recover certain operating and capital expenses, including property maintenance and services, property taxes and insurance (collectively “Recoverable Expenses”), is recognized as revenue when the additional rent is due, pursuant to the lease. Tenant reimbursement amounts are determined based on the Company's estimate of Recoverable Expenses for the year, pro rated to each tenant based on leased square footage of the property. The Company collects the estimated Recoverable Expenses in equal installments as additional rent from the tenant, pursuant to the terms of the lease. At the end of the calendar year, the Company

14
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

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, 2013, the Company estimated that approximately $0.2 million, net, was over collected, which amount is included in accounts payable and other accrued liabilities on the accompanying consolidated balance sheets as of June 30, 2014 and December 31, 2013. Final reconciliations of various properties resulted in an additional $0.1 million in over collections that were included in accounts payable and other accrued liabilities on the accompanying consolidated balance sheets as of June 30, 2014 for a total of $0.3 million. These over payments will be refunded to the tenant either by a credit to contractual rent payments or as a disbursement from operating cash flow.

Organizational and Offering Costs

Organizational and offering costs of the Primary Public Offerings are paid either by the Company or the Sponsor, on behalf of the Advisor, for the Company and are reimbursed from the proceeds of the Public Offerings at the estimated rate as disclosed in the Company’s prospectus. Organizational and offering costs consist of all expenses (other than sales commissions and dealer manager fees) to be paid by the Company in connection with the Public Offerings, including legal, accounting, printing, mailing and filing fees, charges from the escrow holder and other accountable offering expenses, including, but not limited to, (i) amounts to reimburse the Advisor for all marketing-related costs and expenses, such as salaries and direct expenses of employees of the Advisor and its affiliates in connection with registering and marketing the Company’s shares; (ii) technology costs associated with the offering of the Company’s shares; (iii) costs of conducting training and education meetings; (iv) costs of attending seminars conducted by participating broker-dealers; and (v) payment or reimbursement of bona fide due diligence expenses.
Pursuant to the Advisory Agreement, the Company will reimburse the Advisor for organizational and offering expenses incurred in connection with the Primary Public Offerings in an amount not to exceed 3.5% of gross offering proceeds of the terminated or completed Primary Public Offerings for issuer costs (excluding sales commissions and dealer manager fees). In addition, pursuant to the Advisory Agreement, organization and offering expenses (including sales commissions and dealer manager fees and non-accountable due diligence expense allowance but excluding acquisition fees and expenses) may not exceed 15% of gross offering proceeds of the terminated or completed Public Offerings. If the organization and offering expenses exceed such limits discussed above, within 60 days after the end of the month in which the Public Offerings terminate or are completed, the Advisor must reimburse the Company for any excess amounts. As long as the Company is subject to the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association (“NASAA REIT Guidelines”), such limitations discussed above will also apply to any future public offerings. As of closing of the Follow-On Offering, organizational and offering costs were 2.3% and 0.3% of gross offering proceeds, excluding sales commissions and dealer manager fees, for the Initial Public Offering and the Follow-On Offering, respectively, and 11.9% and 10.1%, including sales commissions and dealer manager fees for the Initial Public Offering and the Follow-On Offering, respectively. (See Note 7, Related Party Transactions.)
The Company has incurred organizational and offering costs, including those due to the Advisor for organizational and offering expenses incurred on the Company’s behalf, as follows:
 
 
June 30, 2014
 
December 31, 2013
Cumulative offering costs- Private and Public Offerings
$
130,478,478

 
$
53,914,695

Cumulative organizational costs- Private and Public Offerings
$
805,570

 
$
552,442

Organizational and offering costs advanced by and due to the Advisor (1)
$
21,663

 
$
279,570

 
(1)
As of June 30, 2014 and December 31, 2013, these amounts are included in the Due to affiliates balance on the consolidated balance sheets.
Deferred Financing Costs

Deferred financing costs represent commitment fees, loan fees, and other fees associated with obtaining financing. These costs are amortized to, and included as a component of, interest expense over the terms of the respective financing agreements.

15
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

Amortization expense for the three and six months ended June 30, 2014 were $2.0 million and $2.7 million, respectively, including approximately $1.8 million of write-offs related to the refinancing through the AIG loan and the KeyBank Credit Facility and KeyBank Term Loan, which were both terminated in conjunction with the execution of the Unsecured Term Loan on May 8, 2014. Amortization expense for the three and six months ended June 30, 2013 were $0.4 million and $0.9 million, respectively, including $0.3 million of write-offs related to the refinancing through the Midland Mortgage Loan. The Company’s deferred financing costs balance as of June 30, 2014 is comprised of financing costs incurred for the loan assumption related to the Ace Hardware property acquisition, Unsecured Term Loan, Midland Mortgage Loan and AIG Loan, discussed in Note 5, Debt. As of June 30, 2014 and December 31, 2013, the Company’s deferred financing costs, net of accumulated amortization, were $12.8 million and $9.0 million, respectively.
Other Assets

Other assets consist primarily of tenant and non-tenant receivables, prepaid expenses, and deferred leasing commissions, net of amortization. Non-tenant receivables primarily consist of a $6.4 million termination fee, net of $0.3 million in collections, as a result of the lease termination with World Kitchen, LLC on January 24, 2014, which was financed over approximately 5.5 years at 5.5%. Prepaid expenses will be expensed as incurred or reclassified to other asset accounts upon being put into service in future periods. Leasing commissions for new, renewal or expansion leases are amortized using the straight-line method over the term of the related lease. Amortization of leasing commissions is included in depreciation and amortization in our accompanying consolidated statements of operations. Deferred leasing costs totaled $2.0 million and $0.5 million as of June 30, 2014 and December 31, 2013, respectively. Amortization expense on leasing commissions was less than $0.03 million and $0.04 million for the three and six months ended June 30, 2014. There was no amortization expense for the three and six months ended June 30, 2013.

Noncontrolling Interests

Due to the Company’s control through the general partner interest in the Operating Partnership and the limited rights of the limited partners, the Operating Partnership, including its wholly-owned subsidiaries, is consolidated with the Company and the limited partners’ interests are reflected as noncontrolling interests on the accompanying consolidated balance sheets.
The Company reports noncontrolling interests in subsidiaries within equity in the consolidated financial statements, but separate from total stockholders’ equity. Also, any acquisitions or dispositions of noncontrolling interests that do not result in a change of control are accounted for as equity transactions. Further, the Company recognizes a gain or loss in net income (loss) when a subsidiary is deconsolidated upon a change in control. Net income (loss) allocated to noncontrolling interests is shown as a reduction to net income (loss) in calculating 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) is not allocated to redeemable noncontrolling interests and distributions to redeemable noncontrolling interest holders are allocated between common stockholders and noncontrolling interests based on their respective weighted-average ownership percentage of the Operating Partnership. (See Note 6, Equity.)


16
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

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. 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 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 started recognizing compensation expense for the 1,000 shares of restricted stock granted and subject to the vesting period. The fair value of both issuances was estimated at $10.28 per share, the then most recent price paid to acquire a share of the Company's common stock. All issuances of restricted stock are entitled to dividends upon vesting of the shares. As a result of these issuances, the Company incurred approximately $0.1 million of stock-based compensation expense during the three and six months ended June 30, 2014, which is included in general and administrative expenses in the accompanying consolidated statements of operations.
Fair Value Measurements
The fair value of financial and nonfinancial assets and liabilities is based on a fair value hierarchy established by the FASB that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:
•
Level 1. Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets;
•
Level 2. Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
•
Level 3. Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
When available, the Company utilizes quoted market prices for similar assets or liabilities from independent third-party sources to determine fair value. Financial instruments as of June 30, 2014, 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 June 30, 2014 and December 31, 2013, including the Unsecured Term Loan, which was executed on May 8, 2014 and the Ace Hardware mortgage debt, which was recorded at fair value with a premium of $1.8 million as of the date of acquisition on April 24, 2014. The fair value of the six mortgage loans in the table below is estimated by discounting each loan’s contractual cash flows using current borrowing rates available to the Company for debt instruments with similar terms and maturities as shown below. The Company determined that the mortgage debt valuation in its entirety is classified in Level 3 of the fair value hierarchy and there were no transfers into and out of fair value measurement levels during the six months ended June 30, 2014 and year ended December 31, 2013.
 

17
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

 
June 30, 2014
 
December 31, 2013
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Plainfield
$
21,094,318

 
$
19,798,855

 
$
21,213,722

 
$
19,958,225

Emporia Partners
$
4,558,975

 
$
4,277,137

 
$
4,668,597

 
$
4,442,140

LTI (1)
$
33,132,141

 
$
32,477,844

 
$
33,387,920

 
$
32,822,202

TransDigm (2)
$
6,830,601

 
$
6,644,233

 
$
6,888,864

 
$
6,711,394

Midland Mortgage Loan
$
101,180,439

 
$
105,600,000

 
$
100,049,130

 
$
105,600,000

AIG Loan
$
116,440,985

 
$
110,640,000

 
$
—

 
$
—

 
(1)
The carrying value does not include the debt premium of $0.1 million and $0.2 million as of June 30, 2014 and December 31, 2013, respectively.
(2)
The carrying value does not include the debt premium of $0.1 million as of June 30, 2014 and December 31, 2013.
 
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. 
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 June 30, 2014 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 June 30, 2014 and December 31, 2013, there were no common stock equivalents that would have a dilutive effect on earnings (loss) per share for common stockholders.
Distributions declared and paid per common share assumes each share was issued and outstanding each day during the three months ended June 30, 2014. Distributions declared per common share was based on daily declaration and record dates selected by the Company’s board of directors of $0.001901096 per day per share on the outstanding shares of common stock.
Segment Information
ASC Topic 280, Segment Reporting, establishes standards for reporting financial and descriptive information about a public entity’s reportable segments. The Company internally evaluates all of the properties and interests therein as one reportable segment.

18
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

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 April 2014, the FASB issued Accounting Standards Updated ("ASU") No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU No. 2014-08"). ASU No. 2014-08 raises the threshold for disposals of components of an entity to qualify as discontinued operations. Under ASU No. 2014-08, a discontinued operation is (i) a component of an entity or group of components that has been disposed of by sale, that has been disposed of other than by sale, or that is classified as held for sale that represents a strategic shift that has or will have a major effect on an entity's operations and financial results or (ii) an acquired business or nonprofit activity that is classified as held for sale on the date of the acquisition. A strategic shift that has or will have a major effect on an entity's operations and financial results could include the disposal of (i) a major line of business, (ii) a major geographic area, (iii) a major equity method investment, or (iv) other major parts of an entity. Under current GAAP, an entity is prohibited from reporting a discontinued operation if it has certain continuing cash flows or involvement with the component after the disposal. ASU No. 2014-08 eliminates this criteria and is effective for public companies during the interim and annual periods, beginning after December 15, 2014. The Company is required to adopt the provisions in ASU No. 2014-08 no later than January 1, 2015. The Company expects the adoption thereof to result in fewer real estate sales qualifying as discontinued operations reported in its consolidated financial statements and accompanying notes.
  In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”). ASU No. 2014-09 replaces substantially all industry-specific revenue recognition requirements and converges areas under this topic with International Financial Reporting Standards.  ASU No. 2014-09 implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards.  ASU No. 2014-09 also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers.  Other major provisions in ASU No. 2014-09 include capitalizing and amortizing certain contract costs, ensuring the time value of money is considered in the applicable transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances.  Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption.  ASU No. 2014-09 is effective for reporting periods beginning after December 15, 2016, and early adoption is prohibited.  ASU No. 2014-09 does not apply to lease contracts accounted for under Leases (Topic 840).  The Company does not expect the adoption of ASU No. 2014-09 to have an impact on its financial statements.




19
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

3.
Real Estate
As of June 30, 2014, the Company’s real estate portfolio consisted of 53 properties in 19 states consisting substantially of office, warehouse, and manufacturing facilities with a combined acquisition value of $1.7 billion, including the allocation of the purchase price to above and below-market lease valuation.
2014 Acquisitions
During the six months ended June 30, 2014, the Company acquired eleven properties from unaffiliated parties. The aggregate purchase price of the acquisitions was $563.8 million as shown below.
 
Property
 
Location
 
Tenant/Major Lessee
 
Acquisition
Date
 
Purchase
Price
 
Square
Feet
 
Acquisition
Fees and
Reimbursable
Expenses
Paid to the
Advisor (1)
 
KeyBank Credit
Facility (2)
 
Mortgage Debt (3)
 
Year of
Lease
Expiration (for Major Lessee)
 
2014
Annualized
Net Rent (4)
Caterpillar
 
Joliet, IL
 
Caterpillar, Inc.
 
1/7/2014
 
$
57,000,000

 
1,380,070

 
$
1,710,000

 
$
56,900,000

 
$
—

 
2018
 
$
5,992,000

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

 
430,000

 
2,760,000

 
92,000,000

 
—

 
2030
 
6,343,000

Waste Management
 
Phoenix, AZ
 
Waste Management of AZ
 
1/16/2014
 
22,825,000

 
131,850

 
684,750

 
—

 
—

 
2023
 
1,999,000

BT Infonet
 
El Segundo, CA
 
Infonet Services Corporation
 
2/27/2014
 
52,668,500

 
157,000

 
1,580,055

 
—

 
—

 
2021
 
4,155,000

Wyndham Worldwide
 
Parsippany, NJ
 
Wyndham Worldwide Operations, Inc.
 
4/23/2014
 
96,600,000

 
249,400

 
2,898,000

 
—

 
—

 
2029
 
6,307,000

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

 
206,000

 
1,110,000

 
—

 
23,842,505

 
2024
 
2,833,000

Equifax
 
St. Louis, MO
 
Equifax, Inc.
 
5/20/2014
 
14,200,000

 
94,000

 
426,000

 
—

 
—

 
2023
 
1,081,000

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

 
337,400

 
1,530,000

 
—

 
—

 
2019
 
3,773,000

SoftBank
 
San Carlos, CA
 
SoftBank Regional HQ
 
5/28/2014
 
90,100,000

 
207,900

 
2,703,000

 
—

 
—

 
2020
 
5,846,000

Vanguard
 
Charlotte, NC
 
The Vanguard Group, Inc.
 
6/19/2014
 
33,200,000

 
224,600

 
996,000

 
—

 
—

 
2024
 
2,411,000

Parallon
 
Largo (Tampa Bay), FL
 
Parallon Business Performance Group
 
6/25/2014
 
17,235,000

 
83,200

 
517,050

 
—

 
—

 
2025
 
1,206,000

 
 
 
 
 
 
 
 
$
563,828,500

 
3,501,420

 
$
16,914,855

 
$
148,900,000

 
$
23,842,505

 
 
 
$
41,946,000


20
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

 
(1)
The Advisor is entitled to receive acquisition fees equal to 2.5% and acquisition expense reimbursement of up to 0.5%, of the contract purchase price for each property acquired. The total is included in acquisition fees and expenses to affiliates on the consolidated statements of operations.
(2)
Represents borrowings from the KeyBank Credit Facility discussed in Note 5, Debt. Any remaining purchase price was funded with net proceeds raised in the Follow-On Offering.
(3)
Represents loan assumption related to the Ace Hardware property (the "Ace Hardware mortgage debt"), see Note 5, Debt.
(4)
Net rent is based on (1) the contractual rental payments assuming the lease requires the tenant to reimburse the Company for certain operating expenses; or (2) contractual rent payments less certain operating expenses that are the responsibility of the Company for the 12-month period subsequent to June 30, 2014 and includes assumptions that may not be indicative of the actual future performance of a property, including the assumption that the tenant will perform its obligation under its lease agreement during the next 12 months. Total rental income received for the Wyndham Worldwide, Ace Hardware, Equifax, American Express, SoftBank, Vanguard, and Parallon properties for the three months ended June 30, 2014 was $1.3 million, $0.5 million, $0.2 million, $0.4 million, $0.6 million, $0.1 million, and $0.02 million, based on an acquisition date of April 23, 2014, April 24, 2014, May 20, 2014, May 22, 2014, May 28, 2014, June 19, 2014, and June 25, 2014, respectively.
(5)
The DigitalGlobe property is leased entirely to the previous owner, Avaya, Inc., through June 2015, immediately after which a lease with DigitalGlobe, Inc. will commence.
 

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

 
$
37,903,506

 
$
8,607,130

 
$
4,489,364

 
$
—

 
$
—

 
$
57,000,000

Digital Globe
8,600,000

 
52,145,256

 
31,254,744

 
—

 
—

 
—

 
$
92,000,000

Waste Management (1)
—

 
11,757,412

 
4,757,605

 
4,055,641

 
2,254,342

 
—

 
$
22,825,000

BT Infonet
9,800,000

 
34,244,179

 
7,238,556

 
1,385,765

 
—

 
—

 
$
52,668,500

Wyndham Worldwide
6,200,000

 
76,333,376

 
14,819,250

 
(752,626
)
 
—

 
—

 
$
96,600,000

Ace Hardware (2)
6,500,000

 
26,381,083

 
7,742,944

 
(1,824,601
)
 
—

 
(1,799,426
)
 
$
37,000,000

Equifax
1,850,000

 
7,971,185

 
4,737,820

 
(359,005
)
 
—

 
—

 
$
14,200,000

American Express
15,000,000

 
32,096,295

 
13,796,341

 
(9,892,636
)
 
—

 
—

 
$
51,000,000

SoftBank
22,788,850

 
53,944,995

 
15,004,689

 
(1,638,534
)
 
—

 
—

 
$
90,100,000

Vanguard
2,230,000

 
23,685,082

 
7,376,433

 
(91,515
)
 
—

 
—

 
$
33,200,000

Parallon
1,000,000

 
12,728,557

 
4,043,089

 
(536,646
)
 
—

 
—

 
$
17,235,000

Total property acquisitions
$
79,968,850

 
$
369,190,926

 
$
119,378,601

 
$
(5,164,793
)
 
$
2,254,342

 
$
(1,799,426
)
 
$
563,828,500

Restoration Hardware (3)
15,200,279

 
1,657,809

 
—

 
—

 
—

 
—

 
—

Total
$
95,169,129

 
$
370,848,735

 
$
119,378,601

 
$
(5,164,793
)
 
$
2,254,342

 
$
(1,799,426
)
 
$
563,828,500

 
(1)
The land associated with the property is subject to a ground lease with the State of Arizona expiring on December 31, 2095.
(2)
As of June 30, 2014, the purchase price allocation for the Ace Hardware property acquisition had not been finalized.
(3)
Represents the purchase of land and construction-in-progress costs related to a joint venture for real estate development as discussed in Note 2, Basis of Presentation and Summary of Significant Accounting Policies.

21
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

The following unaudited condensed pro forma operating information is presented as if the Company’s properties acquired in 2014 had been included in operations as of January 1, 2013. The pro forma operating information includes certain nonrecurring adjustments, such as acquisition fees and expenses incurred as a result of the assets acquired in the acquisitions:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Revenue
$
51,605,991

 
$
26,063,842

 
$
109,317,189

 
$
49,655,598

Net income (loss)
$
5,433,798

 
$
(13,732,498
)
 
$
18,152,319

 
$
(18,103,970
)
Net income (loss) attributable to noncontrolling interests
$
188,009

 
$
(2,485,582
)
 
$
795,072

 
$
(3,575,534
)
Distributions to redeemable noncontrolling interests attributable to common stockholders
$
(88,720
)
 
$
(77,383
)
 
$
(174,904
)
 
$
(151,192
)
Net income (loss) attributable to common stockholders (1)
$
845,587

 
$
(16,295,463
)
 
$
14,084,987

 
$
(21,830,696
)
Net income (loss) attributable to common stockholders per share, basic and diluted
$
0.01

 
$
(0.82
)
 
$
0.15

 
$
(1.22
)

(1)
Amount is net of net income (loss) attributable to noncontrolling interests and distributions to redeemable noncontrolling interests attributable to common stockholders.
The lease expirations of the Company’s 53 properties range from 2014 to 2030. The future minimum net rent payments pursuant to the lease terms are shown in the table below.
 
2014
76,195,797

2015
153,529,674

2016
157,530,076

2017
158,125,367

2018
150,085,512

Thereafter
688,767,249

Total
$
1,384,233,675


Revenue Concentration
No lessee or property, based on annualized net rent for the 12-month period subsequent to June 30, 2014, pursuant to the respective in-place leases, was greater than 5% as of June 30, 2014.










22
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

The percentage of annualized net rent for the 12-month period subsequent to June 30, 2014, by state, based on the respective in-place leases, is as follows:
 
State
 
Annualized Net Rent
 
Number of
Properties
 
Percentage of
Annualized
Net Rent
California
 
$
19,142,000

 
6

 
14.1
%
Illinois
 
14,917,000

 
6

 
10.9

Arizona
 
12,195,000

 
4

 
9.0

Ohio
 
12,183,000

 
5

 
9.0

Georgia
 
11,638,000

 
3

 
8.6

New Jersey
 
11,460,000

 
4

 
8.4

Colorado
 
11,212,000

 
4

 
8.2

Texas
 
7,741,000

 
3

 
5.7

All others (1)
 
35,533,000

 
18

 
26.1

Total
 
$
136,021,000

 
53

 
100
%
(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 June 30, 2014, by industry, based on the respective in-place leases, is as follows:
 
Industry (1)
 
Annualized
Net
Rent
 
Number of
Lessees
 
Percentage of
Annualized
Net Rent
Manufacturing
 
$
38,739,000

 
16

 
28.5
%
Finance & Insurance
 
32,007,000

 
24

 
23.5

Information (2)
 
16,521,000

 
5

 
12.1

Professional, Scientific & Technical Services (3)
 
11,297,000

 
6

 
8.3

Wholesale Trade (4)
 
8,926,000

 
3

 
6.6

All others (5)
 
28,531,000

 
17

 
21.0

Total
 
$
136,021,000

 
71

 
100
%

(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) Includes, but is not limited to: Machinery, Equipment, and Supplies Merchant Wholesalers; Professional and Commercial Equipment and Supplies Merchant Wholesalers; Household Appliances and Electrical and Electronic Goods Merchant Wholesalers; Paper and Paper Product Merchant Wholesalers; and Apparel, Piece Goods, and Notions Merchant Wholesalers.
(5) All others account for less than 5% of total annualized net rent on an individual basis.



23
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

The tenant lease expirations by year based on annualized net rent for the 12-month period subsequent to June 30, 2014 are as follows:
 
Year of Lease Expiration
 
Annualized
Net Rent
 
Number of
Lessees
 
Square Feet
 
Percentage of
Annualized
Net Rent
2014
 
$
20,000

 
1

 
5,000

 
—
%
2015
 
1,252,000

 
5

 
349,700

 
0.9
%
2016
 
1,105,000

 
4

 
109,800

 
0.8
%
2017
 
5,125,000

 
4

 
276,600

 
3.8
%
2018
 
17,684,000

 
9

 
2,248,170

 
13.0
%
2019
 
16,153,000

 
9

 
1,289,700

 
11.9
%
2020
 
15,588,000

 
6

 
1,900,500

 
11.4
%
2021
 
9,091,000

 
4

 
892,800

 
6.7
%
2022
 
11,634,000

 
5

 
1,014,100

 
8.6
%
2023
 
8,945,000

 
5

 
553,450

 
6.6
%
2024
 
15,428,000

 
8

 
1,317,400

 
11.3
%
2025
 
17,178,000

 
7

 
1,314,100

 
12.6
%
2026
 
2,316,000

 
1

 
294,800

 
1.7
%
2027
 
1,852,000

 
1

 
81,600

 
1.4
%
2029
 
6,307,000

 
1

 
249,400

 
4.6
%
2030
 
6,343,000

 
1

 
430,000

 
4.7
%
Vacant
 
—

 
—

 
69,000

 
—
%
Total
 
$
136,021,000

 
71

 
12,396,120

 
100
%
Tenant Risk
The Company monitors the credit of all tenants to stay abreast of any material changes in credit quality. The Company monitors tenant credit by (1) reviewing the credit ratings of tenants (or their parent companies) that are rated by nationally recognized rating agencies; (2) reviewing financial statements that are publicly available or that are required to be provided pursuant to the lease; (3) monitoring news reports regarding the tenants and their underlying business and industry; and (4) monitoring the timeliness of rent collections.
In June 2013, World Kitchen, LLC vacated the Will Partners property located in Monee, Illinois (a manufacturing and distribution facility) but remained obligated for the rental payments over the remaining lease term of approximately 7 years, or through February 29, 2020, with no option for early termination. On January 24, 2014, the Company executed a termination agreement with World Kitchen, LLC in which the Company agreed to a termination fee of $7.125 million, which is included in rental income on the consolidated statements of operations, and a restoration amount of approximately $0.5 million. The Company financed the termination fee, net of certain adjustments and the initial payment, for a total of $6.7 million at 5.5% over an approximate 5.5 year term. As of June 30, 2014, $0.3 million had been collected resulting in a net balance of $6.4 million. In return the Company released World Kitchen, LLC from any and all obligations under the lease in-place. Upon the execution of the termination agreement KeyBank released the property as collateral of the Key Bank Credit Facility, and released the re-tenanting reserves funded pursuant to the second amended and restated Key Bank Credit Agreement.  The Company’s property manager is actively involved in finding an appropriate replacement tenant. During the six months ended June 30, 2014, and as a result of the termination, the Company wrote off approximately $0.9 million of unamortized in-place lease intangible assets that were recorded as part of the purchase price allocation when the property was acquired and approximately $0.3 million of deferred rent.

On February 3, 2014, Life Technologies Corporation, the tenant occupying the LTI property, was acquired by Thermo Fisher Scientific.  Thermo Fisher is a public company (NYSE: TMO) focused on providing precision laboratory equipment

24
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

used in healthcare, scientific research, safety and education. Life Technologies Corporation is now a wholly-owned subsidiary of Thermo Fisher and remains on the lease.  It is now referred to as the Life Sciences Solutions Group (LSG), Thermo Fisher Scientific.
Tenant security deposits as of June 30, 2014 and December 31, 2013, which were included in the accounts payable and other liabilities balance on the consolidated balance sheets, totaled $0.3 million and $0.07 million, respectively, as required pursuant to the leases for certain tenants. The Company bears the full risk of tenant rent collections for those leases in which a security deposit is not required. Certain leases do, however, require the tenant to pay a penalty in the event of early termination, which fee would be utilized for re-tenanting and restoration. Tenant receivables as of June 30, 2014 and December 31, 2013 totaled $0.4 million and $0.9 million, respectively.
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. The leases were measured against comparable leasing information and the present value of the difference between the contractual, in-place rent and the fair market rent was calculated using, as the discount rate, the capitalization rate utilized to compute the value of the real estate at acquisition or contribution. The discount rate used to compute the present value of the intangible assets for the Westinghouse property was adjusted to consider the potential risk that the tenant would exercise the termination option pursuant to the lease.
 
 
Balance
June 30, 2014
 
Balance
December 31, 2013
In-place lease valuation (above market)
$
28,611,409

 
$
18,680,639

In-place lease valuation (above market)- accumulated amortization
(4,591,255
)
 
(1,970,482
)
In-place lease valuation (above market), net
24,020,154

 
16,710,157

Ground leasehold interest (below market)
2,254,342

 
—

Ground leasehold interest (below market)- accumulated amortization
(12,501
)
 
—

Ground leasehold interest (below market), net
2,241,841

 
—

Intangible assets, net
$
26,261,995

 
$
16,710,157

In-place lease valuation (below market)
$
(41,803,923
)
 
$
(26,708,360
)
In-place lease valuation (below market)- accumulated amortization
4,992,474

 
3,156,902

In-place lease valuation (below market), net
$
(36,811,449
)
 
$
(23,551,458
)
Tenant origination and absorption cost
$
365,895,346

 
$
246,516,745

Tenant origination and absorption cost- accumulated amortization
(42,678,347
)
 
(22,933,515
)
Tenant origination and absorption cost, net
$
323,216,999

 
$
223,583,230

 
The intangible assets are amortized over the remaining lease term of each property, which on a weighted-average basis, was approximately 8.1 years and 7.7 years as of June 30, 2014 and December 31, 2013, respectively. The amortization of the intangible assets for the respective periods is as follows:
 
 
Amortization (income) expense for the six months ended June 30,
 
2014
 
2013
In-place lease valuation, net
$
(785,201
)
 
$
137,192

Tenant origination and absorption cost
$
19,744,832

 
$
4,500,090

Ground leasehold interest (below market)
$
12,501

 
$
—

As of June 30, 2014, annual amortization (income) expense for in-place lease valuation, net, and tenant origination and absorption cost is expected to be $(1.8) million and $43.8 million, respectively, each year for the next five years. As of

25
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

December 31, 2013, amortization (income) expense for in-place lease valuation, net, and tenant origination and absorption cost was expected to be $(0.9) million and $35.3 million, respectively, each year for the next five years.
Restricted Cash
As part of certain acquisitions and contributions, or as required by certain lenders, the Company has assumed or established certain building and tenant improvement or rent abatement reserves, 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
December 31, 2013
 
Additions
 
Deductions
 
Balance
June 30, 2014
Rent abatement reserves (1)
$
4,333,842

 
—

 
$
(3,504,311
)
 
$
829,531

Tenant improvement reserves (2)
18,722,721

 
27,625,292

 
(4,317,003
)
 
42,031,010

Midland Mortgage Loan repairs reserves (3)
453,371

 
158

 
—

 
453,529

Real estate tax reserve (Emporia Partners) (4)
41,224

 
5,346

 
—

 
46,570

Property insurance reserve (Emporia Partners) (4)
204,175

 
204,281

 
—

 
408,456

Restricted deposits (5)
10,000

 
5,000

 
—

 
15,000

Midland Mortgage Loan restricted lockbox (6)
1,695,663

 
1,201,495

 
(1,695,663
)
 
1,201,495

Total
$
25,460,996

 
$
29,041,572

 
$
(9,516,977
)
 
$
44,985,591


 
(1)
Represents a rent abatement escrow funded by the seller for base rent as specified per the terms of the lease. Deductions represent rent earned during the period for certain properties.
(2)
Additions represent tenant improvement reserves either funded by the seller or the Company and held by the lender for acquisitions made in the current period. The most significant of these reserves is $21.5 million and $4.3 million for the Digital Globe tenant improvements and tenant improvements for a new lease executed at an existing property, respectively. Deductions represent tenant improvement reimbursements made to certain tenants during the current period.
(3)
Represents a deferred maintenance reserve funded by the Company as part of the refinancing that occurred on February 28, 2013 whereby certain properties became collateral for the Midland Mortgage Loan, as discussed in Note 5, Debt. Additions represent interest earned during the period.
(4)
Additions represent monthly funding by the tenant during the current period.
(5)
Addition represents a required impressed balance in the lender-controlled account for the Ace Hardware property which was acquired during the current period.
(6)
As part of the terms of the Midland Mortgage Loan, as discussed in Note 5, Debt, rent collections from the eight properties which serve as collateral thereunder, are received in a designated cash collateral account which is controlled by the lender until the designated payment date, as defined in the loan agreement, and the excess cash is transferred to the appropriate property operating accounts.

4.
Investments
On April 12, 2013, the Company purchased a 10% beneficial ownership interest in a DST that is sponsored by an affiliate of the Company. As of June 30, 2014, the investment balance totaled approximately $1.4 million, adjusted for the Company’s share of net earnings or losses and reduced by distributions as shown below. See Note 2, Equity Investments.
 
Balance
June 30, 2014
Balance
December 31, 2013
Investment in unconsolidated entity
$
1,421,443

$
1,600,000

Net income (loss)
19,765

(106,227
)
Distributions
(52,015
)
(72,330
)
Total
$
1,389,193

$
1,421,443



26
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

5.
Debt
As of June 30, 2014 and December 31, 2013, the Company’s debt consisted of the following:
 
 
Balance as of June 30, 2014
 
Balance as of December 31, 2013
 
Contractual Interest Rate as of June 30, 2014 (1)
 
 
Payment Type
 
Loan
Maturity
Plainfield Mortgage Loan
$
19,798,855

 
$
19,958,225

 
6.65%
 
 
Principal and Interest
 
November 2017
Emporia Partners Mortgage Loan
4,277,137

 
4,442,140

 
5.88%
 
 
Principal and Interest
 
September 2023
LTI Mortgage Loan
32,477,844

 
32,822,202

 
5.80%
 
 
Principal and Interest
 
March 2016
LTI Mortgage Loan Premium
143,152

 
186,092

 
—
  
 
—
 
—
TransDigm Mortgage Loan
6,644,233

 
6,711,394

 
5.98%
 
 
Principal and Interest
 
June 2016
TransDigm Mortgage Loan Premium
101,298

 
127,491

 
—
  
 
—
 
—
Ace Hardware Mortgage Loan
23,816,769

 
—

 
5.588%
 
 
Principal and Interest
 
October 2024
Ace Hardware Mortgage Loan Premium
1,767,344

 
—

 
5.588%
 
 
—
 
—
Midland Mortgage Loan
105,600,000

 
105,600,000

 
3.94%
 
 
Interest Only through
March 2017/Principal
and Interest  thereafter
 
April 2023
AIG Loan
110,640,000

 
—

 
4.96%
 
 
Interest Only through January 2017/Principal and Interest thereafter
 
February 2029
Mortgage Loan Total
305,266,632

 
169,847,544

 
 
 
 
 
 
 
KeyBank Credit Facility
—

 
44,499,848

 
2.16%
(2)
 
Interest Only
 
June 2018 (3)
KeyBank Term Loan
—

 
282,000,000

 
2.16%
(2)
 
Interest Only
 
November 2018 (3)
Unsecured Term Loan
300,000,000

 
—

 
1.61%
(4)
 
Interest Only
 
May 2019
Total
$
605,266,632


$
496,347,392

 
 
 
 
 
 
 
 
(1)
The weighted average interest rate as of June 30, 2014 was approximately 3.3% for the Company’s fixed-rate and variable-rate debt combined and 4.9% for the Company’s fixed-rate debt only.
(2)
As discussed below, the interest rate is a one-month LIBO Rate + 2.00%. As of June 30, 2014, the LIBO Rate was 0.16%.
(3)
As discussed below, the KeyBank Credit Facility and Term Loan were both terminated on May 8, 2014.
(4)
As discussed below, the interest rate is a one-month LIBO Rate + 1.45%. As of June 30, 2014, the LIBO Rate was 0.16%.
 
KeyBank Credit Facility
On June 13, 2013, the Company, through the Operating Partnership, and seven of its wholly-owned property-owning SPEs, entered into that certain Second Amended and Restated Credit Agreement (the “Second Restated KeyBank Credit Agreement”) with KeyBank National Association ("KeyBank"), as administrative agent, Bank of America as syndication agent, and a syndicate of lenders (collectively, the “Lenders”), pursuant to which the Lenders initially provided available financing commitments of $190.0 million, of a total $400.0 million Credit Facility (the “KeyBank Credit Facility”). During the first two

27
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

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

28
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

AIG Loan
On January 24, 2014, the Company, through five SPEs wholly owned by the Operating Partnership, entered into various loan agreements (the “AIG Loan Documents”) with National Union Fire Insurance Company and The Variable Annuity Life Insurance Company of Pittsburgh, Pa. (collectively, the “Lenders”), pursuant to which the Lenders provided such SPEs with a loan in the aggregate amount of $110.64 million (the “AIG Loan”). The funds were utilized to refinance five of the properties previously serving as security for the KeyBank Credit Facility. The AIG Loan is secured by cross-collateralized and cross-defaulted first mortgage liens or first lien deeds of trust and second mortgage liens or second lien deeds of trust on the Verizon, Avnet, Northrop Grumman, Schlumberger, and UTC properties. The AIG Loan has a term of 15 years, maturing on February 1, 2029. The AIG Loan bears interest at a fixed rate of 4.96% and requires monthly payments of interest only for the first three years and fixed monthly payments of principal and interest thereafter.
Unsecured Credit Facility
On May 8, 2014, the Company, through the Operating Partnership, entered into an unsecured credit agreement (the “Unsecured Credit Agreement”) with KeyBank as administrative agent, Bank of America as syndication agent and a syndicate of lenders. Pursuant to the Unsecured Credit Agreement, the Company was provided with a $750.0 million senior unsecured credit facility (the "Unsecured Credit Facility"), consisting of a $450.0 million senior unsecured revolver (the "Unsecured Revolver") and a $300.0 million senior unsecured term loan (the "Unsecured Term Loan"). The Unsecured Credit Facility may be increased up to $500.0 million for a maximum of $1.25 billion by increasing the Unsecured Revolver, the Unsecured Term Loan or a combination of both. The Unsecured Revolver has an initial term of four years, maturing on May 8, 2018 and may be extended for a one-year period if certain conditions are met. The Unsecured Term Loan has a term of five years, maturing on May 8, 2019. Availability under the Unsecured Credit Agreement is limited to the lesser of a (i) a specified leverage ratio applied to a portfolio real estate pool value computed as adjusted net operating income divided by specified capitalization rate; or (ii) debt service coverage ratio ("DSCR") calculation, all as set forth in the Unsecured Credit Agreement.
The Unsecured Credit Facility has an interest rate based on the leverage ratio reported with quarterly compliance certificate, as discussed below, and calculated based on the LIBO Rate plus the applicable LIBO Rate margin, as provided in the Unsecured Credit Agreement, or Base Rate plus the applicable base rate margin, as provided in the Unsecured Credit Agreement. The Base Rate is calculated as the greater of (i) the KeyBank Prime rate or (ii) the Federal Funds rate plus 0.50%. Payments under the Unsecured Credit Facility are interest only and are due on the first day of each quarter.
As of June 30, 2014, there was an outstanding balance of $300.0 million on the Unsecured Term Loan, which was required to be drawn pursuant to the Unsecured Credit Agreement, and was used to repay the existing KeyBank Term Loan, which had an outstanding balance of $227.0 million on May 8, 2014. The remaining proceeds were used to acquire additional properties.
Debt Covenant Compliance
Pursuant to the terms of the Second Restated KeyBank Credit Agreement, the Operating Partnership, in consolidation with the Company, was subject to certain loan compliance covenants including, but not limited to (as defined therein), (1) a maximum total leverage ratio (65%); (2) a minimum interest coverage ratio (2.0 to 1); (3) a minimum fixed charge ratio (1.75 to 1); (4) a maximum unhedged variable debt ratio (30%); and (5) minimum tangible net worth of at least $157,650,464 plus 80% of the net proceeds of any equity issuance after the effective date and 100% of the equity in any properties contributed to the Company after the effective date, the violation of which would constitute an event of default. The KeyBank Credit Facility was terminated on May 8, 2014 upon execution of the Unsecured Credit Agreement.
Pursuant to the terms of the Midland Mortgage Loan, the Operating Partnership is required to maintain a debt service coverage ratio (as defined in there in), of 1.60 to 1 and must maintain a minimum net worth of $75.0 million.
Pursuant to the terms of the KeyBank Term Loan, the Operating Partnership was required to maintain a debt service coverage ratio (as defined in there in) as follows: (1) if the Pool DSCR is less than 1.25x, the Borrower SPEs must fund all excess cash flow after debt service on a monthly basis into a cash collateral reserve account with KeyBank. These funds may be released to the Borrower SPEs upon achievement of a Pool DSCR of 1.25x or greater for two consecutive quarters; (2) If the Pool DSCR falls below 1.20x, the Borrower SPEs will make a principal payment (or post other cash collateral) in an amount to bring the Pool DSCR up to no less than 1.30x. Any collateral would be released upon the achievement of the required 1.30x Pool DSCR for two consecutive quarters. The KeyBank Term Loan was terminated on May 8, 2014 upon execution of the Unsecured Credit Agreement.

29
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

Pursuant to the terms of the AIG Loan, the Operating Partnership is required to maintain (1) a minimum debt service coverage ratio as defined in the loan agreement for the secured properties of 1.60x; (2) a maximum loan-to-value ratio of 60%; (3) minimum annual base rent of $14.75 million; and (4) minimum net worth of $110.6 million.
Pursuant to the terms of the Unsecured Credit Facility, the Operating Partnership, in consolidation with the Company, is subject to certain loan compliance covenants including, but not limited to (as defined therein), (1) a maximum consolidated leverage ratio (60% or 65% for two consecutive quarters following a material acquisition); (2) a minimum fixed charges coverage ratio (1.5 to 1); (3) a minimum tangible net worth of at least $861,987,871 plus 75% of the net proceeds generated by any common or preferred share issuances plus 75% of units issued in connection with the contribution of any properties; (4) a maximum secured debt ratio (40%); (5) a maximum secured recourse debt ratio (5%); (6) a maximum unhedged variable rate debt (30%); (7) a maximum payout ratio of 95% of distribution to core funds from operations, as defined in the Unsecured Credit Agreement; (8) minimum unencumbered asset pool DSCR (1.35 to 1); and (9) maximum unencumbered asset pool leverage ratio (60% or 65% for two consecutive quarters following a material acquisition).
The Company was in compliance with all debt covenants as of June 30, 2014.
The following summarizes the future principal repayments of all loans as of June 30, 2014 per the loan terms discussed above:
 
2014
$
915,973

  
2015
1,931,666

  
2016
38,935,942

(1) 
2017
22,337,799

(2) 
2018
4,486,690

 
Thereafter
534,646,768

(3) 
Total principal
603,254,838

  
Unamortized debt premium
2,011,794

  
Total debt
$
605,266,632

  
 
(1)
Amount includes payment of the balances of the LTI and TransDigm property mortgage loans which mature in 2016. Principal repayments on both mortgage loans do not include the unamortized valuation premium of $0.2 million.
(2)
Amount includes payment of the balance of the Plainfield property mortgage loan which matures in 2017.
(3)
Amount includes payment of the balances of the Unsecured Term Loan, Midland Mortgage Loan, Ace Hardware property mortgage loan, and AIG Loan which mature in 2019, 2023, 2024, and 2029, respectively. Principal repayments on the Ace Hardware property mortgage loan do not include the unamortized valuation premium of $1.8 million.

6.
Equity

Preferred Equity
On November 5, 2013, in connection with the acquisition of the Investment Grade Portfolio, the Operating Partnership, entered into a purchase agreement with an affiliate of Starwood Property Trust (“Starwood”), pursuant to which Starwood provided a $250.0 million equity investment in the Operating Partnership in exchange for 24,319,066 Series A Cumulative Exchangeable Preferred Units of limited partnership interest (the “Preferred Units”) of the Operating Partnership. Starwood is entitled to monthly distributions calculated as follows:

•From November 5, 2013 through October 31, 2015, a rate of LIBO plus 7.25% per annum of the Liquidation Preference (defined below) per Preferred Unit;
•From November 1, 2015 through October 31, 2016, a rate of LIBO plus 8.25% per annum of the Liquidation Preference per Preferred Unit;
•From November 1, 2016 through October 31, 2017, a rate of LIBO plus 9.25% per annum of the Liquidation Preference per Preferred Unit;

30
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

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

At all times, LIBOR will be subject to a minimum floor of 0.25%.
The Preferred Units may be redeemed by the Operating Partnership, in whole or in part, at any time. The redemption price for the Preferred Units will be equal to the sum of (i) $10.28 per Preferred Unit, plus all accumulated and unpaid distributions (the “Liquidation Preference”); (ii) 1.81% of the Liquidation Preference; (iii) all accumulated and unpaid distributions through the date of redemption, plus interest thereon. No redemptions had been made as of June 30, 2014. The Operating Partnership may, however, redeem up to 75% of the Preferred Units after the units have been outstanding for 18 months and the remaining 25% of the outstanding Preferred Units on the 24th month. In both instances the Operating Partnership will not be obligated for the Liquidation Preference and other early redemption fees.
Pursuant to the terms of the purchase agreement with Starwood, the Operating Partnership, in consolidation with the Company, is subject to certain covenants including, but not limited to, covenants that limit the Operating Partnership’s discretion in utilizing cash flows and require that distributions on the Preferred Units be given priority over other disbursements, including distributions on Common Units and redemptions of the Company's shares. In addition, the covenants require (1) a maximum Senior Loan-to-Value Ratio on the Company's aggregate property portfolio of 54% during the 12 month period following the date the Preferred Units were issued and 50% thereafter; and (2) a minimum Debt Yield of at least 13.5%. After the 24th month Starwood may cause the Operating Partnership to begin redeeming the investment if certain covenants are not met, as defined in the underlying agreements. Should an event of default occur, or the investment remains outstanding on the 60th month, Starwood will have the right to appoint a majority to the board of directors. In addition, Starwood will have the right to convert any amount of the limited partnership units to preferred stock of the Company. The Company caused certain amended documents to be placed into escrow that could become effective upon an event of default or the investment remains outstanding on the 60th month, at Starwood's discretion. The Company was in compliance with all of the covenants as of June 30, 2014.
Common Equity
The Company issued 19,200,570 shares of the Company’s common stock for gross proceeds of approximately $191.5 million in the Initial Public Offering, which terminated on April 25, 2013. In connection with the Follow-On Offering, the Company had issued 108,022,106 shares of the Company’s common stock for gross proceeds of approximately $1.1 billion from April 26, 2013 through June 30, 2014, including shares issued pursuant to the DRP. As of June 30, 2014, the Company had received aggregate gross offering proceeds of approximately $1.3 billion from the sale of shares in the Private Offering and the Public Offerings, as discussed in Note 1, Organization. There were 127,295,023 shares outstanding at June 30, 2014, including shares issued pursuant to the DRP, less shares redeemed pursuant to the share redemption plan discussed below.
Distribution Reinvestment Plan, (DRP)
The Company has adopted the DRP, which allows stockholders to have dividends and other distributions otherwise distributable to them invested in additional shares of common stock. No sales commissions or dealer manager fee will be paid on shares sold through the DRP. The Company may amend or terminate the DRP for any reason at any time upon 10 days' prior written notice to stockholders.
The Company registered 7,500,000 shares of common stock pursuant to the DRP for the Initial Public Offering at a price of $9.50 per share. In connection with the Follow-On Offering, the Company registered approximately 10.2 million shares pursuant to the DRP at a price equal to 95% of the share price of the Follow-On Offering of $10.28 per share, which is approximately $9.77 per share. The amended and restated DRP states that the purchase price for shares pursuant to the DRP shall be equal to 95% of the per share offering price of the Company's common stock, until the earliest to occur of (A) the date that all DRP shares registered have been issued or (B) all offerings terminate and the Company elects to deregister with the SEC the unsold DRP shares, if any. The other material terms of the DRP were otherwise unchanged.
On May 7, 2014, the Company filed a Registration Statement on Form S-3 with the SEC for the registration of $75.0 million in shares for sale pursuant to the DRP (the “DRP Offering”). The DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders.

31
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

As of June 30, 2014 and December 31, 2013, $31.5 million and $12.7 million in shares, respectively, had been issued under the DRP, of which $0.8 million and $0.2 million, respectively, were reclassified from redeemable common stock to accounts payable and accrued liabilities in the consolidated balance sheets.
Share Redemption Program
The Company has adopted a share redemption program ("SRP") that enables stockholders to sell their stock to the Company in limited circumstances. As long as the common stock is not listed on a national securities exchange or over-the-counter market, stockholders who have held their stock for at least one year may, under certain circumstances, be able to have all or any portion of their shares of stock redeemed by the Company. The Company may redeem, on a quarterly basis, the shares of stock presented for redemption for cash to the extent that there are sufficient funds available to fund such redemptions. In no event shall the Company redeem more than 5.0% of the weighted average shares outstanding during the prior calendar year, and the cash available for redemption will be limited to the proceeds from the sale of shares pursuant to the DRP. Effective March 17, 2013, the redemption price per share shall be as shown below, which is based upon the number of years the stock is held:
 
Period of Time Held
 
Redemption Price
At least one year
 
Lower of $9.25 or the price paid by the stockholder
At least two years
 
Lower of $9.50 or the price paid by the stockholder
At least three years
 
Lower of $9.75 or the price paid by the stockholder
At least four years
 
Lower of $10.28 or the price paid by the stockholder

 As the use of the proceeds from the DRP for redemptions is outside the Company’s control, the net proceeds from the DRP are considered to be temporary equity and are presented as common stock subject to redemption on the accompanying consolidated balance sheets. The cumulative proceeds from the DRP, net of any redemptions, will be computed at each reporting date and will be classified as temporary equity on the Company’s consolidated balance sheets. As noted above, the redemption is limited to proceeds from new permanent equity from the sale of shares pursuant to the DRP.

Redemption requests will be honored on 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. As of June 30, 2014 and December 31, 2013, $31.5 million and $12.7 million in shares of common stock, respectively, were eligible for redemption, of which $0.8 million and $0.2 million, respectively, were reclassified from redeemable common stock to accounts payable and accrued liabilities in the consolidated balance sheets. Since inception, through June 30, 2014, the Company redeemed 175,631 shares of common stock for approximately $1.7 million at a weighted average price per share of $9.66 pursuant to the SRP. As of June 30, 2014, there were 76,337 shares totaling $0.8 million subject to redemption requests to be processed subsequent to June 30, 2014. On July 31, 2014, the Company satisfied all of the eligible redemption requests at a weighted average price per share of $9.97. 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 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 June 30, 2014, noncontrolling interests were approximately 3% of total shares outstanding and approximately 4% 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

32
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

noncontrolling interest that fails to qualify as permanent equity has been reclassified as temporary equity and adjusted to the greater of (a) the carrying amount, or (b) its redemption value as of the end of the period in which the determination is made.
The Operating Partnership issued 4.8 million limited partnership units to affiliated parties and unaffiliated third parties in exchange for certain properties and 0.2 million limited partnership units to unaffiliated third parties unrelated to property contributions. To the extent the contributors should elect to redeem all or a portion of their Operating Partnership units, pursuant to the terms of the respective contribution agreement, such redemption shall be at a per unit value equivalent to the price at which the contributor acquired its limited partnership units in the respective transaction.
Operating partnership units issued pursuant to the Will Partners REIT, LLC, (Will Partners), 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) attributed to these limited partners is allocated proportionately between common stockholders and other noncontrolling interests that are not considered redeemable.
The limited partners of the Operating Partnership will have the right to cause the general partner of the Operating Partnership, the Company, to redeem their limited partnership units for cash equal to the value of an equivalent number of shares, or, at the Company’s option, purchase their limited partnership units by issuing one share of the Company’s common stock for the original redemption value of each limited partnership unit redeemed. These rights may not be exercised under certain circumstances which could cause the Company to lose its REIT election. Furthermore, the limited partners may exercise their redemption rights only after their limited partnership units have been outstanding for one year. There were no redemption requests during the three months ended June 30, 2014 and the year ended December 31, 2013.
 
Noncontrolling interests include the Company's interest in the joint venture with Weeks Robinson, the real estate developer engaged to develop and construct the Restoration Hardware property. See Note 3, Real Estate. The interest in the joint venture is deemed to be a variable interest in a VIE and based on an evaluation of the variable interest against the criteria for consolidation, the Company determined that it is the primary beneficiary of the investment. As such, the interest in the VIE is recorded using the consolidation method of accounting in the accompanying consolidated financial statements. Under the consolidation method, the company includes the assets, liabilities, noncontrolling interests, and results of activities of the VIE in its consolidated financial statements as shown below.

The following summarizes the activity for noncontrolling interests for the six months ended June 30, 2014 and the year ended December 31, 2013:
 
 
Six Months Ended
June 30, 2014
 
Year Ended December 31, 2013
Beginning balance
$
19,735,946

 
$
17,511,838

Issuance of limited partnership units
1,504,376

 
8,095,303

Distributions to noncontrolling interests
(1,500,661
)
 
(2,730,432
)
Allocated distributions to noncontrolling interests subject to redemption
(7,893
)
 
(49,245
)
Net loss
(553,544
)
 
(3,091,518
)
Ending balance
$
19,178,224

 
$
19,735,946


7.
Related Party Transactions
The following table summarizes the related party costs and fees incurred, paid and due to affiliates as of June 30, 2014 and December 31, 2013:
 

33
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

 
Year Ended December 31, 2013
 
Six Months Ended June 30, 2014
 
Incurred
 
Paid
 
Payable
 
Incurred
 
Paid
 
Payable
Advisor and Property Manager fees
 
 
 
 
 
 
 
 
 
 
 
Acquisition fees and expenses
$
24,849,257

 
$
22,931,203

 
$
1,918,054

 
$
16,914,855

 
$
18,832,909

 
$
—

Operating expenses
584,043

 
549,660

 
151,519

 
515,132

 
396,122

 
$
270,529

Asset management fees
4,317,544

 
3,786,434

 
726,815

 
5,462,504

 
5,123,819

 
$
1,065,500

Property management fees
1,838,574

 
1,942,864

 
(33,605
)
 
2,539,882

 
2,036,049

 
$
470,228

Costs advanced by the Advisor
2,356,945

 
2,214,800

 
279,570

 
947,688

 
1,205,595

 
$
21,663

Dealer Manager fees
10,959,027

 
10,886,184

 
97,030

 
23,281,192

 
23,378,222

 
$
—

Total
$
44,905,390

 
$
42,311,145

 
$
3,139,383

 
$
49,661,253

 
$
50,972,716

 
$
1,827,920


The Advisory Agreement requires, upon termination of the Public Offerings, that any organizational and offering costs, including sales commissions and dealer manager fees, incurred above 15% of gross equity raised in the Company’s Public Offerings and that any organizational and offering costs not including sales commissions and dealer manager fees, incurred above 3.5% of gross equity raised in the Company’s Public Offerings shall be reimbursed to the Company. As of June 30, 2014 and December 31, 2013, organizational and offering costs did not exceed the limitations for organizational and offering costs the Advisor is subject to, as discussed in Note 2, Basis of Presentation and Summary of Significant Accounting Policies — Organizational and Offering Costs.

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


34
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

Type of Compensation
(Recipient)
  
   Determination of
    Amount
Sales Commissions
(Participating Dealers)
  
During the Public Offerings, the Dealer Manager was entitled to receive a sales commission of up to 7% of gross proceeds from gross sales proceeds in the Primary Public Offerings. The Dealer Manager entered into participating dealer agreements with certain other broker-dealers to authorize them to sell shares of the Company in the Public Offerings. Upon sale of shares of the Company by such broker-dealers, the Dealer Manager re-allowed all of the sales commissions paid in connection with sales made by these broker-dealers, except that no sales commission was payable on shares sold under the Company's DRP. The sales commissions may vary for different categories of purchasers.
 
 
Dealer Manager Fee
(Dealer Manager)
  
During the Public Offerings, the Dealer Manager was entitled to receive a dealer manager fee of up to 3% of gross proceeds from sales in the Primary Public Offerings. The Dealer Manager entered into participating dealer agreements with certain other broker-dealers as noted above. The Dealer Manager re-allowed to these broker-dealers a portion of the 3% dealer manager fee as marketing fees, reimbursement of certain costs and expenses of attending training and education meetings sponsored by the Dealer Manager, payment of attendance fees required for employees of the Dealer Manager or other affiliates to attend retail seminars and public seminars sponsored by these broker-dealers, or to defray other distribution-related expenses. No dealer manager fee was payable on shares sold under the Company's DRP.
 
 
Reimbursement of
Organization and Offering Expenses
(Advisor)
  
The Company is required under the Advisory Agreement to reimburse the Advisor for organization and offering costs (as defined in the Company’s prospectus and the Advisory Agreement) up to 3.5% of gross proceeds from the Primary Public Offerings, excluding sales commissions and dealer manager fees. The Advisory Agreement also states that organization and offering expenses, including sales commissions and dealer manager fees, may not exceed 15% of gross offering proceeds of the Public Offerings. If the organization and offering expenses exceed such limits, within 60 days after the end of the month in which the Public Offerings terminate or are completed, the Advisor must reimburse the Company for any excess amounts. Organization and offering expenses are estimated to be 1.25% of gross offering proceeds from the Follow-On Offering in the event the Company raises the maximum offering.
 
 
Acquisition Fees and Expenses
(Advisor)
  
Under the Advisory Agreement the Advisor receives acquisition fees equal to 2.5%, and reimbursement for actual acquisitions related expense incurred by the Advisor of up to 0.50%, of the Contract Purchase Price, as defined therein, of each property acquired by the Company, and reimbursement for actual acquisition expenses incurred on the Company's behalf, including certain payroll costs for acquisition-related efforts by the Advisor's personnel, as defined in the agreements. In addition, the Company pays acquisition expenses to unaffiliated third parties equal to approximately 0.60% of the purchase price of our 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.
 
 
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.
 

35
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

Type of Compensation
(Recipient)
  
   Determination of
    Amount
Operating Expenses
(Advisor)
  
The Advisor and its affiliates are entitled to reimbursement, at cost, for actual expenses incurred by them on behalf of the Company in connection with their provision of administrative services, including related personnel costs; provided, however, the Advisor must reimburse the Company for the amount, if any, by which total operating expenses (as defined), including advisory fees, paid during the previous 12 months then ended exceeded the greater of: (i) 2% of the Company’s average invested assets for that 12 months then ended; or (ii) 25% of the Company’s net income, before any additions to reserves for depreciation, bad debts or other expenses connected with the acquisition and disposition of real estate interests and before any gain from the sale of the Company’s assets, for that fiscal year, unless the Company’s board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors. For the three and six months ended June 30, 2014 and 2013 approximately $0.3 million, $0.5 million, $0.1 million, and $0.3 million, respectively, of operating expenses incurred by the Advisor were allocated to the Company in each period. Such costs are allocated using methodologies meant to fairly allocate such costs based upon the related activities and in accordance with the agreement. The Company expects the Advisor’s direct and indirect allocated costs to increase as offering proceeds and acquisition activity increase.
 
 
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.
Conflicts of Interest
The Sponsor, Advisor, Property Manager and their officers and certain of their key personnel and their respective affiliates currently serve as key personnel, advisors, managers and sponsors to some or all of 16 other real estate programs affiliated with the Sponsor, including Griffin-American Healthcare REIT II, Inc. ("GAHR II") and Griffin-American Healthcare REIT III, Inc. ("GAHR III"), both publicly-registered, non-traded real estate investment trusts. The Company's Sponsor is also the sponsor of Griffin Capital Essential Asset REIT II, Inc., whose offering went effective with the SEC on July 31, 2014. Because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between the Company’s business and these other activities.

Some of the material conflicts that the Sponsor, Advisor, and Property Manager and their key personnel and their respective affiliates will face are (1) competing demand for time of the Advisor’s executive officers and other key personnel from the Sponsor and other affiliated entities; (2) determining if a certain investment opportunity should be recommended to the Company or another program of the Sponsor; and (3) influence of the fee structure under the Advisory Agreement that

36
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

could result in actions not necessarily in the long-term best interest of the Company’s stockholders. The board of directors has adopted the Sponsor’s acquisition allocation policy, which is as follows:

In the event that an investment opportunity becomes available, the Sponsor will first present the opportunity to the Company, which has a right of first refusal on all single tenant net lease real estate assets that fit within the investment objectives of the Company until the earlier to occur of (a) the date that is six months after the completion of the Company's last offering of shares of its common stock or (b) the date on which the Company has invested all of its available investment equity and achieved a blended loan-to-value ratio of at least 40% across its portfolio of properties; provided that this right of first refusal will expire no later than October 29, 2014. Following the expiration of the Company's right of first refusal, the Sponsor will allocate potential investment opportunities to the Company and Griffin Capital Essential Asset REIT II, Inc. 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 Griffin Capital Essential Asset REIT II, Inc., 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 our advisor, for both Griffin Capital Essential Asset REIT II, Inc. and one or more other entities affiliated with the Sponsor, the Sponsor has agreed to present such investment opportunities to Griffin Capital Essential Asset REIT II, Inc. 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.


37
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

8.
Commitments and Contingencies
Ground Lease Obligations
The Company acquired a property on January 16, 2014 that is subject to a ground lease with an expiration date of December 31, 2095. The Company incurred $0.1 million and $0.2 million in rent expense related to the ground lease during the three and six months ended June 30, 2014, respectively. As of June 30, 2014, the remaining required payments under the terms of these ground lease are as follows:
 
2014
$
90,202

2015
180,404

2016
180,404

2017
198,444

2018
198,444

Thereafter
34,444,241

Total
$
35,292,139


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.

9.
Declaration of Distributions
During the quarter ended June 30, 2014, the Company paid distributions in the amount of $0.001901096 per day per share on the outstanding shares of common stock (equivalent to an annual distribution rate of 6.75% assuming the share was purchased for $10.28 or an annual distribution rate of 6.94% assuming the shares were purchased for $10.00) payable to stockholders of record at the close of business on each day during the period from January 1, 2014 through June 30, 2014.  Such distributions were paid on a monthly basis, on the first day of the month, for the month then-ended.
On June 12, 2014, the Company’s board of directors declared distributions in the amount of $0.001901096 per day per share on the outstanding shares of common stock (equivalent to an annual distribution rate of 6.75% assuming the share was purchased for $10.28 or an annual distribution rate of 6.94% assuming the shares were purchased for $10.00) payable to stockholders of record at the close of business on each day during the period from July 1, 2014 through September 30, 2014. Such distributions payable to each stockholder of record during a month will be paid on such date of the following month as the Company’s Chief Executive Officer may determine.

10.
Subsequent Events

Offering Status

On April 22, 2014, the Company announced that it was no longer accepting subscriptions in the Follow-On Offering, as the maximum offering amount was expected to be reached, following the transfer agent's reconciliation of pending subscriptions. As of August 8, 2014, the Company had sold approximately 108.5 million shares of the Company’s common stock for gross proceeds of approximately $1.1 billion in such Follow-On Offering, including shares issued pursuant to the DRP.

Acquisition of TW Telecom property


38
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)

On August 1, 2014, the Company, through the Operating Partnership, acquired a six-story office facility located in Lone Tree, Colorado (the "TW Telecom property"). The TW Telecom property is leased in its entirety pursuant to a full-service gross lease to TW Telecom Holdings Inc. On the acquisition date, the remaining term of the lease was approximately 10 years.

The purchase price of the TW Telecom property was $43.0 million. In conjunction with the acquisition of the TW Telecom property the Company executed a first mortgage loan in the amount of $21.5 million. The remaining purchase price, along with other closing fees and expenses, and acquisition fees and expense reimbursement paid to the Advisor, was funded with proceeds from the Follow-On Offering.



39

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, 2013. 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 single tenant properties that are business essential to the 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. On February 25, 2013, we changed our name from Griffin Capital Net Lease REIT, Inc. to Griffin Capital Essential Asset REIT, Inc. We have no employees and are externally advised and managed by an affiliate, Griffin Capital Essential Asset Advisor, LLC, our Advisor.
Under our initial public offering, we offered a maximum of 82,500,000 shares of common stock to the public, consisting of 75,000,000 shares (the “Primary Public Offering”) and 7,500,000 shares for sale pursuant to our distribution reinvestment plan (together with the Primary Public Offering, the “Initial Public Offering”). We issued 19,200,570 total shares of our common stock for gross proceeds of approximately $191.5 million in our Initial Public Offering, which terminated on April 25, 2013, of which 585,533 shares, or $5.6 million, were issued pursuant to the distribution reinvestment plan (“DRP”).
On April 26, 2013, we began to offer, in a follow-on offering, up to $1.0 billion in shares of common stock, consisting of approximately 97.2 million shares at $10.28 per share (the “Primary Follow-On Offering” and together with the Primary Public Offering, the “Primary Public Offerings”) and $100 million in shares of common stock, consisting of approximately 10.2 million shares pursuant to the DRP, at a price equal to 95% of the share price, which is approximately $9.77 per share (together with the Primary Follow-On Offering, the “Follow-On Offering” and, collectively with the Initial Public Offering, the “Public Offerings”). In connection with our Follow-On Offering, we had issued 108,022,106 shares of our common stock for gross proceeds of approximately $1.1 billion from April 26, 2013 through June 30, 2014. On April 22, 2014, we announced that we were no longer accepting subscriptions in the Follow-On Offering, as we expected to reach the maximum offering amount following our transfer agent's reconciliation of pending subscriptions. On May 7, 2014, we filed a Registration Statement on Form S-3 with the SEC for the registration of $75.0 million in shares for sale pursuant to the DRP (the “DRP Offering”). The DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders. As of August 8, 2014, we had sold approximately 108.5 million shares of our common stock for gross proceeds of approximately $1.1 billion in such Follow-On Offering, including shares issued pursuant to the DRP. As of June 30, 2014, we redeemed 175,631 shares of common stock for approximately $1.7 million at a weighted average price per share of $9.66.
We have made the following acquisitions: (1) two properties in two states (Illinois and South Carolina) for a total purchase price of approximately $54.4 million in the year ended December 31, 2009; (2) four properties in four states (California, Colorado, Illinois and Kansas) for a total purchase price of approximately $54.3 million in the year ended December 31, 2010; (3) one property, located in California, for a purchase price of $56.0 million in the year ended December 31, 2011; (4) seven properties in seven states (Washington, Pennsylvania, New Jersey, Colorado, Illinois, Ohio, and California) for a total purchase price of approximately $160.6 million in the year ended December 31, 2012; (5) 28 properties in 17 states (Colorado, Washington, Texas, North Carolina, Arizona, Illinois, New Jersey, California, Georgia, Ohio, Michigan, Wisconsin, Pennsylvania, Missouri, Indiana, Tennessee and Kansas) for a total purchase price of approximately $851.3 million in the year ended December 31, 2013. The tenants of our properties operate in a diverse range of industries, including consumer products, financial services, manufacturing, education, printing, technology, telecommunications, insurance, energy, and aerospace, as described in more detail in Part I, Item 2 of our Annual Report on Form 10-K for the year ended December 31, 2013.



40

As of June 30, 2014, we owned a fee simple interest, except as discussed in footnote 6 below, in 53 properties, as shown in the table below, encompassing approximately 12.4 million rentable square feet:
 
Property
 
Location
 
Tenant/Major Lessee
 
Acquisition
Date
 
Purchase Price
 
Square Feet
 
% Leased by Major Lessee (1)
 
% Leased
 
Property
Type
 
Year of Lease Expiration (for Major Lessee)
 
2014 Annualized Net Rent (2)
Renfro
 
Clinton, SC
 
Renfro Corp
 
6/18/2009
 
$21,700,000
 
566,500

 
100%
 
100%
 
 Manufacturing/
Distribution
 
2021
 
$2,078,000
Plainfield
 
Plainfield, IL
 
Chicago Bridge & Iron Company (Delaware)
 
6/18/2009
 
32,660,000
 
176,000

 
100%
 
100%
 
 Office/Laboratory
 
2022
 
2,587,000
Will Partners (3)
 
Monee, IL
 
World Kitchen, LLC
 
6/4/2010
 
26,305,000
 
700,200

 
—%
 
—%
 
 Manufacturing/
Distribution
 
—
 
—
Emporia Partners
 
Emporia, KS
 
Hopkins Enterprises, Inc.
 
8/27/2010
 
8,360,000
 
320,800

 
100%
 
100%
 
 Manufacturing/
Distribution
 
2020
 
887,000
ITT
 
Los Angeles, CA
 
ITT Educational Services, Inc.
 
9/23/2010
 
7,800,000
 
35,800

 
100%
 
100%
 
 Office
 
2016
 
762,000
Quad/Graphics
 
Loveland, CO
 
World Color (USA), LLC
 
12/30/2010
 
11,850,000
 
169,800

 
100%
 
100%
 
Printing Facility/
Office
 
2022
 
1,216,000
LTI
 
Carlsbad, CA
 
Life Technologies Corporation
 
5/13/2011
 
56,000,000
 
328,700

 
100%
 
100%
 
 Office/
Flex Facility
 
2022
 
4,329,000
AT&T
 
Redmond, WA
 
AT&T Services, Inc.
 
1/31/2012
 
40,000,000
 
155,800

 
100%
 
100%
 
 Office/
Data Center
 
2019
 
3,220,000
Westinghouse
 
Cranberry Township, PA
 
Westinghouse Electric Company, LLC
 
3/22/2012
 
36,200,000
 
118,000

 
100%
 
100%
 
Office
 
2025
 
2,887,000
TransDigm
 
Whippany, NJ
 
TransDigm (4)
 
5/31/2012
 
13,000,000
 
114,300

 
100%
 
100%
 
Assembly/
Manufacturing
 
2018
 
1,145,000
Travelers
 
Greenwood Village, CO
 
Travelers Indemnity
 
6/29/2012
 
16,100,000
 
131,000

 
100%
 
100%
 
 Office
 
2024
 
1,356,000
Zeller Plastik
 
Libertyville, IL
 
Zeller Plastik USA, Inc.
 
11/8/2012
 
15,600,000
 
193,700

 
100%
 
100%
 
 Manufacturing
 
2022
 
1,304,000
Northrop Grumman
 
Beavercreek (Dayton), OH
 
Northrop Grumman Systems Corp.
 
11/13/2012
 
17,000,000
 
99,200

 
100%
 
100%
 
 Office
 
2019
 
1,510,000
Health Net
 
Rancho Cordova, CA
 
Health Net of California, Inc.
 
12/18/2012
 
22,650,000
 
145,900

 
100%
 
100%
 
 Office
 
2022
 
2,198,000
Comcast
 
Greenwood Village, CO
 
Comcast Cable Holdings, LLC
 
1/11/2013
 
27,000,000
 
157,300

 
100%
 
100%
 
 Office
 
2021
 
2,297,000
Boeing
 
Renton, WA
 
The Boeing Company
 
2/15/2013
 
12,000,000
 
70,100

 
100%
 
100%
 
 Office
 
2017
 
993,000
Schlumberger
 
Houston, TX
 
Schlumberger Technology Corporation
 
5/1/2013
 
48,750,000
 
149,700

 
100%
 
100%
 
 Office
 
2024
 
3,032,000

41

Property
 
Location
 
Tenant/Major Lessee
 
Acquisition
Date
 
Purchase Price
 
Square Feet
 
% Leased by Major Lessee (1)
 
% Leased
 
Property
Type
 
Year of Lease Expiration (for Major Lessee)
 
2014 Annualized Net Rent (2)
UTC
 
Charlotte, NC
 
United Technologies Corporation ("UTC")
 
5/3/2013
 
39,188,000
 
198,900

 
100%
 
100%
 
 Office
 
2025
 
2,589,000
Avnet
 
Chandler, AZ
 
Avnet, Inc.
 
5/29/2013
 
32,462,100
 
231,400

 
100%
 
100%
 
 Research & Development/Flex Facility
 
2018
 
2,758,000
Cigna
 
Phoenix, AZ
 
Connecticut General Life Insurance Company
 
6/20/2013
 
54,500,000
 
232,600

 
100%
 
100%
 
 Office
 
2023
 
3,665,000
Nokia
 
Arlington Heights, IL
 
Nokia Solutions & Networks
 
8/13/2013
 
29,540,000
 
214,200

 
100%
 
100%
 
 Office
 
2025
 
2,201,000
Verizon
 
Warren, NJ
 
Cellco Partnership d/b/a Verizon Wireless
 
10/3/2013
 
40,000,000
 
210,500

 
100%
 
100%
 
 Office
 
2020
 
3,386,000
Fox Head
 
Irvine, CA
 
Fox Head, Inc.
 
10/29/2013
 
27,250,000
 
81,600

 
100%
 
100%
 
 Office
 
2027
 
1,852,000
Coca-Cola Refreshments
 
Atlanta, GA
 
Coca-Cola Refreshments USA
 
11/5/2013
 
56,700,000
 
315,900

 
94%
 
100%
 
 Office
 
2018
 
4,850,000
Atlanta Wildwood
 
Atlanta, GA
 
Hyundai Capital USA/BlueLinx
 
11/5/2013
 
28,000,000
 
250,000

 
50%/100%
 
100%
 
 Office
 
2019
 
2,516,000
General Electric (5)
 
Atlanta, GA
 
General Electric Company
 
11/5/2013
 
61,000,000
 
265,100

 
100%
 
100%
 
 Office
 
2025
 
4,272,000
Community Insurance
 
Mason, OH
 
Community Insurance Company
 
11/5/2013
 
23,500,000
 
223,500

 
100%
 
100%
 
 Office
 
2019
 
2,419,000
Anthem
 
Mason, OH
 
Anthem Prescription Management
 
11/5/2013
 
9,500,000
 
78,200

 
100%
 
100%
 
 Office
 
2019
 
939,000
JPMorgan Chase
 
Westerville, OH
 
JPMorgan Chase
 
11/5/2013
 
44,500,000
 
388,700

 
100%
 
100%
 
 Office
 
2025
 
3,177,000
IBM
 
Dublin, OH
 
IBM
 
11/5/2013
 
37,300,000
 
322,700

 
88%
 
100%
 
 Office
 
2020
 
4,138,000
Aetna
 
Arlington, TX
 
Aetna Life Insurance Company
 
11/5/2013
 
16,000,000
 
139,400

 
87%
 
94%
 
 Office
 
2020
 
1,416,000
CHRISTUS Health
 
Irving, TX
 
CHRISTUS Health
 
11/5/2013
 
46,350,000
 
253,300

 
98%
 
100%
 
 Office
 
2024
 
3,293,000
Roush Industries
 
Allen Park, MI
 
Roush Industries
 
11/5/2013
 
12,250,000
 
169,200

 
100%
 
100%
 
 Office
 
2015
 
1,241,000
Eagle Rock Executive Office Center
 
East Hanover, NJ
 
GfK Holding, Inc.
 
11/5/2013
 
6,500,000
 
177,800

 
17%
 
36%
 
 Office
 
2024
 
622,000
College Park Plaza
 
Indianapolis, IN
 
Republic Airways Holdings
 
11/5/2013
 
7,400,000
 
179,500

 
42%
 
80%
 
 Office
 
2015
 
73,000
Wells Fargo
 
Milwaukee, WI
 
Wells Fargo Bank, N.A.
 
11/5/2013
 
26,000,000
 
229,600

 
100%
 
100%
 
 Office
 
2019
 
2,144,000
One Century Place
 
Nashville, TN
 
Willis North America
 
11/5/2013
 
70,000,000
 
538,800

 
32%
 
90%
 
 Office
 
2026
 
6,433,000

42

Property
 
Location
 
Tenant/Major Lessee
 
Acquisition
Date
 
Purchase Price
 
Square Feet
 
% Leased by Major Lessee (1)
 
% Leased
 
Property
Type
 
Year of Lease Expiration (for Major Lessee)
 
2014 Annualized Net Rent (2)
Shire Pharmaceuticals
 
Wayne, PA
 
Shire Pharmaceuticals, Inc.
 
11/5/2013
 
21,500,000
 
114,100

 
100%
 
100%
 
 Office
 
2017
 
2,281,000
Comcast (Northpointe Corporate Center I)
 
Lynwood, WA
 
Comcast Corporation
 
11/5/2013
 
19,825,000
 
87,400

 
100%
 
100%
 
 Office
 
2017
 
1,772,000
Northpointe Corporate Center II
 
Lynwood, WA
 
Vacant
 
11/5/2013
 
7,175,000
 
69,000

 
N/A
 
N/A
 
 Office
 
N/A
 
—
United HealthCare
 
St. Louis, MO
 
United HealthCare Services
 
11/5/2013
 
28,000,000
 
188,500

 
100%
 
100%
 
 Office
 
2018
 
2,783,000
Farmers (5)
 
Kansas City, KS
 
Farmers Insurance Exchange
 
12/27/2013
 
19,100,000
 
102,000

 
100%
 
100%
 
 Office
 
2024
 
1,454,000
Caterpillar
 
Joliet, IL
 
Caterpillar, Inc.
 
1/7/2014
 
57,000,000
 
1,380,070

 
100%
 
100%
 
 Industrial
 
2018
 
5,992,000
DigitalGlobe
 
Westminster, CO
 
DigitalGlobe, Inc. (4)
 
1/14/2014
 
92,000,000
 
430,000

 
100%
 
100%
 
 Office
 
2030
 
6,343,000
Waste Management (6)
 
Phoenix, AZ
 
Waste Management of AZ
 
1/16/2014
 
22,825,000
 
131,850

 
100%
 
100%
 
 Office
 
2023
 
1,999,000
BT Infonet
 
El Segundo, CA
 
Infonet Services Corporation
 
2/27/2014
 
52,668,500
 
157,000

 
100%
 
100%
 
 Office
 
2021
 
4,155,000
Wyndham Worldwide
 
Parsippany, NJ
 
Wyndham Worldwide Operations, Inc.
 
4/23/2014
 
96,600,000
 
249,400

 
100%
 
100%
 
 Office
 
2029
 
6,307,000
ACE Hardware
 
Oak Brook, IL
 
Ace Hardware Corporate HQ
 
4/24/2014
 
37,000,000
 
206,000

 
100%
 
100%
 
 Office
 
2024
 
2,833,000
Equifax
 
St. Louis, MO
 
Equifax, Inc.
 
5/20/2014
 
14,200,000
 
94,000

 
100%
 
100%
 
 Office
 
2023
 
1,081,000
American Express
 
Phoenix, AZ
 
American Express Travel Related Services Co.
 
5/22/2014
 
51,000,000
 
337,400

 
100%
 
100%
 
 Office
 
2019
 
3,773,000
SoftBank
 
San Carlos, CA
 
SoftBank Regional HQ
 
5/28/2014
 
90,100,000
 
207,900

 
100%
 
100%
 
 Office
 
2020
 
5,846,000
Vanguard
 
Charlotte, NC
 
The Vanguard Group, Inc.
 
6/19/2014
 
33,200,000
 
224,600

 
100%
 
100%
 
 Office
 
2024
 
2,411,000
Parallon
 
Largo (Tampa Bay), FL
 
Parallon Business Performance Group
 
6/25/2014
 
17,235,000
 
83,200

 
100%
 
100%
 
 Office
 
2025
 
1,206,000
 
 
 
 
 
 
 
 
$
1,740,343,600

 
$
12,396,120

 

 
 
 
 
 
 
 
$
136,021,000

 
(1)
The weighted average occupancy including all tenants is approximately 90%. The recent decrease in our occupancy rate as a percentage of portfolio square feet is a direct result of the termination of the World Kitchen, LLC lease on January 24, 2014 as discussed below. However, the net rent payment of approximately $2.3 million represents only approximately 2% of our total portfolio annualized rent.
(2)
Net rent is based on (1) the contractual rental payments assuming the lease requires the tenant to reimburse the Company for certain operating expenses; or (2) contractual rent payments less certain operating expenses that are the responsibility of the Company for the 12-month period subsequent to June 30, 2014 and includes assumptions that may not be indicative of the actual future performance of a property, including the assumption that the tenant will perform its obligations under its lease agreement during the next 12 months.
(3)
In June 2013, World Kitchen, LLC vacated the Will Partners property and on January 24, 2014, we executed a termination agreement with World Kitchen, LLC as discussed in Note 3, Real Estate to the consolidated financial statements. Though the lease was non-cancellable and did not expire until February 29, 2020, we felt it was necessary to assume control of the property to facilitate re-leasing efforts.

43

(4)
The DigitalGlobe property is leased entirely to the previous owner, Avaya, Inc., through June 2015, immediately after which a lease with DigitalGlobe, Inc. will commence.
(5)
In connection with the acquisition of the Farmers and General Electric properties, we were assigned and assumed a leasehold estate and the rights to a payment in lieu of taxes agreement (the “PILOT Program”) with the municipalities which own the underlying leased fee estate and subsequently leased the ground to us.  The ground lease arrangements were put in place to provide real estate tax abatements, which is facilitated through the issuance of a municipal bond. Payments on the bonds, which are owned by us as lessee, are funded solely from the payments on the ground leases. The bonds can only be transferred to any successor to us, or any affiliate, as a lessee under the lease, including but not limited to any purchaser of our leasehold interest.  Upon termination of the lease, we have the obligation to purchase the land for a nominal amount.  The bonds, ground lease obligations and purchase options were measured at fair value at acquisition in accordance with ASC 805 and, due to their inseparability, are presented as a component of land on the consolidated balance sheets.
(6)
The land associated with the property is subject to a ground lease with the State of Arizona expiring on December 31, 2095.





44

Acquisition Indebtedness
For a discussion of our acquisition indebtedness, see Note 3, Real Estate, and Note 5, Debt, to the consolidated financial statements.
Significant Accounting Policies and Estimates
We have established accounting policies which conform to generally accepted accounting principles (“GAAP”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”). The preparation of our consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different estimates would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may use different estimates and assumptions that may impact the comparability of our financial condition and results of operations to those companies.
We believe the accounting policies listed below are the most critical in the preparation of our consolidated financial statements. These policies are described in greater detail in Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to the consolidated financial statements:
•
Real Estate- Valuation and purchase price allocation, depreciation;
•
Impairment of Real Estate and Related Intangible Assets and Liabilities;
•
Revenue Recognition;
•
Noncontrolling Interests in Consolidated Subsidiaries;
•
Investments in Unconsolidated Entities and Joint Ventures;
•
Common Stock, Preferred Units and Noncontrolling Interests Subject to Redemption;
•
Fair Value Measurements;
•
Income Taxes- Deferred tax assets and related valuation allowance, REIT qualification;
•
Loss Contingencies; and
•
Related Party Transactions.
Recently Issued Accounting Pronouncements
See Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to the consolidated financial statements.
Results of Operations
We are not aware of any material trends or uncertainties, other than national economic conditions affecting real estate in general, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition, management and operations of properties other than those listed in Part I, Item 1A. Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2013.
Same Property Analysis
Comparison of the Three Months Ended June 30, 2014 and 2013
For the quarter ended June 30, 2014, our "Same Property" portfolio consisted of 16 properties, encompassing approximately 3.5 million square feet, with an acquisition value of $364.2 million and annual net rent of $28.8 million (for the 12-month period subsequent to June 30, 2014). Our "Same Property" portfolio includes properties which were held for a full period for all periods presented. The following table provides a comparative summary of the results of operations for the 16 properties for the three months ended June 30, 2014 and 2013:

45

 
Three Months Ended June 30,
 
Increase/(Decrease)
 
Percentage
Change
 
2014
 
2013
 
Rental income
$
7,935,446

 
$
8,430,940

 
$
(495,494
)
 
(6
)%
Property expense recoveries
1,631,787

 
1,867,422

 
(235,635
)
 
(13
)%
Asset management fees to affiliates
682,979

 
682,493

 
486

 
—
 %
Property management fees to affiliates
273,366

 
339,703

 
(66,337
)
 
(20
)%
Property operating expense
1,046,153

 
830,915

 
215,238

 
26
 %
Property tax expense
1,241,476

 
1,067,539

 
173,937

 
16
 %
Rental Income
The variance in rental income is primarily due to a net decrease of $0.6 million in rental income, including in-place lease valuation amortization, due to the World Kitchen, LLC lease termination, which became effective on January 24, 2014, and $0.1 million less in straight-line rent adjustments mainly related to rent increases for the Renfro, LTI, AT&T, Travelers, and Comcast properties, as the contractual rent more closely approximated the straight-line rent amount.
Property Expense Recoveries
Also included as a component of revenue is the recovery of maintenance expenses and certain other recoverable operating and capital expenses, including property taxes and insurance. The decrease in property expense recoveries is primarily due to the World Kitchen, LLC lease termination, which resulted in a decrease of approximately $0.2 million in property tax expense recovery as taxes were previously paid by the tenant.
Property Management Fees to Affiliates
The property management fee decrease is a result of the decrease in base rent due to (1) the World Kitchen, LLC lease termination; and (2) non-recoverable fees that were waived in the current period, primarily for the Travelers, Northrop, Health Net, and Comcast properties.
Property Operating Expense and Property Tax Expense
The increase in property operating expense and property tax expense is mainly attributed to (1) an increase in property tax expense of $0.2 million, which is a result of property reassessments for the current taxable year for certain properties, of which the Travelers and Northrop Grumman properties accounted for $0.1 million; and (2) an increase in property operating expenses of $0.2 million, primarily due to utilities and repairs and maintenance for the Will Partners and Comcast properties.
Comparison of the Six Months Ended June 30, 2014 and 2013
As of June 30, 2014, our "Same Property" portfolio consisted of 14 properties, encompassing approximately 3.3 million square feet, with an acquisition value of $325.2 million and annual net rent of 25.5 million (for the 12-month period subsequent to June 30, 2014). The following table provides a comparative summary of the results of operations for the 14 properties for the six months ended June 30, 2014 and 2013:

 
Six Months Ended June 30,
 
Increase/(Decrease)
 
Percentage
Change
 
2014
 
2013
 
Rental income
$
12,905,410

 
$
15,012,109

 
$
(2,106,699
)
 
(14
)%
Property expense recoveries
2,313,992

 
2,514,050

 
(200,058
)
 
(8
)%
Asset management fees to affiliates
1,221,206

 
1,220,856

 
350

 
—
 %
Property management fees to affiliates
458,859

 
515,369

 
(56,510
)
 
(11
)%
Property operating expense
1,141,829

 
943,965

 
197,864

 
21
 %
Property tax expense
2,065,856

 
1,789,694

 
276,162

 
15
 %


46

Rental Income
The decrease in rental income is directly a result of the World Kitchen, LLC lease termination, which became effective on January 24, 2014. As a result of the termination, there was a decrease of approximately $0.9 million in base rent. Additionally, the unamortized in-place lease valuation ($0.9 million) and deferred rent asset ($0.3 million) were written off during the six months ended June 30, 2014. For comparability purposes, the rental income for the six months ended June 30, 2014 does not include the $7.125 million termination fee, which is included in rental income on the consolidated statements of operations.
Property Expense Recoveries
The decrease in property expense recoveries is primarily the net result of the World Kitchen, LLC lease termination, which resulted in a decrease of approximately $0.3 million in property tax expense recovery and an increase of $0.1 million in the recovery of maintenance expenses and certain other recoverable operating and capital expenses, mainly related to the Travelers and Health Net properties.
Property Management Fees to Affiliates
The property management fee decrease is a result of a $0.9 million decrease in base rent as a result of the World Kitchen, LLC lease termination, as discussed above, offset by base rent increases of approximately $0.2 million, primarily for the Renfro, LTI, and Travelers properties.
Property Operating Expense and Property Tax Expense
The increase in property operating expense and property tax expense is mainly attributed to an increase in property tax expense, which is a result of property reassessments for the current taxable year for certain properties, of which the Travelers and Northrop Grumman properties accounted for $0.2 million, and an increase in property expenses, primarily due to utilities and repairs and maintenance for the Will Partners, Travelers, and Health Net properties.
Portfolio Analysis
As of June 30, 2013, we owned 20 properties, and, as shown in the table above, as of June 30, 2014 we owned 53 properties. We are a “blind pool” offering and are in the offering and acquisitions stages of our life cycle, with the objective and concentration of continually growing our portfolio with assets that adhere to our investment criteria. Therefore, our results of operations for our entire portfolio for the three and six months ended June 30, 2014 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 Property analysis above for properties held for the same period of time. We expect that rental income, operating expenses, depreciation, and amortization expenses will each increase in future periods as we acquire additional properties.
Comparison of the Three Months Ended June 30, 2014 and 2013
The following table provides summary information about our results of operations for the three months ended June 30, 2014 and 2013:
 
 
Three Months Ended
June 30,
 
Increase
 
Percentage
Change
 
2014
 
2013
 
Rental income
$
38,149,346

 
$
9,865,904

 
$
28,283,442

 
287
%
Property expense recoveries
9,135,488

 
2,452,744

 
6,682,744

 
272
%
Asset management fees to affiliates
2,940,449

 
825,577

 
2,114,872

 
256
%
Property management fees to affiliates
1,328,129

 
358,686

 
969,443

 
270
%
Property operating expense
6,916,196

 
1,121,643

 
5,794,553

 
517
%
Property tax expense
5,781,737

 
1,220,930

 
4,560,807

 
374
%
Acquisition fees and expenses to non-affiliates
2,171,266

 
609,218

 
1,562,048

 
256
%
Acquisition fees and expenses to affiliates
10,180,050

 
5,247,003

 
4,933,047

 
94
%
General and administrative expenses
1,978,826

 
784,822

 
1,194,004

 
152
%
Depreciation and amortization
16,885,109

 
4,417,791

 
12,467,318

 
282
%
Interest expense
7,291,805

 
3,140,998

 
4,150,807

 
132
%

47

Rental Income
Rental income for the three months ended June 30, 2014 is comprised of base rent of $35.1 million, adjustments to straight-line contractual rent of $2.9 million and in-place lease valuation amortization of $0.1 million. Rental income for the three months ended June 30, 2014 increased by $28.3 million compared to the same period a year ago primarily as a result of (1) $1.9 million in higher rental revenue related to the real estate acquired during the three months ended June 30, 2013, which includes one full quarter of activity compared to the same quarter in the prior year; (2) $26.9 million in higher rental revenue related to the real estate acquired subsequent to June 30, 2013; (3) $0.1 million in in-place valuation amortization; less (4) $0.6 million in rental income as a result of the World Kitchen, LLC lease termination.
Property Expense Recoveries
Also included as a component of revenue is the recovery of maintenance expenses and certain other recoverable operating and capital expenses, including property taxes and insurance (collectively "Recoverable Expenses"), which increased by $6.7 million compared to the same period in the prior year as a result of (1) $2.2 million in property tax recoveries related to certain properties; and (2) $4.5 million increase in property expense recoveries for recoverable expenses primarily related to properties acquired during the year ended December 31, 2013.
Management Fees (Asset and Property)
Asset Management and Property Management fees for the three months ended June 30, 2014 and 2013 totaled $4.3 million and $1.2 million, respectively. The total increase of $3.1 million compared to the same period a year ago is a result of (1) $1.4 million in asset management fees and $0.7 million in property management fees related to the acquisitions made during the year ended December 31, 2013; and (2) $0.7 million in asset management fees and $0.2 million in property management fees related to the properties acquired subsequent to December 31, 2013.
Property Expenses
Property expenses for the three months ended June 30, 2014 and 2013 totaled $12.7 million and $2.3 million, respectively, consisting of property operating expenses and property taxes. Property operating expenses include insurance, property management, repairs and maintenance, security, janitorial, landscaping and other administrative expenses incurred to operate our properties. The total increase of $10.4 million compared to the same period a year ago is primarily a result of (1) $4.6 million in property taxes, of which $3.4 million relates to real estate acquired during the year ended December 31, 2013 and $1.0 million relates to real estate acquired subsequent to the year ended December 31, 2013; (2) $0.1 million in ground lease rent expense for the Waste Management property which was acquired on January 16, 2014; (3) $4.5 million in property operating expenses related to certain real estate for which we paid certain operating expenses on behalf of the tenant and recovered through estimated monthly recoverable expense reimbursements (31 of our property leases contained such provisions compared to 11 leases in the same period in the prior year) of which $3.8 million relates to properties acquired subsequent to June 30, 2013; and (4) $1.0 million in property operating expenses related to certain single-tenant properties that were acquired subsequent to June 30, 2013 and are leased pursuant to full service gross leases in which we are responsible for all operating expenses.
Acquisition Fees and Expenses
Real estate acquisition fees and expenses to non-affiliates, which totaled $2.2 million for the three months ended June 30, 2014, increased by $1.6 million compared to the three months ended June 30, 2013 due to increased acquisition activity in the current period. Real estate acquisition fees and expenses to affiliates of $10.2 million represent the acquisition fees and expense reimbursement earned by our Advisor for the seven property acquisitions made in the current period totaling $339.3 million compared to the prior year in which acquisitions totaled $174.9 million.
General and Administrative Expenses
General and administrative expenses for the three months ended June 30, 2014 increased by $1.2 million compared to the same period a year ago due to increased operating activity. General and administrative expenses represent costs unrelated to property operations or transaction costs. These expenses primarily include corporate office expenses, related to being a public company including transfer agent fees, certain audit fees, regulatory fees, legal costs and other professional fees. The $1.2 million increase is primarily due to the following: (1) an increase of $0.3 million in transfer agent fees as a result of higher equity sales; (2) an increase of $0.1 million in allocated expenses which are related to additional personnel and rent costs incurred by our Advisor; (3) an increase of $0.2 million in professional fees primarily for audit and tax fees, lease administration costs, and proxy campaign management services; (4) an increase of $0.5 million in state tax expense primarily due to the allocation of properties across 19 states for the three months ended June 30, 2014 compared to 12 states for the three

48

months ended June 30, 2013; and (5) an increase of $0.1 million in organizational costs primarily due to a write-off of prepaid filing fees as a result of the termination of the Follow-On Offering in the current period.
Depreciation and Amortization Expense
Depreciation and amortization expense for the three months ended June 30, 2014 consisted of depreciation of building and building improvements of our properties of $6.7 million and amortization of the contributed and acquired values allocated to tenant origination and absorption costs of $10.2 million. The increase of $12.5 million as compared to the three months ended June 30, 2013 is a result of additional depreciation and amortization of (1) $2.1 million related to the acquisitions made during the three months ended March 31, 2014; (2) $1.7 million related to the acquisitions made during the three months ended June 30, 2014; and (3) $8.7 million related to the acquisitions made during the year ended December 31, 2013, which includes three full months of activity compared to partial months of activity during the three months ended June 30, 2013, and three full months for acquisitions made subsequent to June 30, 2013.
Interest Expense
Interest expense for the three months ended June 30, 2014 increased by $4.2 million compared to the same period in 2013 due to the following: (1) $1.1 million in new mortgage interest expense for five properties refinanced through the AIG Loan on January 24, 2014, which previously served as security for the KeyBank Credit Facility, and had a lower interest rate, of which only four of the five properties served as collateral for the Key Bank Credit Facility for the same period in the prior year; (2) $1.0 million in new interest expense related to the Unsecured Term Loan, which was entered into on May 8, 2014, including amortization of deferred financing costs; (3) $0.5 million in additional interest expense as it relates to the KeyBank Term Loan, which was originated in November 2013 to acquire the Investment Grade Portfolio; (4) $0.2 million in new mortgage interest expense for the Ace Hardware mortgage loan, which was assumed upon acquisition on April 24, 2014; (5) $1.5 million in additional amortization of deferred financing costs as a result of the write-offs related to the KeyBank Credit Facility and KeyBank Term Loan, which were both terminated in conjunction with the Unsecured Term Loan origination; (6) $0.2 million in additional unused commitment fees primarily related to the Unsecured Revolver, of which $0.03 million related to the secured KeyBank Credit Facility, which was fully paid off in February 2014; and less (7) $0.3 million in interest expense, as a result of the full repayment of the KeyBank Credit Facility.
Comparison of the Six Months Ended June 30, 2014 and 2013
The following table provides summary information about our results of operations for the six months ended June 30, 2014 and 2013:

 
Six Months Ended June 30,
 
Increase
 
Percentage
Change
 
2014
 
2013
 
Rental income
$
77,618,011

 
$
18,045,149

 
$
59,572,862

 
330
%
Property expense recoveries
17,659,028

 
4,120,059

 
13,538,969

 
329
%
Asset management fees to affiliates
5,462,504

 
1,492,077

 
3,970,427

 
266
%
Property management fees to affiliates
2,539,882

 
624,863

 
1,915,019

 
306
%
Property operating expense
13,784,145

 
1,888,850

 
11,895,295

 
630
%
Property tax expense
11,006,250

 
2,190,985

 
8,815,265

 
402
%
Acquisition fees and expenses to non-affiliates
2,885,962

 
864,997

 
2,020,965

 
234
%
Acquisition fees and expenses to affiliates
16,914,855

 
6,417,003

 
10,497,852

 
164
%
General and administrative expenses
3,194,374

 
1,373,790

 
1,820,584

 
133
%
Depreciation and amortization
32,086,416

 
7,964,002

 
24,122,414

 
303
%
Interest expense
12,864,292

 
5,849,792

 
7,014,500

 
120
%
Rental Income
Rental income for the six months ended June 30, 2014 is comprised of base rent of $73.3 million, adjustments to straight-line contractual rent of $5.1 million and in-place lease valuation amortization expense of $(0.8) million. Rental income for the six months ended June 30, 2014 increased by $59.6 million compared to the same period a year ago as a result of (1) $5.4 million in higher rent collections related to the real estate acquired during the six months ended June 30, 2013, which includes two full quarters of activity compared to the same period in the prior year; (2) $36.9 million in higher rental income related to the real estate acquired subsequent to June 30, 2013 through December 31, 2013; (3) $12.4 million in additional rental income

49

related to the real estate acquired during the six months ended June 30, 2014; (4) an approximately $7.1 million lease termination fee related to World Kitchen, LLC, the tenant previously occupying the Will Partners property; less (5) $1.3 million in rental income and $0.9 million in in-place lease valuation amortization as a result of the World Kitchen, LLC lease termination.
Property Expense Recoveries
Also included as a component of revenue is the recovery of maintenance expenses and certain other recoverable operating and capital expenses, including property taxes and insurance (collectively "Recoverable Expenses"), which increased by $13.5 million compared to the same period in the prior year as a result of (1) $1.9 million in property tax recoveries related to certain properties; (2) $2.1 million in property expense recoveries for recoverable expenses primarily related to properties acquired during the year ended December 31, 2013; and (3) $9.5 million in other property expense recoveries primarily related to properties acquired during the year ended December 31, 2013.
Management Fees (Asset and Property)
Asset Management and Property Management fees for the six months ended June 30, 2014 and 2013 totaled $8.0 million and $2.1 million, respectively. The total increase of $5.9 million compared to the same period a year ago is a result of (1) $2.9 million in asset management fees and $1.5 million in property management fees related to the acquisitions made during the year ended December 31, 2013; and (2) $1.1 million in asset management fees and $0.4 million in property management fees related to the properties acquired during the six months ended June 30, 2014.
Property Expenses
Property expenses for the six months ended June 30, 2014 and 2013 totaled $24.8 million and $4.1 million, respectively, consisting of property operating expenses and property taxes. Property operating expenses include insurance, property management, repairs and maintenance, security, janitorial, landscaping and other administrative expenses incurred to operate our properties. The total increase of $20.7 million compared to the same period a year ago is primarily a result of (1) $8.8 million in property taxes, of which $7.2 million relates to real estate acquired during the year ended December 31, 2013 and $1.3 million relates to real estate acquired during the six months ended June 30, 2014; (2) $0.2 million in ground lease rent expense for the Waste Management property which was acquired on January 16, 2014; (3) $9.2 million in property operating expenses related to certain real estate for which we paid certain operating expenses on behalf of the tenant and recovered through estimated monthly recoverable expense reimbursements (31 of our property leases contained such provisions compared to 11 leases in the same period in the prior year) of which $7.6 million relates to property acquired subsequent to June 30, 2013; and (4) $2.3 million in property operating expenses related to certain single-tenant properties that are leased pursuant to full service gross leases in which we are responsible for all operating expenses, of which $2.2 million relates to property acquired subsequent to June 30, 2013.
Acquisition Fees and Expenses
Real estate acquisition fees and expenses to non-affiliates, which totaled $2.9 million for the six months ended June 30, 2014, increased by $2.0 million compared to the six months ended June 30, 2013 due to increased acquisition activity in the current period. Real estate acquisition fees and expenses to affiliates of $16.9 million represent the acquisition fees and expense reimbursement earned by our Advisor for the 11 property acquisitions made in the current period totaling $563.8 million compared to the prior year in which acquisitions totaled $213.9 million.
General and Administrative Expenses
General and administrative expenses for the six months ended June 30, 2014 increased by $1.8 million compared to the same period a year ago due to increased operating activity. General and administrative expenses represent costs unrelated to property operations or transaction costs. These expenses primarily include corporate office expenses, related to being a public company, including transfer agent fees, certain audit fees, regulatory fees, legal costs and other professional fees. The $1.8 million increase is primarily due to the following: (1) an increase of $0.6 million in transfer agent fees as a result of higher equity sales; (2) an increase of $0.2 million in allocated expenses which are related to additional personnel and rent costs incurred by our Advisor; (3) an increase of $0.2 million in professional fees primarily for audit and tax fees, lease administration costs, and proxy campaign management services; (4) an increase of $0.5 million in state tax expense primarily due to the allocation of properties across 19 states for the six months ended June 30, 2014 compared to 12 states for the six months ended June 30, 2013; (5) $0.1 million in stock-based compensation for restricted stock units issued to our independent directors; and (6) an increase of $0.2 million in organizational costs primarily due to a write-off of prepaid filing fees as a result of the termination of the follow-on offering in the current period.

50

Depreciation and Amortization Expense
Depreciation and amortization expense for the six months ended June 30, 2014 consisted of depreciation of building and building improvements of our properties of $12.3 million and amortization of the contributed and acquired values allocated to tenant origination and absorption costs of $19.8 million. The increase of $24.1 million as compared to the six months ended June 30, 2013 is a result of additional depreciation and amortization of (1) $5.4 million related to the acquisitions made during the six months ended June 30, 2014; and (2) $18.7 million related to the acquisitions made during the year ended December 31, 2013, which includes six full months of activity compared to partial months of activity during the six months ended June 30, 2013, and six full months for acquisitions made subsequent to June 30, 2013.
Interest Expense
Interest expense for the six months ended June 30, 2014 increased by $7.0 million compared to the same period in 2013 due to the following: (1) $0.1 million in new mortgage interest expense for seven of the eight properties refinanced on the Midland Mortgage Loan on February 28, 2013, which previously served as security for the KeyBank Credit Facility, and had a lower interest rate; (2) $0.2 million in new mortgage interest expense for the Ace Hardware mortgage loan which was assumed upon acquisition on April 24, 2014; (3) $2.0 million in new mortgage interest expense for five properties refinanced through the AIG Loan on January 24, 2014, which previously served as security for the KeyBank Credit Facility, and had a lower interest rate, of which four of the five properties served as collateral for the Key Bank Credit Facility for the same period in the prior year; (4) $1.9 million in additional interest expense as it relates to the KeyBank Term Loan, which was originated in November 2013 to acquire the Investment Grade Portfolio; (5) $1.0 million of interest expense related to the Unsecured Term Loan which was entered into on May 8, 2014, including the amortization of deferred financing costs; (6) $0.4 million in additional unused commitment fees of which $0.2 million related to the Unsecured Revolver and the remaining $0.2 million related to the secured KeyBank Credit Facility, which was fully paid off in February 2014; (7) $1.8 million in additional amortization of financing costs as a result of the write-offs related to the refinancing through the AIG loan and the secured KeyBank Credit Facility and KeyBank Term Loan, which were both terminated in conjunction with the addition of the Unsecured Term Loan; (8) a $0.3 million decrease in interest expense related to the KeyBank Credit Facility, which was fully paid off in February 2014; and (9) a $0.1 million decrease in interest expense related to the Bridge Loan, which was terminated during the three months ended December 31, 2013.
Funds from Operations and Modified Funds from Operations
Our management believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient. Additionally, publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start-up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases.
In order to provide a more complete understanding of the operating performance of a REIT, the National Association of Real Estate Investment Trusts (“NAREIT”) promulgated a measure known as funds from operations (“FFO”). FFO is defined as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, adding back asset impairment write-downs, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships, joint ventures and preferred distributions. Because FFO calculations exclude such items as depreciation and amortization of real estate assets and gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. It should be noted, however, that other REITs may not define FFO in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently than we do, making comparisons less meaningful.
The Investment Program Association (“IPA”) issued Practice Guideline 2010-01 (the “IPA MFFO Guideline”) on November 2, 2010, which extended financial measures to include modified funds from operations (“MFFO”). In computing MFFO, FFO is adjusted for certain non-operating cash items such as acquisition fees and expenses and certain non-cash items such as straight-line rent, amortization of in-place lease valuations, amortization of discounts and premiums on debt investments, nonrecurring impairments of real estate-related investments, mark-to-market adjustments included in net income

51

(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, it is added back to FFO 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, it is added back to FFO to arrive at MFFO as a means of determining operating results of our portfolio.
•
Acquisition-related costs. We were organized primarily with the purpose of acquiring or investing in income-producing real property in order to generate operational income and cash flow that will allow us to provide regular cash distributions to our stockholders. In the process, we incur non-reimbursable affiliated and non-affiliated acquisition-related costs, which in accordance with GAAP, are expensed as incurred and are included in the determination of income (loss) from operations and net income (loss). These costs have been and will continue to be funded with cash proceeds from our Primary Public Offerings or included as a component of the amount borrowed to acquire such real estate. If we acquire a property after all offering proceeds from our Public Offerings have been invested, there will not be any offering proceeds to pay the corresponding acquisition-related costs. Accordingly,

52

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 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 the 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 the 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.
For all of these reasons, we believe the non-GAAP measures of FFO and MFFO, in addition to income (loss) from operations, net income (loss) and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful to investors in evaluating the performance of our real estate portfolio. However, a material limitation associated with FFO and MFFO is that they are not indicative of our cash available to fund distributions since other uses of cash, such as capital expenditures at our properties and principal payments of debt, are not deducted when calculating FFO and MFFO. Additionally, MFFO has limitations as a performance measure in an offering such as ours where the price of a share of common stock is a stated value. The use of MFFO as a measure of long-term operating performance on value is also limited if we do not continue to operate under our current business plan as noted above. MFFO is useful in assisting management and investors in assessing our on-going ability to generate cash flow from operations and continue as a going concern in future operating periods, and in particular, after the offering and acquisition stages are complete and NAV is disclosed. However, MFFO is not a useful measure in evaluating NAV because impairments are taken into account in determining NAV but not in determining MFFO. Therefore, FFO and MFFO should not be viewed as more prominent a measure of performance than income (loss) from operations, net income (loss) or to cash flows from operating activities and each should be reviewed in connection with GAAP measurements.
Neither the SEC, NAREIT, nor any other applicable regulatory body has opined on the acceptability of the adjustments contemplated to adjust FFO in order to calculate MFFO and its use as a non-GAAP performance measure. In the future, the SEC or NAREIT may decide to standardize the allowable exclusions across the REIT industry, and we may have to adjust the calculation and characterization of this non-GAAP measure.
Our calculation of FFO and MFFO is presented in the following table for the three and six months ended June 30, 2014 and 2013.
 

53

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Net loss
$
(7,989,916
)
 
$
(5,269,080
)
 
$
(5,249,125
)
 
$
(6,362,037
)
Adjustments:
 
 
 
 
 
 
 
Distributions to redeemable preferred unit holders
(4,739,583
)
 
—

 
(9,427,083
)
 
—

Depreciation of building and improvements
6,654,435

 
1,935,565

 
12,305,475

 
3,463,912

Amortization of leasing costs and intangibles
10,230,674

 
2,482,226

 
19,780,941

 
4,500,090

Company's share of depreciation of building and improvements- unconsolidated entity
14,350

 
14,164

 
28,542

 
14,164

Company's share of amortization of intangible assets- unconsolidated entity
16,233

 
14,271

 
32,288

 
14,271

FFO
$
4,186,193

 
$
(822,854
)
 
$
17,471,038

 
$
1,630,400

Reconciliation of FFO to MFFO
 
 
 
 
 
 
 
FFO
$
4,186,193

 
$
(822,854
)
 
$
17,471,038

 
$
1,630,400

Adjustments:
 
 
 
 
 
 
 
Acquisition fees and expenses to non-affiliates
2,171,266

 
609,218

 
2,885,962

 
864,997

Acquisition fees and expenses to affiliates
10,180,050

 
5,247,003

 
16,914,855

 
6,417,003

Company's share of acquisition fees and expenses to non-affiliates- unconsolidated entity
—

 
28,313

 
—

 
28,313

Revenues in excess of cash received (straight-line rents)
(2,880,546
)
 
(548,731
)
 
(5,066,065
)
 
(1,000,779
)
Amortization of above/(below) market rent
(150,140
)
 
(92,858
)
 
785,201

 
(137,192
)
Amortization of ground leasehold interests (below market)
6,734

 
—

 
12,501

 
—

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

 
—

 
(7,125,000
)
 
—

Cash received related to termination fee
249,491

 
—

 
540,613

 
—

Loss on extinguishment of debt - write-off of deferred financing costs
1,755,168

 
—

 
1,755,168

 
—

Company's share of revenues in excess of cash received (straight-line rents)- unconsolidated entity
(4,909
)
 
(5,402
)
 
(10,517
)
 
(5,402
)
Company's share of amortization of above/(below) market rent- unconsolidated entity
5,323

 
4,679

 
10,587

 
4,679

Gain from discount on investment in unconsolidated entity
—

 
(160,000
)
 
—

 
(160,000
)
MFFO
$
15,518,630

 
$
4,259,368

 
$
28,174,343

 
$
7,642,019



54

Liquidity and Capital Resources
Long-Term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds will be for property acquisitions, either directly or through entity interests, for the payment of operating expenses and distributions, and for the payment of debt service on our outstanding indebtedness, including repayment of the Unsecured Term Loan and fixed rate and assumed mortgage loans discussed below, and other investments, including preferred equity distributions and redemptions pursuant to the purchase agreement with Starwood as discussed in Note 6, Equity. Generally, cash needs for items, other than property acquisitions, will be met from operations . There may be a delay in the deployment of the proceeds raised in our Follow-On Offering for the additional properties that could result in a delay in the benefits to our stockholders, if any, of returns generated from our investments. Our Advisor will evaluate potential additional property acquisitions and engage in negotiations with sellers on our behalf. After a purchase contract is executed that contains specific terms, the property will not be purchased until the successful completion of due diligence, which includes review of the title insurance commitment, an appraisal and an environmental analysis. In some instances, the proposed acquisition will require the negotiation of final binding agreements, which may include financing documents. During this period, we may decide to repay debt as allowed under the loan agreements or temporarily invest any unused proceeds from our Follow-On Offering in certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions.
Unsecured Credit Facility
On May 8, 2014, we, through our Operating Partnership, entered into a credit agreement (the “Unsecured Credit Agreement”) with KeyBank as administrative agent, Bank of America as syndication agent and a syndicate of lenders. Pursuant to the Unsecured Credit Agreement, we were provided with a $750.0 million senior unsecured credit facility (the "Unsecured Credit Facility"), consisting of a $450.0 million senior unsecured revolver (the "Unsecured Revolver") and a $300.0 million senior unsecured term loan (the "Unsecured Term Loan"). The Unsecured Credit Facility may be increased up to $500.0 million for a maximum of $1.25 billion by increasing the Unsecured Revolver, the Unsecured Term Loan or a combination of both. The Unsecured Revolver has an initial term of four years, maturing on May 8, 2018 and may be extended for a one-year period if certain conditions are met. The Unsecured Term Loan has a term of five years, maturing on May 8, 2019. Availability under the Unsecured Credit Agreement is limited to the lesser of a (i) a specified leverage ratio applied to a portfolio real estate pool value computed as adjusted net operating income divided by specified capitalization rate; or (ii) debt service coverage ratio ("DSCR") calculation, all as set forth in the Unsecured Credit Agreement.
The Unsecured Credit Facility has an interest rate based on the leverage ratio reported with quarterly compliance certificate, as discussed below, and calculated based on the LIBO Rate plus the applicable LIBO Rate margin, as provided in the Unsecured Credit Agreement, or Base Rate plus the applicable base rate margin, as provided in the Unsecured Credit Agreement. The Base Rate is calculated as the greater of (i) the KeyBank Prime rate or (ii) the Federal Funds rate plus 0.50%. Payments under the Unsecured Credit Facility are interest only and are due on the first day of each quarter.
AIG Loan
On January 24, 2014, we, through five SPEs wholly owned by our Operating Partnership, entered into various loan agreements (the “AIG Loan Documents”) with National Union Fire Insurance Company and The Variable Annuity Life Insurance Company of Pittsburgh, Pa. (collectively, the “Lenders”), pursuant to which the Lenders provided such SPEs with a loan in the aggregate amount of $110.64 million (the “AIG Loan”). The funds were utilized to refinance five of the properties previously serving as security for the KeyBank Credit Facility. The AIG Loan is secured by cross-collateralized and cross-defaulted first mortgage liens or first lien deeds of trust and second mortgage liens or second lien deeds of trust on the Verizon, Avnet, Northrop Grumman, Schlumberger, and UTC properties. The AIG Loan has a term of 15 years, maturing on February 1, 2029. The AIG Loan bears interest at a fixed rate of 4.96% and requires monthly payments of interest only for the first three years and fixed monthly payments of principal and interest thereafter.
KeyBank Term Loan
On November 5, 2013, we, through 17 borrower SPEs wholly-owned by our Operating Partnership, obtained a $300.0 million term loan with KeyBank (the "KeyBank Term Loan"). The KeyBank Term Loan had an initial funding of $282.0 million, with the remaining $18.0 million held back to fund future projected tenant improvements and leasing costs for the properties comprising the 2013 Investment Grade Portfolio (the "Mortgaged Properties"). The KeyBank Term Loan was secured by cross-collateralized, first mortgage liens on the properties comprising the Mortgaged Properties. The KeyBank Term Loan had a term of three years, maturing in November 2016, subject to two, one-year extension options (subject to the fulfillment of certain conditions), and required monthly interest-only payments.
The KeyBank Term Loan was terminated on May 8, 2014 upon our execution of the Unsecured Credit Agreement.
KeyBank Credit Facility

55

On June 13, 2013, we, through our Operating Partnership, and seven of its wholly-owned property-owning special purpose entities (“SPEs”), entered into that certain Second Amended and Restated Credit Agreement (the “Second Restated KeyBank Credit Agreement”) with KeyBank, as administrative agent, Bank of America as syndication agent, and the other Lenders, pursuant to which the Lenders initially provided available financing commitments of $190.0 million of a total $400.0 million Credit Facility (the “KeyBank Credit Facility”). During the first two years under the term of the Second Restated KeyBank Credit Agreement, we had the option of requesting additional commitments up to the $400.0 million available Credit Facility, and the administrative agent would act on a best efforts basis to obtain such increases or additional commitments. Availability under the Second Restated KeyBank Credit Agreement is limited to the lesser of certain loan-to-value and debt service coverage ratio calculations set forth in the Second Restated KeyBank Credit Agreement.
In connection with the acquisitions made during the three months ended June 30, 2014, we, through our Operating Partnership, made draws totaling $148.9 million under the KeyBank Credit Facility and repaid $193.4 million, $109.0 million of which was from the AIG Loan discussed below. Per the terms of the Second Restated KeyBank Credit Agreement, the maximum loan available under the KeyBank Credit Facility was the lesser of the total commitments ($335.0 million) or the aggregate borrowing base availability less the outstanding balance.
The KeyBank Credit Facility was terminated on May 8, 2014, at which time there was no outstanding balance, upon our execution of the Unsecured Credit Agreement.
Midland Mortgage Loan

On February 28, 2013, certain property-owning SPEs wholly-owned by our Operating Partnership, entered into a fixed-rate mortgage loan agreement with Midland National Life Insurance Company (the “Midland Mortgage Loan”), whereby certain properties, which previously served as security for the KeyBank Credit Facility, were refinanced in the amount of $105.6 million and now serve as collateral for the Midland Mortgage Loan. The Midland Mortgage Loan has a fixed interest rate of 3.94%, a term of 10 years and requires monthly interest-only payments for the first four years of the term, followed by principal and interest payments based on a 30-year amortization schedule with all remaining principal and unpaid interest due at maturity. The Midland Mortgage Loan is secured by a first lien on and individual security agreements with the Operating Partnership’s underlying interest in the SPEs owning certain properties, along with individual fixture filings, and assignments of leases, rents, income and profits related to each such property.

Preferred Equity
On November 5, 2013, in connection with the acquisition of the Investment Grade Portfolio, our Operating Partnership entered into a purchase agreement with an affiliate of Starwood Property Trust (“Starwood”), pursuant to which Starwood provided a $250.0 million equity investment in our Operating Partnership in exchange for 24,319,066 Series A Cumulative Exchangeable Preferred Units of limited partnership interest (the “Preferred Units”) of our Operating Partnership. Starwood is entitled to monthly distributions calculated as follows:
From November 5, 2013 through October 31, 2015, a rate of LIBO plus 7.25% per annum of the Liquidation Preference (defined below) per Preferred Unit;
From November 1, 2015 through October 31, 2016, a rate of LIBO plus 8.25% per annum of the Liquidation Preference per Preferred Unit;
From November 1, 2016 through October 31, 2017, a rate of LIBO plus 9.25% per annum of the Liquidation Preference per Preferred Unit;
From November 1, 2017 through October 31, 2018, a rate of LIBO plus 10.25% per annum of the Liquidation Preference per Preferred Unit.
At all times, LIBOR will be subject to a minimum floor of 0.25%.

The Preferred Units may be redeemed by our Operating Partnership, in whole or in part, at any time. The redemption price for the Preferred Units will be equal to the sum of (i) $10.28 per Preferred Unit, plus all accumulated and unpaid distributions (the “Liquidation Preference”); (ii) 1.81% of the Liquidation Preference; (iii) all accumulated and unpaid distributions through the date of redemption, plus interest thereon. No redemptions had been made as of June 30, 2014. Our Operating Partnership may, however, redeem up to 75% of the Preferred Units after the units have been outstanding for 18 months and the remaining 25% of the outstanding Preferred Units on the 24th month. In both instances our Operating Partnership will not be obligated for the Liquidation Preference and other early redemption fees.

Other Potential Future Sources of Capital

56

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 the proceeds of our Follow-On Offering and income from operations in order to meet our long-term liquidity requirements and to fund our distributions.
Short-Term Liquidity and Capital Resources
We expect to meet our short-term operating liquidity requirements with remaining proceeds raised in our Follow-On Offering and DRP Offering, and operating cash flows generated from our properties and other properties we acquire in the future. All advances from our Advisor will be repaid, without interest, as funds are available after meeting our current liquidity requirements, subject to the limitations on reimbursement set forth in the “Management Compensation” section of our prospectus.
Our cash and cash equivalent balances increased by approximately $236.7 million during the six months ended June 30, 2014 and were used in or provided by the following:
Operating Activities. During the six months ended June 30, 2014, we generated approximately $26.5 million of net cash from operating activities, compared to $2.1 million generated during the same period in 2013. The net loss of $5.2 million in the current period is offset by (1) non-cash adjustments of $30.5 million (consisting of depreciation and amortization of $35.5 million, $0.1 million of stock-based compensation, less deferred rent of $5.1 million), which increased compared to the same period in 2013 in which the same non-cash adjustments totaled $7.7 million, as a result of the increase in depreciation and amortization and deferred rent related to the properties acquired subsequent to June 30, 2013; and (2) cash provided by working capital of $1.2 million compared to cash provided by working capital of $1.0 million for the six months ended June 30, 2013. The $0.2 million increase in working capital is due to (1) a $5.2 million decrease in the change in other assets mainly due to a $1.9 million tenant reimbursement for the Atlanta Wildwood property, a $0.3 million termination fee payment from Bluelinx for reducing its leased space during the previous ownership, a $0.2 million termination fee payment from Perot for terminating its lease in December 2013, and $3.2 million in year-end equity sales, for which cash was received as of January 2, 2014; (2) a $6.4 million increase related to a note receivable for the World Kitchen, LLC lease termination fee discussed in Note 3, Real Estate, to the consolidated financial statements; (3) a $2.7 million decrease related to the cash collections received in a designated cash collateral account which is controlled by the lender; (4) a $2.7 million decrease in the change in operating reserves due to rent earned during the period; (5) a $2.4 million increase in the change in tenant improvement reserves due to additions made for certain properties, partially offset by disbursements made in the current period; (6) a $0.6 million increase in the change in accounts payable as a result of additional prepaid rent received in the current period; and (7) a $2.1 million decrease in the change in due to affiliates primarily related to the $1.9 million expense reimbursement for the Investment Grade Portfolio acquisition, which was paid as of January 30, 2014.
Investing Activities. During the six months ended June 30, 2014, we used $544.3 million in cash for investing activities related to (1) $540.0 million for the acquisitions made in the current period; (2) $7.6 million for the investment in a land development joint venture; (3) $0.8 million paid for construction-in-progress and tenant improvements; less (4) $4.1 million in real estate acquisition deposits used in the current period.

Financing Activities. During the six months ended June 30, 2014, we generated $754.5 million in financing activities, compared to $201.3 million generated during the same period in 2013, an increase in cash provided by financing activities of $553.2 million. The increase in cash generated is the net result of a $947.8 million increase in the change in cash provided by financing activities compared to the prior year and a $394.6 million increase in the change in cash used in financing activities compared to the prior year. The $947.8 million increase is comprised of: (1) an increase of $19.7 million in proceeds from borrowings on the KeyBank Credit Facility discussed above; (2) a net increase of $5.0 million due to an increase of $110.6 million in proceeds from borrowings on the AIG Loan discussed above offset by a decrease of $105.6 million in proceeds from borrowings on the Midland Mortgage Loan discussed above; (3) an increase of $300.0 million in proceeds from borrowings on the Unsecured Term Loan discussed above; (4) $2.3 million in financing-related deposits that were paid in the prior year and applied at closing during the six months ended June 30, 2014; (5) an increase of $619.4 million in the issuance of common stock during the six months ended June 30, 2014, compared to the same period in 2013; and (6) an increase of $1.4 million in the issuance of limited partnership units during the six months ended June 30, 2014. The $394.6 million increase in the change in cash used consists of the following: (1) an increase of $89.8 million in principal repayments on the KeyBank Credit Facility; (2) an increase of $282.0 million in principal repayments on the KeyBank Term Loan; (3) an increase of $3.2 million in deferred financing costs; (4) an increase of

57

$0.3 million in common stock repurchases; (5) an increase of $19.2 million in distribution payments to common stockholders, preferred unit holders and noncontrolling interests; and (6) an increase of $0.1 million in principal amortization due to the addition of the Ace Hardware property mortgage loan.

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 so that investors may be entitled to distributions immediately upon purchasing our shares. We expect to pay distributions regularly unless our results of operations, our general financial condition, general economic conditions, or other factors inhibit us from doing so. Distributions will be authorized at the discretion of our board of directors, which will be directed, in substantial part, by its obligation to cause us to comply with the REIT requirements of the Internal Revenue Code of 1986, as amended (the “Code”). The funds we receive from operations that are available for distribution may be affected by a number of factors, including the following:
•
the amount of time required for us to invest the funds received in our Follow-On Offering;
•
our operating and interest expenses;
•
the amount of distributions or dividends received by us from our indirect real estate investments;
•
our ability to keep our properties occupied;
•
our ability to maintain or increase rental rates;
•
tenant improvements, capital expenditures and reserves for such expenditures;
•
the issuance of additional shares; and
•
financings and refinancings.
We have funded distributions with operating cash flow from our properties and offering proceeds raised in our Public Offerings. To the extent that we do not have taxable income, distributions paid will be considered a return of capital to stockholders. The following table shows distributions paid during the six months ended June 30, 2014 and the year ended December 31, 2013:
 
 
Six Months Ended
June 30, 2014
 
 
 
Year Ended December 31,
2013
 
 
Distributions paid in cash — noncontrolling interests
$
1,482,453

  
 
 
$
2,675,196

 
 
Distributions paid in cash — redeemable noncontrolling interests (1)
201,839

  
 
 
366,441

 
 
Distributions paid in cash — common stockholders
12,313,723

  
 
 
7,730,534

 
 
Distributions paid in cash — preferred equity
9,479,166

 
 
 
1,354,167

 
 
Distributions reinvested (shares issued)
18,789,154

  
 
 
8,901,619

 
 
Total distributions
$
42,266,335

(2)
 
 
$
21,027,957

 
 
Source of distributions:
 
 
 
 
 
 
 
Cash flows provided by operations (3) 
23,477,181

  
56
%
 
$
2,599,509

 
13
%
Offering proceeds from issuance of common stock
—

  
—
%
 
9,526,829

 
45
%
Offering proceeds from issuance of common stock pursuant to the DRP
18,789,154

  
44
%
 
8,901,619

 
42
%
Total sources
$
42,266,335

  
100
%
 
$
21,027,957

 
100
%
 
(1)
Distributions represent the actual payments made to redeemable noncontrolling interests. These distributions are allocated to common stockholders (see consolidated statements of operations for the six months ended June 30, 2014) and noncontrolling interests (see consolidated statements of equity for the six months ended June 30, 2014) based on their respective ownership percentages as of June 30, 2014, as discussed in Note 6, Equity.
(2)
Total distributions declared but not paid as of June 30, 2014 were $3.0 million, $0.3 million and $1.6 million for common stockholders, noncontrolling interests, and preferred equity holders, respectively.
(3)
Percentages were calculated by dividing the respective source amount by the total sources of distributions.
For the six months ended June 30, 2014, we paid and declared distributions of approximately $32.9 million to common stockholders including shares issued pursuant to the DRP, and approximately $11.1 million to the limited partners of our Operating Partnership, including those distributions paid to the preferred unit holders, as compared to FFO and MFFO for the

58

six months ended June 30, 2014 of $17.5 million and $28.2 million, respectively. The payment of distributions from sources other than FFO or MFFO may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds.
Contractual Commitments and Contingencies
The following is a summary of our contractual obligations as of June 30, 2014:
 
 
Payments Due During the Years Ending December 31,
 
Total
 
 
2014
 
2015-2016
 
2017-2018
 
Thereafter
Outstanding debt obligations (1)
$
603,254,838

 
 
$
915,973

 
$
40,867,608

 
$
26,824,489

 
$
534,646,768

Interest on outstanding debt obligations (2)
156,465,125

  
 
9,402,137

 
38,061,584

 
32,933,387

 
76,068,017

Ground lease obligations
35,292,139

 
 
90,202

 
360,808

 
396,888

 
34,444,241

Total
$
795,012,102

  

$
10,408,312

 
$
79,290,000

 
$
60,154,764

 
$
645,159,026

 
(1)
Amounts include principal payments only. As of June 30, 2014, the total Unsecured Term Loan balance was $300.0 million and is due on May 8, 2019. The payments on our mortgage debt do not include the premium of $2.0 million.
(2)
Projected interest payments are based on the outstanding principal amounts at June 30, 2014. Projected interest on the Unsecured Term Loan is based on the interest rate in effect at June 30, 2014.

Off-Balance Sheet Arrangements
As of June 30, 2014, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.
Subsequent Events
See Note 10, Subsequent Events, to the consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risks include risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market-sensitive instruments. We expect that the primary market risk to which we will be exposed is interest rate risk, including the risk of changes in the underlying rates on our variable rate debt.
As of June 30, 2014, our debt consisted of (1) mortgage loans of $305.3 million, of which $89.0 million relates to property-specific mortgages, which include $2.0 million in debt premiums; and (2) the Unsecured Term Loan of $300.0 million. The KeyBank Credit Facility and KeyBank Term Loan were terminated on May 8, 2014 upon our entry into the Unsecured Credit Agreement discussed below.
In the future, we may be exposed to the effects of interest rate changes primarily as a result of borrowings used to maintain liquidity and fund acquisition, expansion, and financing of our real estate investment portfolio and operations. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve our objectives, we may borrow at fixed rates or variable rates that are lower than our current borrowing cost. In order to mitigate our interest rate risk on certain financial instruments, we may enter into interest rate hedge instruments, such as interest rate cap agreements, and in order to mitigate our risk to foreign currency exposure we may enter into foreign currency hedges. We will not enter into derivative or interest rate transactions for speculative purposes.
AIG Loan
In conjunction with the refinancing of certain properties that previously served as security for the KeyBank Credit Facility, certain property-owning SPEs wholly-owned by our Operating Partnership, entered into the AIG Loan for $110.64 million as discussed in Note 5, Debt. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.

59

Midland Mortgage Loan
In conjunction with the refinancing of certain properties that previously served as security for the KeyBank Credit Facility, certain property-owning SPEs wholly-owned by our Operating Partnership, entered into the Midland Mortgage Loan for $105.6 million as discussed in Note 5, Debt. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.
TransDigm Mortgage Debt
In conjunction with the acquisition of the TransDigm property, we, through a wholly-owned subsidiary of our Operating Partnership, assumed $6.9 million in debt. See Note 5, Debt, to the consolidated financial statements for a detailed description of the assumed debt. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.

LTI Mortgage Debt
In conjunction with the contribution of the LTI property, we, through a wholly-owned subsidiary of our Operating Partnership, assumed $34.4 million in debt. See Note 5, Debt, to the consolidated financial statements for a detailed description of the assumed debt. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.
Emporia Partners Mortgage Debt
In conjunction with the contribution of the Emporia Partners property, we, through a wholly-owned subsidiary of our Operating Partnership, assumed $5.4 million in debt. See Note 5, Debt, to the consolidated financial statements for a detailed description of the assumed debt. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.
Ace Hardware Mortgage Debt
In conjunction with the acquisition of the Ace Hardware property, we, through a wholly-owned subsidiary of our Operating Partnership, assumed $23.9 million in debt. See Note 5, Debt, to the consolidated financial statements for a detailed description of the assumed debt. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.
Unsecured Credit Facility
On May 8, 2014, we, through our Operating Partnership, entered into a credit agreement (the “Unsecured Credit Agreement”) with KeyBank as administrative agent, Bank of America as syndication agent and a syndicate of lenders. Pursuant to the Unsecured Credit Agreement, we were provided with a $750.0 million senior unsecured credit facility (the "Unsecured Credit Facility"), consisting of a $450.0 million senior unsecured revolver (the "Unsecured Revolver") and a $300.0 million senior unsecured term loan (the "Unsecured Term Loan").
The Unsecured Credit Facility has an interest rate based on the leverage ratio reported with quarterly compliance certificate, as discussed below, and calculated based on the LIBO Rate plus the applicable LIBO Rate margin, as provided in the Unsecured Credit Agreement, or Base Rate plus the applicable base rate margin, as provided in the Unsecured Credit Agreement. The Base Rate is calculated as the greater of (i) the KeyBank Prime rate or (ii) the Federal Funds rate plus 0.50%. Payments under the Unsecured Credit Facility are interest only and are due on the first day of each quarter. An increase in the LIBO Rate may have an impact on our future earnings or cash flows as the current interest rate on the Unsecured Credit Facility is tied to this index. If the LIBO Rate increased by 1.00%, the interest expense on the Unsecured Term Loan would have potentially increased by approximately $0.5 million for the six months ended June 30, 2014.

Preferred Equity
In connection with the investment in the Preferred Units of our Operating Partnership, Starwood is entitled to monthly distributions calculated as follows:
From November 5, 2013 through October 31, 2015, a rate of LIBO plus 7.25% per annum of the Liquidation Preference (defined in Note 6, Equity, to the consolidated financial statements) per Preferred Unit;
From November 1, 2015 through October 31, 2016, a rate of LIBO plus 8.25% per annum of the Liquidation Preference per Preferred Unit;
From November 1, 2016 through October 31, 2017, a rate of LIBO plus 9.25% per annum of the Liquidation Preference per Preferred Unit;

60

From November 1, 2017 through October 31, 2018, a rate of LIBO plus 10.25% per annum of the Liquidation Preference per Preferred Unit.
At all times, LIBOR will be subject to a minimum floor of 0.25%.
If the LIBO Rate increased by 1.00%, the distribution payments on the Preferred Units would have potentially increased by approximately $1.1 million for the six months ended June 30, 2014.

 
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 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 June 30, 2014 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, 2013.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
None.
(b)
We registered 82,500,000 shares of our common stock in our Initial Public Offering (SEC File No. 333-159167, effective November 6, 2009), of which we registered 75,000,000 shares to be offered to the public in our primary offering at an aggregate offering price of up to $750,000,000, or $10.00 per share through February 14, 2013, and 7,500,000 shares to be offered to investors pursuant to our DRP at an aggregate offering price of $71,250,000, or $9.50 per share through February 14, 2013. On February 15, 2013, we began offering shares in our Initial Public Offering at the revised price of $10.28 per share, and a revised price under our DRP equal to 95% of the revised share offering price, which is approximately $9.77 per share. Our Initial Public Offering was terminated on April 25, 2013 and on April 26, 2013, we began to offer $1.0 billion in shares of our common stock in our Follow-On Offering (SEC File No. 333-183614) (together with the Initial Public Offering, the “Public Offerings”) at $10.28 per share and the DRP reflected a price equal to 95% of the share offering price, which is approximately $9.77 per share. Our equity raise as of June 30, 2014 resulted in the following:

61

Common shares issued in our Public Offerings
123,986,710

Common shares issued in our Public Offerings pursuant to our DRP
3,235,966

Common shares redeemed in our SRP
(175,631
)
Total common shares outstanding in our Public Offerings
127,047,045

Gross proceeds from our Public Offerings
$
1,266,541,733

Gross proceeds from our Public Offerings from shares issued pursuant to our DRP
31,496,523

Total gross proceeds from our Public Offerings
1,298,038,256

Redemption of common shares pursuant to our SRP
(1,696,866
)
Selling commissions and dealer manager fees paid
(123,635,916
)
Reimbursement to our Advisor of O&O costs paid
(5,326,392
)
Net proceeds paid from our Public Offerings
1,167,379,082

Reimbursement to our Advisor of O&O and other costs payable
(21,663
)
Net proceeds from our Public Offerings
$
1,167,357,419

The net offering proceeds raised in the Public Offerings, exclusive of the $236.7 million increase in cash and cash equivalents per the consolidated statements of cash flows, were used primarily to fund (1) $263.3 million to repay a significant portion of the outstanding balance of the KeyBank Credit Facility during the six months ended June 30, 2014; (2) $477.4 million for certain property acquisitions paid at closing; (3) $92.1 million in payments on mezzanine and bridge loans used to acquire certain properties; (4) $81.5 million of various fees and reimbursements paid to affiliates; (5) $55.0 million to repay a portion of the outstanding balance of the KeyBank Term Loan during the six months ended June 30, 2014; (6) $19.5 million in deferred financing costs paid to lending banks; (7) $5.4 million in offering costs related to the preferred units issued as a result of the Investment Grade Portfolio acquisition during the year ended December 31, 2013; (8) $3.0 million for real estate acquisition and other deposits to unaffiliated parties primarily for current and potential future acquisitions and financing, which are included in real estate acquisition deposits and in other assets on the consolidated balance sheets; (9) $1.4 million for the investment in an unconsolidated beneficial interest in a DST as discussed in Note 4, Investments; (10) $7.7 million for the investment in a land development joint venture; less (11) $3.6 million in additional proceeds as a result of the $105.6 million and $110.64 million in borrowing proceeds from the Midland Mortgage Loan and AIG Loan, respectively, both discussed in Note 5, Debt, to the consolidated financial statements, less the $103.6 and $109.0 million, respectively, used from those proceeds to repay a portion of the outstanding balance of the KeyBank Credit Facility; and less (12) $73.0 million in additional proceeds as a result of the $300.0 million in borrowing proceeds from the Unsecured Term Loan, discussed in Note 5, Debt, to the consolidated financial statements, less the $227.0 million used from those proceeds to repay the outstanding balance of the KeyBank Term Loan.
(c)
As noted in Note 6, Equity – Share Redemption Program, in the notes to the financial statements contained in this report, and more fully described in our prospectus, as supplemented from time to time, our board of directors adopted a share redemption program ("SRP") on February 20, 2009, which enables our stockholders to have their shares redeemed by us, subject to the significant conditions and limitations described in our prospectus. Our SRP has no set termination date, but our ability to redeem shares under the program is limited as described in the prospectus.
As of June 30, 2014 and December 31, 2013, $31.5 million and $12.7 million in shares of common stock, respectively, were eligible for redemption, of which $0.8 million and $0.2 million, respectively, were reclassified from redeemable common stock to accounts payable and accrued liabilities in the consolidated balance sheets as of June 30, 2014 and December 31, 2013. During the six months ended June 30, 2014, we redeemed 78,671, shares of common stock for approximately $0.7 million at a weighted average price per share of $9.54. Since inception through June 30, 2014, the Company redeemed 175,631 shares of common stock for approximately $1.7 million at a weighted average price per share of $9.66 pursuant to the SRP. As of June 30, 2014, there were 76,337 shares totaling $0.8 million subject to redemption requests to be processed subsequent to June 30, 2014. On July 31, 2014, we satisfied all of the eligible redemption requests at a weighted average price per share of $9.97. Our board of directors may choose to amend, suspend or terminate our share redemption program upon 30 days’ written notice at any time.
During the quarter ended June 30, 2014, we redeemed shares as follows:
 

62

For the Month Ended
 
Total
Number of
Shares
Redeemed
 
Average
Price Paid
per Share
 
Total Number of
Shares Redeemed as
Part of Publicly
Announced Plans or
Programs
 
Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that
May Yet Be Purchased
Under the Plans or
Programs
April 30, 2014
 
51,924

 
$
9.74

 
51,924

 
(1
)
May 31, 2014
 
—

 
N/A

 
—

 
—

June 30, 2014
 
—

 
N/A

 
—

 
—

 
(1)
A description of the maximum number of shares that may be purchased under our share redemption program is included in the narrative preceding this table.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
(a)
During the quarter ended June 30, 2014, 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 June 30, 2014, 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 June 30, 2014 (and are numbered in accordance with Item 601 of Regulation S-K).

63

Exhibit
No.
  
Description
3.1
  
Third Articles of Amendment and Restatement of Griffin Capital Essential Asset REIT, Inc., incorporated by reference to Exhibit 3.1 to Pre-Effective Amendment No. 3 to the Registrant’s Registration Statement on Form S-11, filed on October 29, 2009, Commission File No. 333-159167
3.2
  
Bylaws of Griffin Capital Essential Asset REIT, Inc., incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-11, filed on May 12, 2009, Commission File No. 333-159167
3.3
  
Articles of Amendment to Third Articles of Amendment and Restatement of Griffin Capital Essential Asset REIT, Inc., incorporated by reference to Exhibit 3.3 to Post-Effective Amendment No. 6 to the Registrant’s Registration Statement on Form S-11, filed on July 12, 2011, Commission File No. 333-159167
3.4
  
Second Articles of Amendment to the Third Articles of Amendment and Restatement of Griffin Capital Essential Asset REIT, Inc., incorporated by reference to Exhibit 3.1 to the Registrant’s current report on Form 8-K filed on February 25, 2013, Commission File No. 000-54377
3.5
  
Third Articles of Amendment to the Third Articles of Amendment and Restatement of Griffin Capital Essential Asset REIT, Inc., incorporated by reference to Exhibit 3.1 to the Registrant’s current report on Form 8-K filed on June 14, 2013, Commission File No. 000-54377
4.1
  
Form of Subscription Agreement and Subscription Agreement Signature Page (included as Appendix A to Supplement No. 3, incorporated by reference to Post-Effective Amendment No. 10 to the Registrant’s Registration Statement on Form S-11, filed on July 17, 2012, Commission File No. 333-159167)
10.1
 
Unsecured Credit Agreement dated May 8, 2014, incorporated by reference to Exhibit 10.1 to the Registrant’s current report on Form 8-K filed on May 14, 2014, Commission File No. 000-54377
10.2
 
Revolver Note, dated May 8, 2014, incorporated by reference to Exhibit 10.2 to the Registrant’s current report on Form 8-K filed on May 14, 2014, Commission File No. 000-54377
10.3
 
Term Loan Note, dated May 8, 2014, incorporated by reference to Exhibit 10.3 to the Registrant’s current report on Form 8-K filed on May 14, 2014, Commission File No. 000-54377
10.4
 
Guaranty, dated May 8, 2014, incorporated by reference to Exhibit 10.4 to the Registrant’s current report on Form 8-K filed on May 14, 2014, Commission File No. 000-54377
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 June 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Comprehensive loss (unaudited), (iii) Consolidated Statements of Equity (unaudited), (iv) Consolidated Statements of Cash Flows (unaudited) and (v) Notes to Consolidated Financial Statements (unaudited).

*
Filed herewith.

64

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

Dated:
August 8, 2014
By:
 
/s/ Joseph E. Miller
 
 
 
 
Joseph E. Miller
 
 
 
 
On behalf of the Registrant and as Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

65

Griffin Capital Essential Asset REIT, Inc. Reports

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