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EX-32.1 - EXHIBIT - Griffin Capital Essential Asset REIT, Inc.gcearii06302014exhibit3211.htm

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

FORM 10-Q
____________________________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended 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