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

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

FORM 10-Q
____________________________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission File Number: 000-54377
_______________________________________________
Griffin Capital Essential Asset REIT, Inc.
(Exact name of Registrant as specified in its charter)
________________________________________________
Maryland
 
26-3335705
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)

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

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




Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 11, 2015: 173,891,702 shares of common stock, $0.001 par value per share.


FORM 10-Q
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
TABLE OF CONTENTS
 
 
Page No.
 
 
Item 1.
Financial Statements:
 
 
Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014 (unaudited)
 
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014 (unaudited)
 
Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2015 and 2014 (unaudited)
 
Consolidated Statements of Equity for the Year Ended December 31, 2014 and the Six Months Ended June 30, 2015 (unaudited)
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (unaudited)
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

3

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

4

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 
June 30,
2015
 
December 31,
2014
 
(unaudited)
ASSETS
 
 
 
Cash and cash equivalents
$
40,913

 
$
68,915

Restricted cash
28,019

 
41,354

Restricted cash - real estate funds held for exchange
—

 
10,105

Real estate:
 
 
 
Land
338,326

 
258,103

Building and improvements
1,775,895

 
1,221,461

Tenant origination and absorption cost
493,398

 
379,419

Construction in progress
72,675

 
35,664

Total real estate
2,680,294

 
1,894,647

Less: accumulated depreciation and amortization
(149,026
)
 
(107,504
)
Total real estate, net
2,531,268

 
1,787,143

Real estate assets and other assets held for sale, net
18,946

 
27,192

Investments in unconsolidated entities
61,612

 
66,249

Intangible assets, net
36,610

 
24,344

Deferred rent
23,415

 
17,189

Deferred financing costs, net
11,308

 
11,791

Other assets, net
15,088

 
11,165

Total assets
$
2,767,179

 
$
2,065,447

LIABILITIES AND EQUITY
 
 
 
Debt:
 
 
 
Mortgages payable, plus unamortized premium of $1,701 and $1,858, respectively
$
324,581

 
$
325,696

Unsecured Term Loan
300,000

 
300,000

Unsecured Revolver
490,100

 
—

Total debt
1,114,681

 
625,696

Restricted reserves
25,614

 
37,653

Accounts payable and other liabilities
53,143

 
43,731

Distributions payable
5,534

 
5,083

Due to affiliates
5,302

 
1,930

Below market leases, net
44,435

 
40,394

Liabilities of real estate assets held for sale
901

 
1,011

Total liabilities
1,249,610

 
755,498

Commitments and contingencies (Note 8)

 

Preferred units subject to redemption, 6,079,766 and 24,319,066 units eligible towards redemption as of June 30, 2015 and December 31, 2014, respectively
62,500

 
250,000

Noncontrolling interests subject to redemption, 531,000 units eligible towards redemption as of June 30, 2015 and December 31, 2014
12,543

 
12,543

Common stock subject to redemption
81,130

 
56,421

Stockholders’ equity:
 
 
 
Preferred Stock, $0.001 par value; 200,000,000 shares authorized; no shares outstanding, as of June 30, 2015 and December 31, 2014
—

 
—

Common Stock, $0.001 par value; 700,000,000 shares authorized; 173,715,536 and 129,763,016 shares outstanding as of June 30, 2015 and December 31, 2014, respectively
1,391

 
1,326

Additional paid-in capital
1,562,704

 
1,128,318

Cumulative distributions
(151,057
)
 
(104,429
)
Accumulated deficit
(66,578
)
 
(51,285
)
Accumulated other comprehensive loss
(554
)
 
(423
)
Total stockholders’ equity
1,345,906

 
973,507

Noncontrolling interests
15,490

 
17,478

Total equity
1,361,396

 
990,985

Total liabilities and equity
$
2,767,179

 
$
2,065,447

See accompanying notes.

5

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except share and per share amounts)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
Rental income
$
49,633

 
$
38,149

 
$
94,348

 
$
77,618

Property expense recoveries
11,930

 
9,136

 
22,428

 
17,659

Total revenue
61,563

 
47,285

 
116,776

 
95,277

Expenses:
 
 
 
 
 
 
 
Asset management fees to affiliates
4,273

 
2,941

 
8,060

 
5,463

Property management fees to affiliates
1,590

 
1,328

 
3,064

 
2,540

Property management fees to non-affiliates
54

 
—

 
54

 
—

Property operating expense
8,172

 
6,910

 
15,071

 
13,773

Property tax expense
7,857

 
5,782

 
14,735

 
11,006

Acquisition fees and expenses to non-affiliates
441

 
2,171

 
845

 
2,886

Acquisition fees and expenses to affiliates
20,291

 
10,180

 
22,271

 
16,915

General and administrative expenses
1,934

 
1,979

 
3,058

 
3,194

Depreciation and amortization
22,418

 
16,892

 
41,883

 
32,099

Total expenses
67,030

 
48,183

 
109,041

 
87,876

Income (loss) from operations
(5,467
)
 
(898
)
 
7,735

 
7,401

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(6,392
)
 
(7,292
)
 
(11,820
)
 
(12,864
)
Interest income
558

 
193

 
664

 
193

Income (loss) from investment in unconsolidated entities
(354
)
 
7

 
(746
)
 
20

Gain from sale of depreciable operating property
—

 
—

 
3,613

 
—

Net loss
(11,655
)
 
(7,990
)
 
(554
)
 
(5,250
)
Distributions to redeemable preferred unit holders
(2,904
)
 
(4,740
)
 
(7,591
)
 
(9,427
)
Preferred units redemption premium
(7,429
)
 
—

 
(7,429
)
 
—

Less: Net loss attributable to noncontrolling interests
668

 
441

 
458

 
554

Net loss attributable to controlling interest
(21,320
)
 
(12,289
)
 
(15,116
)
 
(14,123
)
Distributions to redeemable noncontrolling interests attributable to common stockholders
(89
)
 
(89
)
 
(177
)
 
(175
)
Net loss attributable to common stockholders
$
(21,409
)
 
$
(12,378
)
 
$
(15,293
)
 
$
(14,298
)
Net loss attributable to common stockholders per share, basic and diluted
$
(0.15
)
 
$
(0.10
)
 
$
(0.11
)
 
$
(0.15
)
Weighted average number of common shares outstanding, basic and diluted
140,825,261

 
122,833,322

 
135,495,479

 
96,130,980

See accompanying notes.

6

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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(11,655
)
 
$
(7,990
)
 
$
(554
)
 
$
(5,250
)
Other comprehensive loss:
 
 
 
 
 
 
 
Equity in other comprehensive income (loss) of unconsolidated joint venture
287

 
—

 
(131
)
 
 
Total comprehensive loss
(11,368
)
 
(7,990
)
 
(685
)
 
(5,250
)
   Distributions to redeemable preferred unit holders
(2,904
)
 
(4,740
)
 
(7,591
)
 
(9,427
)
Preferred units redemption premium
(7,429
)
 
—

 
(7,429
)
 
—

   Less: Net loss attributable to noncontrolling interests
668

 
441

 
458

 
554

Comprehensive loss attributable to controlling interests
(21,033
)
 
(12,289
)
 
(15,247
)
 
(14,123
)
Distributions to redeemable noncontrolling interests attributable to common stockholders
(89
)
 
(89
)
 
(177
)
 
(175
)
Comprehensive loss attributable to common stockholders
$
(21,122
)
 
$
(12,378
)
 
$
(15,424
)
 
$
(14,298
)
See accompanying notes.




7

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF EQUITY
For the Year Ended December 31, 2014 and the Six Months Ended June 30, 2015 (unaudited)
(In thousands, except share data)
 
 
 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Cumulative
Distributions
 
Accumulated
Deficit
 
 
Total
Stockholders’
Equity
 
Non-
controlling
Interests
 
Total
Equity
 
Shares
 
Amount
 
BALANCE December 31, 2013
49,893,502

 
$
508

 
$
433,644

 
$
(26,683
)
 
$
(32,631
)
 
—

 
$
374,838

 
$
19,736

 
$
394,574

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

 
776

 
775,831

 
—

 
—

 
—

 
776,607

 
—

 
776,607

Stock-based compensation
10,000

 
—

 
108

 
—

 
—

 
—

 
108

 
—

 
108

Discount on issuance of common stock
—

 
—

 
(1,885
)
 
—

 
—

 
—

 
(1,885
)
 
—

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

 
—

 
(76,638
)
 
—

 
—

 
—

 
(76,638
)
 
—

 
(76,638
)
Distributions to common stockholders
—

 
—

 
—

 
(32,799
)
 
—

 
—

 
(32,799
)
 
—

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

 
45

 
44,902

 
(44,947
)
 
—

 
—

 
—

 
—

 
—

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

 
—

 
—

 
(2,560
)
 
—

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

 
—

 
(44,947
)
 
—

 
—

 
—

 
(44,947
)
 
—

 
(44,947
)
Issuance of limited partnership units
—

 
—

 
(140
)
 
 
 
 
 
—

 
(140
)
 
1,504

 
1,364

Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

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

 
—

 
—

 
—

 
—

 
—

 
—

 
(14
)
 
(14
)
Net loss
—

 
—

 
—

 
—

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

 
$
1,326

 
$
1,128,318

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

 
$
17,478

 
$
990,985

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

 
42

 
433,448

 
—

 
—

 
—

 
433,490

 
—

 
433,490

Stock-based compensation
667

 
—

 
5

 
—

 
—

 
—

 
5

 
—

 
5

Offering costs
—

 
—

 
(54
)
 
—

 
—

 
—

 
(54
)
 
—

 
(54
)
Distributions to common stockholders
—

 
—

 
—

 
(20,677
)
 
—

 
—

 
(20,677
)
 
—

 
(20,677
)
Issuance of shares for distribution reinvestment plan
2,495,323

 
26

 
25,925

 
(25,951
)
 
—

 
—

 
—

 
—

 
—

Repurchase of common stock
(308,438
)
 
(3
)
 
(3,022
)
 
—

 
—

 
—

 
(3,025
)
 
—

 
(3,025
)
Additions to common stock subject to redemption
—

 
—

 
(25,951
)
 
—

 
—

 
—

 
(25,951
)
 
—

 
(25,951
)
Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(1,524
)
 
(1,524
)
Distributions to noncontrolling interests subject to redemption
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(6
)
 
(6
)
Offering costs on redemption of preferred units
—

 
—

 
4,035

 
—

 
—

 
—

 
4,035

 
—

 
4,035

Net loss
—

 
—

 
—

 
—

 
(15,293
)
 
(131
)
 
(15,424
)
 
(458
)
 
(15,882
)
BALANCE June 30, 2015
173,715,536

 
$
1,391

 
$
1,562,704

 
$
(151,057
)
 
$
(66,578
)
 
$
(554
)
 
$
1,345,906

 
$
15,490

 
$
1,361,396

See accompanying notes.

8

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
 
Six Months Ended
 
June 30,
 
2015
 
2014
Operating Activities:
 
 
 
Net loss
$
(554
)
 
$
(5,250
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation of building and building improvements
17,490

 
12,305

Amortization of leasing costs and intangibles, including ground leasehold interests
24,393

 
19,794

Amortization of above and below market leases, net
(1,055
)
 
785

Amortization of deferred financing costs
1,142

 
2,704

Amortization of debt premium
(157
)
 
(101
)
Deferred rent
(6,436
)
 
(5,066
)
Termination fee revenue receivable from tenant, net
—

 
(6,446
)
Gain from sale of depreciable operating property
(3,613
)
 
—

(Income) loss from investment in unconsolidated entities
746

 
(20
)
Stock-based compensation
5

 
105

Change in operating assets and liabilities:
 
 
 
Other assets
(1,549
)
 
5,122

Rent collections received in restricted cash collateral account
(2,660
)
 
494

Operating reserves
(1,826
)
 
2,703

Reserves for tenant improvements
5,782

 
(2,407
)
Accounts payable and other liabilities
(2,263
)
 
3,057

Due to affiliates, net
3,360

 
(1,311
)
Net cash provided by operating activities
32,805

 
26,468

Investing Activities:
 
 
 
Acquisition of properties, net
(143,000
)
 
(539,957
)
Cash assumed from the Signature Office REIT merger
8,557

 
—

Proceeds from disposition of properties
11,809

 
—

Real estate acquisition deposits
—

 
4,100

Real estate funds held for exchange
10,105

 
—

Improvements to real estate
(4,701
)
 
(337
)
Payments for construction in progress
(1,400
)
 
(518
)
Real estate development, net of unpaid construction costs
(37,921
)
 
(57
)
Land acquisition - real estate development
—

 
(7,544
)
Distributions of capital from investment in unconsolidated entities
3,760

 
52

Net cash used in investing activities
(152,791
)
 
(544,261
)
Financing Activities:
 
 
 
Proceeds from borrowings - KeyBank credit facility
—

 
148,900

Proceeds from borrowings - Mortgage debt
—

 
110,640

Proceeds from borrowings - Unsecured Term Loan
—

 
300,000

Proceeds from borrowings - Unsecured Revolver
490,100

 
—

Principal payoff of secured indebtedness - KeyBank credit facility
—

 
(193,400
)
Principal payoff of secured indebtedness - KeyBank term loan
—

 
(282,000
)
Principal payoff of secured indebtedness - Signature Office REIT Credit Facility
(173,000
)
 
—

Principal amortization payments on secured indebtedness
(958
)
 
(791
)
Deferred financing costs
(660
)
 
(6,506
)
Financing deposits
—

 
2,305

Offering costs
(54
)
 
(76,564
)
Issuance of common stock, net
—

 
774,735

Issuance of noncontrolling interests, net
—

 
1,364

Repurchase of preferred units
(190,894
)
 
—

Repurchase of common stock
(3,025
)
 
(750
)
Dividends paid on preferred units subject to redemption
(8,815
)
 
(9,479
)
Distributions to noncontrolling interests
(1,717
)
 
(1,684
)
Distributions to common stockholders
(18,993
)
 
(12,314
)
Net cash provided by financing activities
91,984

 
754,456

Net (decrease) increase in cash and cash equivalents
(28,002
)
 
236,663

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

 
10,407

Cash and cash equivalents at the end of the period
$
40,913

 
$
247,070

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid for interest
$
10,817

 
$
9,655

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

 
$
21,500

Supplemental Disclosures of Non-cash Transactions:
 
 
 
Change in fair value of swap agreement
$
(131
)
 
$
—

Construction in progress costs - real estate development
$
(36,630
)
 
$
(1,658
)
Unpaid construction in progress costs - real estate development
$
(1,291
)
 
$
1,601

Mortgage debt assumed in conjunction with the acquisition of real estate assets plus a premium of $0 and $1,799, respectively
$
—

 
$
23,843

Non-controlling interest in land development
$
—

 
$
7,656

Decrease in distributions payable to noncontrolling interests
$
(9
)
 
$
(1
)
Increase in distributions payable to common stockholders
$
1,684

 
$
1,763

Decrease in distributions payable to preferred unit holders
$
(1,224
)
 
$
(52
)
Distributions to redeemable noncontrolling interests attributable to common stockholders as reflected on the consolidated statements of operations
$
89

 
$
175

Common stock issued pursuant to the distribution reinvestment plan
$
25,951

 
$
18,789

Common stock issued pursuant to the Signature Office REIT merger
$
433,490

 
$
—

Common stock redemptions funded subsequent to period-end
$
2,482

 
$
761

Assets and liabilities assumed in conjunction with the Signature Office REIT merger:
 
 
 
Land
$
72,614

 
$
—

Building and improvements
$
435,651

 
$
—

Tenant origination and absorption cost
$
89,424

 
$
—

Above market leases
$
14,324

 
$
—

Other assets
$
2,477

 
$
—

Unsecured debt
$
173,000

 
$
—

Below market leases
$
4,913

 
$
—

Accounts payable and other liabilities
$
11,644

 
$
—

Equity consideration for the Signature Office REIT merger
$
433,490

 
$
—

See accompanying notes.

9
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)


1.
Organization
Griffin Capital Essential Asset REIT, Inc., a Maryland corporation (the “Company”), was formed on August 28, 2008 under the Maryland General Corporation Law. The Company was organized primarily with the purpose of acquiring single tenant properties that are essential to the tenant’s business, and used a substantial amount of the net proceeds from the Public Offerings (as defined below) to invest in these properties. The Company satisfied requisite financial and non-financial requirements and elected to be taxed as a REIT for each taxable year ended since December 31, 2010. The Company’s year end is December 31.
Griffin Capital Corporation, a California corporation (the “Sponsor”), has sponsored the Company’s Public Offerings. The Company’s Sponsor began operations in 1995, and was incorporated in 1996, to engage principally in acquiring and developing office and industrial properties. Kevin A. Shields, the Company's Chief Executive Officer and Chairman, is the sole shareholder of Griffin Capital Corporation.
Griffin Capital Essential Asset Advisor, LLC, a Delaware limited liability company (the “Advisor”), was formed on August 27, 2008. Griffin Capital REIT Holdings, LLC ("Holdings") is the sole member of the Advisor, and the Sponsor is the sole member of Holdings. The Company has entered into an advisory agreement for the Public Offerings (as amended and restated, the “Advisory Agreement”), which states that the Advisor is responsible for managing the Company’s affairs on a day-to-day basis and identifying and making acquisitions and investments on behalf of the Company. The officers of the Advisor are also officers of the Sponsor. The Advisory Agreement has a one-year term, and it may be renewed for an unlimited number of successive one-year periods by the Company’s board of directors.
On August 28, 2008, the Advisor purchased 100 shares of common stock for $1,000 and became the Company’s initial stockholder. On February 20, 2009, the Company began to offer shares of common stock, pursuant to a private placement offering to accredited investors (the “Private Offering”), which included shares for sale pursuant to the distribution reinvestment plan (“DRP”). On November 6, 2009, the Company's registration statement was declared effective by the Securities and Exchange Commission and began to offer, in a public offering, a maximum of 82,500,000 shares of common stock, consisting of 75,000,000 shares at $10.00 per share (the “Primary Public Offering”) and 7,500,000 shares pursuant to the DRP at $9.50 per share (together with the Primary Public Offering, the “Initial Public Offering”) and terminated the Private Offering.
On February 15, 2013, the Company announced the revised share offering price under the Initial Public Offering of $10.28 per share, and a revised price under the DRP equal to 95% of the revised share offering price, which was approximately $9.77 per share.
On April 25, 2013, the Company terminated its Initial Public Offering, having issued approximately 19,200,570 shares of the Company’s common stock for gross proceeds of approximately $191.5 million, including shares issued pursuant to the DRP. On April 26, 2013, the Company began to offer, in a follow-on offering, up to $1.0 billion in shares of common stock, consisting of approximately 97.2 million shares at $10.28 per share in the primary offering (the “Primary Follow-On Offering” and together with the Primary Public Offering, the “Primary Public Offerings”) and $100 million in shares of common stock, consisting of approximately 10.2 million shares, pursuant to the DRP (together with the Primary Follow-On Offering, the “Follow-On Offering” and, collectively with the Initial Public Offering, the “Public Offerings”). On April 22, 2014, the Company announced that it was no longer accepting subscriptions in the Follow-On Offering, as the maximum amount of offering proceeds was expected to have been reached. The Company issued 107,144,337 total shares of the Company’s common stock for gross proceeds of approximately $1.1 billion in the Follow-On Offering, including 1,774,208 shares, or $17.3 million, issued pursuant to the DRP.
On May 7, 2014, the Company filed a Registration Statement on Form S-3 with the SEC for the registration of $75.0 million in shares for sale pursuant to the DRP (the “DRP Offering”). On December 15, 2014, the Company announced a revised offering price for shares pursuant to the DRP Offering of $10.40 per share, effective December 27, 2014. In connection with the DRP Offering, the Company had issued 6,021,352 shares of the Company's common stock for gross proceeds of approximately $60.7 million through June 30, 2015. The DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders.
On November 21, 2014, the Company entered into a merger agreement with Signature Office REIT, Inc. ("SOR"). In connection with the merger (the "SOR Merger"), (1) SOR merged into a wholly-owned subsidiary of the Company, and (2)

10
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

each share of common stock of SOR issued and outstanding was converted into 2.04 shares ("Merger Consideration") of the Company's common stock. On June 10, 2015, the Company issued approximately 41.8 million shares of common stock upon the consummation of the SOR Merger. The assets and liabilities of SOR are included in the Company's consolidated financial statements as of the closing date, June 10, 2015. See Note 3, Real Estate, for further discussion.
As of June 30, 2015, the Company had received aggregate gross offering proceeds of approximately $1.3 billion from the sale of shares in the Private Offering, the Public Offerings, and the DRP Offering. There were 173,715,536 shares outstanding at June 30, 2015, including shares issued pursuant to the DRP, less shares redeemed pursuant to the share redemption plan. As of June 30, 2015 and December 31, 2014, the Company had issued $83.6 million and $57.7 million, respectively, in shares pursuant to the DRP, which are classified on the consolidated balance sheets as common stock subject to redemption, net of redemptions payable totaling approximately $2.5 million and $1.2 million, respectively, which is included in accounts payable and other liabilities on the consolidated balance sheets. See Note 6, Equity — Share Redemption Program. Since inception and through June 30, 2015, the Company had redeemed 664,337 shares of common stock for approximately $6.5 million pursuant to the share redemption plan.
Griffin Capital Securities, Inc. (the “Dealer Manager”) is an affiliate of the Sponsor, and on November 1, 2013 became a wholly-owned subsidiary of the Sponsor. The Dealer Manager was responsible for marketing the Company’s shares offered during the Public Offerings. The dealer manager agreement was terminated in accordance with its terms upon the termination of the Follow-On Offering.
Griffin Capital Essential Asset Operating Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”), was formed on August 29, 2008. The Operating Partnership owns, directly or indirectly, all of the properties that the Company has acquired. The Advisor purchased an initial 99% limited partnership interest in the Operating Partnership for $200,000, and the Company contributed the initial $1,000 capital contribution, received from the Advisor, to the Operating Partnership in exchange for a 1% general partner interest. As of June 30, 2015, the Company owned approximately 94% of the limited partnership units of the Operating Partnership (approximately 97% 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 4% of the limited partnership units were owned by third parties, of which approximately 3% represented a preferred unit investment as discussed in Note 6, Equity. No common limited partnership units of the Operating Partnership have been redeemed during the six months ended June 30, 2015 and year ended December 31, 2014. The Operating Partnership may conduct certain activities through the Company’s taxable REIT subsidiary, Griffin Capital Essential Asset TRS, Inc., a Delaware corporation (the “TRS”) formed on September 2, 2008, which is a wholly-owned subsidiary of the Operating Partnership. The TRS had no activity as of June 30, 2015.
The Company’s property manager is Griffin Capital Essential Asset Property Management, LLC, a Delaware limited liability company (the “Property Manager”), which was formed on August 28, 2008 to manage the Company’s properties. The Property Manager derives substantially all of its income from the property management services it performs for the Company.

2.
Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements of the Company are prepared by management on the accrual basis of accounting and in accordance with principles generally accepted in the United States (“GAAP”) for interim financial information as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), and in conjunction with rules and regulations of the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited consolidated financial statements include accounts and related adjustments, which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim period. Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The unaudited consolidated financial statements include accounts of the Company, the Operating Partnership, including a consolidated VIE (see Note 4, Investments), and the TRS. All significant intercompany accounts and transactions have been eliminated in consolidation.

11
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

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.
Change in Consolidated Financial Statements Presentation
Certain amounts in the Company's prior period consolidated financial statements have been reclassified to conform to the current period presentation.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments that are readily convertible to cash with a maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents may include cash and short-term investments. Short-term investments are stated at cost, which approximates fair value. There were no restrictions on the use of the Company’s operating cash balance as of June 30, 2015 and December 31, 2014.
The Company maintains cash accounts with major financial institutions. The cash balances consist of business checking accounts and money market accounts. These accounts are insured by the Federal Deposit Insurance Corporation up to $250,000 at each institution. At times, the balances in these accounts may exceed the insured amounts. The Company considers balances in excess of the insured amounts to potentially be a concentration of credit risk. However, the Company has not experienced any losses with respect to cash balances in excess of government-provided insurance and does not anticipate any losses in the future.
Restricted Cash
In conjunction with the contribution of certain assets, as required by certain lease provisions or certain lenders in conjunction with an acquisition or debt financing, or credits received by the seller of certain assets, the Company assumed or funded reserves for specific property improvements and deferred maintenance, rent abatement, re-leasing costs, and taxes and insurance (see Note 3, Real Estate). As of June 30, 2015 and December 31, 2014, the balance of these reserves, included in the consolidated balance sheets as restricted cash, was $28.0 million and $41.4 million, respectively. The balance as of June 30, 2015 includes $1.9 million in rent collections from the eight properties which serve as collateral under the Midland Mortgage loan, $21.1 million designated for deferred maintenance and re-leasing costs, $2.2 million of taxes and insurance reserves to be applied to future amounts incurred, and $2.8 million in rent received from the GE Aviation property, which was to be held in escrow pending a tax-deferred real estate exchange, as permitted by Section 1031 of the Internal Revenue Code, with the sale of the Will Partners property. On July 21, 2015, the Company acquired the DreamWorks property (see Note 10, Subsequent Events), which replaced the GE Aviation property in the exchange, thus, releasing any restrictions on the GE Aviation rent receipts.
Real Estate
Purchase Price Allocation
The Company applies the provisions in ASC 805-10, Business Combinations, to account for the acquisition of real estate, or real estate related assets, in which a lease, or other contract, is in place representing an active revenue stream, as a business combination. In accordance with the provisions of ASC 805-10, the Company recognizes the assets acquired, the liabilities assumed and any noncontrolling interest in the acquired entity at their fair values as of the acquisition date, on an “as if vacant” basis. Further, the Company recognizes the fair value of assets acquired, liabilities assumed and any noncontrolling interest in acquisitions of less than a 100% interest when the acquisition constitutes a change in control of the acquired entity. The accounting provisions have also established that acquisition-related costs and restructuring costs are considered separate and not a component of a business combination and, therefore, are expensed as incurred. Acquisition-related costs for the three months ended June 30, 2015 and 2014 totaled $20.7 million and $12.4 million, respectively, and for the six months ended June 30, 2015 and 2014 totaled $23.1 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

12
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

market lease rates for the corresponding in-place leases over a period equal to the remaining non-cancelable term of the lease for above-market leases, taking into consideration below-market extension options for below-market leases. In addition, renewal options are considered and will be included in the valuation of in-place leases if (1) it is likely that the tenant will exercise the option, and (2) the renewal rent is considered to be sufficiently below a fair market rental rate at the time of renewal. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities and amortized as an adjustment to rental income over the remaining terms of the respective leases.
The aggregate fair value of in-place leases includes direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals, which are avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated using methods similar to those used in independent appraisals and management’s consideration of current market costs to execute a similar lease. These direct costs are considered intangible lease assets and are included with real estate assets on the consolidated balance sheets. The intangible lease assets are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid, including real estate taxes, insurance, and other operating expenses, pursuant to the in-place leases over a market lease-up period for a similar lease. Customer relationships are valued based on management’s evaluation of certain characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics management will consider in allocating these values include the nature and extent of the Company’s existing business relationships with tenants, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors. These intangibles are included in intangible lease assets on the consolidated balance sheets and are amortized to expense over the remaining term of the respective leases.
 
The determination of the fair values of the assets and liabilities acquired requires the use of significant assumptions about current market rental rates, rental growth rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the purchase price allocations, which could impact the amount of the Company’s reported net income.
Depreciation and Amortization
The purchase price of real estate acquired and costs related to development, construction, and property improvements are capitalized. Repairs and maintenance costs include all costs that do not extend the useful life of the real estate asset and are expensed as incurred. The Company considers the period of future benefit of an asset to determine the appropriate useful life. The Company anticipates the estimated useful lives of its assets by class to be generally as follows:
 
Buildings
25-40 years
Building Improvements
5-20 years
Land Improvements
15-25 years
Tenant Improvements
Shorter of estimated useful life or remaining contractual lease term
Tenant origination and absorption cost
Remaining contractual lease term
In-place lease valuation
Remaining contractual lease term with consideration as to below-market extension options for below-market leases
Depreciation expense for buildings and improvements for the three months ended June 30, 2015 and 2014 was approximately $9.5 million and $6.7 million, respectively, and for the six months ended June 30, 2015 and 2014 was approximately $17.5 million and $12.3 million, respectively. Amortization expense for intangibles, including but not limited to, tenant origination and absorption costs for the three months ended June 30, 2015 and 2014 was approximately $12.9 million and $10.2 million, respectively, and for the six months ended June 30, 2015 and 2014 was approximately $24.3 million and $19.7 million, respectively. See Note 3, Real Estate, for amortization related to in-place lease valuations.
Assets Held for Sale
The Company will account for properties held for sale in accordance with ASC Topic 360, Property, Plant, and Equipment ("ASC Topic 360"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and Accounting Standards Update ("ASU") No. 2014-08, Presentation of Financial Statements (Topic 205) and Property,

13
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU No. 2014-08"). Under ASU No. 2014-08, a discontinued operation is (i) a component of an entity or group of components that has been disposed of by sale, that has been disposed of other than by sale, or that is classified as held for sale that represents a strategic shift that has or will have a major effect on an entity's operations and financial results or (ii) an acquired business or nonprofit activity that is classified as held for sale on the date of the acquisition.
In accordance with ASC 205, a component of an entity or a group of components of an entity, or a business or nonprofit activity (the entity to be sold), shall be classified as held for sale in the period in which all of the following criteria are met:
•
Management, having the authority to approve the action, commits to a plan to sell the entity to be sold.
•
The entity to be sold is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such entities to be sold.
•
An active program to locate a buyer or buyers and other actions required to complete the plan to sell the entity to be sold have been initiated.
•
The sale of the entity to be sold is probable, and transfer of the entity to be sold is expected to qualify for recognition as a completed sale, within one year, except as permitted by ASC Topic 360.
•
The entity to be sold is being actively marketed for sale at a price that is reasonable in relation to its current fair value.
•
The price at which an entity to be sold is being marketed is indicative of whether the entity currently has the intent and ability to sell the entity to be sold. A market price that is reasonable in relation to fair value indicates that the entity to be sold is available for immediate sale, whereas a market price in excess of fair value indicates that the entity to be sold is not available for immediate sale.
•
Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
In accordance with ASC Topic 360, upon being classified as held for sale, a property is carried at the lower of (i) its carrying amount or (ii) fair value less costs to sell. In addition, a property held for sale ceases to be depreciated. As of June 30, 2015, one property owned by the Company met the criteria to be classified as held for sale and was included in continuing operations in the consolidated statements of operations based on the Company's early adoption of ASU No. 2014-08 as it did not meet the prerequisite requirements to be classified as discontinued operations. See Note 3, Real Estate.
Impairment of Real Estate and Related Intangible Assets
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of real estate and related intangible assets may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, management assesses whether the carrying value of the assets will be recovered through the future undiscounted operating cash flows expected from the use of the assets and the eventual disposition. If, based on this analysis, the Company does not believe that it will be able to recover the carrying value of the asset, the Company will record an impairment charge to the extent the carrying value exceeds the net present value of the estimated future cash flows of the asset.
Projections of expected future undiscounted cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to re-lease the property and the number of years the property is held for investment. As of June 30, 2015 and December 31, 2014, the Company did not record any impairment charges related to its real estate assets or intangible assets.
Intangible Assets and Liabilities Arising from In-Place Leases Where the Company is the Lessee
In-place ground leases where the Company is the lessee may have value associated with effective contractual rental rates that are above or below market rates. Such values are calculated based on the present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place lease and (ii) management's estimate of fair market lease rates for the corresponding in-place lease, measured over a period equal to the remaining terms of the lease. The capitalized above-market and below-market in-place lease values are recorded as intangible lease assets and liabilities, respectively, and are amortized as an adjustment to property operating expense over the remaining term of the respective lease.

14
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

The Operating Partnership, through a single purpose entity, assumed a ground lease with the acquisition of the Waste Management property on January 16, 2014. The ground lease has a remaining term of approximately 81 years, expiring on December 31, 2095. See Note 3, Real Estate.
Investments
ASC 810-10, Consolidation, provides a framework for identifying variable interest entities (“VIEs”) and determining when a company should include the assets, liabilities, noncontrolling interests, and results of activities of the VIE in its consolidated financial statements. In general, a VIE is an entity or other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. Generally, a VIE should be consolidated if a party with an ownership, contractual, or other financial interest in the VIE (a variable interest holder) has the power to direct the VIE’s most significant activities and the obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must record all of the VIE’s assets, liabilities, and noncontrolling interest at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. If the variable interest holder is not the primary beneficiary, the interest in the VIE is recorded under the equity method of accounting. See Note 4, Investments.
Revenue Recognition
Leases associated with the acquisition and contribution of certain real estate assets (see Note 3, Real Estate), have net minimum rent payment increases during the term of the lease and are recorded to rental revenue on a straight-line basis, commencing as of the contribution or acquisition date. If a lease provides for contingent rental income, the Company will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved.
The Company recognized deferred rent from tenants of $3.2 million and $2.9 million for the three months ended June 30, 2015 and 2014, respectively, and $6.4 million and $5.1 million for the six months ended June 30, 2015 and 2014, respectively. As of June 30, 2015 and December 31, 2014, the cumulative deferred rent balance was $23.4 million and $17.2 million, respectively, and is included in deferred rent on the consolidated balance sheets.
Tenant reimbursement revenue, which is comprised of additional amounts collected from tenants for the recovery of certain operating expenses, including repair and maintenance, property taxes and insurance, and capital expenditures, to the extent allowed pursuant to the lease (collectively "Recoverable Expenses"), is recognized as revenue when the additional rent is due. Recoverable Expenses to be reimbursed by a tenant are determined based on the Company's estimate of the property's operating expenses for the year, pro rated based on leased square footage of the property, and are collected in equal installments as additional rent from the tenant, pursuant to the terms of the lease. At the end of the calendar year, the Company reconciles the amount of additional rent paid by the tenant during the year to the actual amount of Recoverable Expenses incurred by the Company for the same period. The difference, if any, is either charged or credited to the tenant pursuant to the provisions of the lease. In certain instances the lease may restrict the amount the Company can recover from the tenant such as a cap on certain or all property operating expenses. As of December 31, 2014, the Company estimated that approximately $0.3 million, net, was over collected from tenants throughout the year, and as a result, the Company recorded a liability. Tenant reimbursement reconciliations were also performed during the six months ended June 30, 2015, which resulted in an additional $0.5 million in net over collections. The combined net over collection of $0.8 million has been, and will continue to be, refunded to the tenant either by a credit to contractual rent payments or as a disbursement from operating cash flow.
Organizational and Offering Costs
Organizational and offering costs of the Primary Public Offerings were paid either by the Company or the Sponsor, on behalf of the Advisor, for the Company, which were reimbursed from the proceeds of the Public Offerings at the estimated rate. Organizational and offering costs consist of all expenses (other than sales commissions and dealer manager fees) paid by the Company in connection with the Public Offerings, including legal, accounting, printing, mailing and filing fees, charges from the escrow holder and other accountable offering expenses, including, but not limited to, (i) amounts to reimburse the Advisor for all marketing-related costs and expenses, such as salaries and direct expenses of employees of the Advisor and its

15
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

affiliates in connection with registering and marketing the Company’s shares; (ii) technology costs associated with the offering of the Company’s shares; (iii) costs of conducting training and education meetings; (iv) costs of attending seminars conducted by participating broker-dealers; and (v) payment or reimbursement of bona fide due diligence expenses.
Pursuant to the Advisory Agreement, the Company was obligated to reimburse the Advisor for organizational and offering expenses incurred in connection with the Primary Public Offerings in an amount not to exceed 3.5% of gross offering proceeds of the terminated or completed Primary Public Offerings for issuer costs (excluding sales commissions and dealer manager fees). In addition, pursuant to the Advisory Agreement, organization and offering expenses (including sales commissions and dealer manager fees and non-accountable due diligence expense allowance but excluding acquisition fees and expenses) were subject to a limitation of 15% of gross offering proceeds of the terminated or completed Public Offerings. If the organization and offering expenses exceeded such limits discussed above, within 60 days after the end of the month in which the Public Offerings terminated or were completed, the Advisor would have been obligated to reimburse the Company for any excess amounts. As long as the Company is subject to the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association (“NASAA REIT Guidelines”), such limitations discussed above will also apply to any future public offerings. As of closing of the Follow-On Offering, organizational and offering costs were 2.3% and 0.3% of gross offering proceeds, excluding sales commissions and dealer manager fees, for the Initial Public Offering and the Follow-On Offering, respectively, and 11.9% and 10.1% of gross offering proceeds, including sales commissions and dealer manager fees, for the Initial Public Offering and the Follow-On Offering, respectively. (See Note 7, Related Party Transactions.)
The Company has incurred organizational and offering costs, including those due to the Advisor for organizational and offering expenses incurred on the Company’s behalf, as follows:
 
Balance as of
June 30, 2015
 
Balance as of
December 31, 2014
Cumulative offering costs - Private and Public Offerings
$
130,607

 
$
130,553

Cumulative organizational costs - Private and Public Offerings
$
812

 
$
811

Deferred Financing Costs
Deferred financing costs represent commitment fees, loan fees, and other fees associated with obtaining financing. These costs are amortized to, and included as a component of, interest expense over the terms of the respective financing agreements. Amortization expense for the three and six months ended June 30, 2015 was approximately $0.6 million and $1.1 million, respectively. Amortization expense for the three and six months ended June 30, 2014 was $2.0 million and $2.7 million, respectively, including approximately $1.8 million of write-offs related to the refinancing through the AIG Loan on January 24, 2014 and the Company's previously existing KeyBank credit facility and KeyBank term loan, which were both terminated in conjunction with the execution of the Unsecured Credit Facility (May 2014) on May 8, 2014. As of June 30, 2015 and December 31, 2014, the Company’s deferred financing costs, net of accumulated amortization, were $11.3 million and $11.8 million, respectively.
Other Assets
Other assets consist primarily of tenant and non-tenant receivables, prepaid expenses, and deferred leasing commissions and other leasing costs ("Deferred Leasing Costs"), net of amortization. Non-tenant receivables primarily consist of a $5.4 million termination fee, as a result of the lease termination with World Kitchen, LLC, the former tenant at the Will Partners property, on January 24, 2014. Prepaid expenses, which are capitalized as other assets, will be expensed as incurred. Leasing commissions for new, renewal or expansion leases are amortized using the straight-line method over the term of the related lease. Amortization of Deferred Leasing Costs is included in depreciation and amortization in the Company's accompanying consolidated statements of operations. Deferred Leasing Costs, net of the Deferred Leasing costs related the College Park property, which was classified as real estate held for sale in the prior year, totaled $2.7 million as of June 30, 2015 and December 31, 2014.
Noncontrolling Interests

16
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

Due to the Company’s control through the general partner interest in the Operating Partnership and the limited rights of the limited partners, the Operating Partnership, including its wholly-owned subsidiaries, is consolidated with the Company and the limited partners’ interests are reflected as noncontrolling interests on the accompanying consolidated balance sheets.
The Company reports noncontrolling interests in subsidiaries within equity in the consolidated financial statements, but separate from total stockholders’ equity. Also, any acquisitions or dispositions of noncontrolling interests that do not result in a change of control are accounted for as equity transactions. Further, the Company recognizes a gain or loss in net income (loss) when a subsidiary is deconsolidated upon a change in control. Net income (loss) allocated to noncontrolling interests is shown as an adjustment to net income (loss) attributable to common stockholders. Any future purchase or sale of an interest in an entity that results in a change of control may have a material impact on the financial statements, as the interest in the entity will be recognized at fair value with gains and losses included in net income (loss).
If noncontrolling interests are determined to be redeemable, they are classified as temporary equity and reported at their redemption value as of the balance sheet date. Since redeemable noncontrolling interests are carried at the redemption amount, net income (loss) and distributions are not allocated to redeemable noncontrolling interests. Distributions to redeemable noncontrolling interest holders are allocated between common stockholders and noncontrolling interests based on their respective weighted-average ownership percentage of the Operating Partnership. (See Note 6, Equity.)
Share-Based Compensation
The Company has adopted an Employee and Director Long-Term Incentive Plan (the “Plan”) pursuant to which the Company may issue stock-based awards to its directors and full-time employees (should the Company ever have employees), executive officers and full-time employees of the Advisor and its affiliate entities that provide services to the Company, and certain consultants who provide significant services to the Company. The term of the Plan is 10 years and the total number of shares of common stock reserved for issuance under the Plan is 10% of the outstanding shares of stock at any time, not to exceed 10,000,000 shares in the aggregate. Awards granted under the Plan may consist of stock options, restricted stock, stock appreciation rights and other equity-based awards. The stock-based payment will be measured at fair value and recognized as compensation expense over the vesting period.
On March 3, 2014, the compensation committee of the board of directors authorized the issuance of 5,000 shares of restricted stock to each of the Company's independent directors. These restricted shares were immediately vested upon issuance. In addition, the compensation committee authorized the future issuance of 1,000 shares of restricted stock to each of the Company's independent directors for each 12-consecutive-month period during which each independent director continuously remains a director for the Company. The future shares granted will vest over a three year period, or will immediately vest upon a change in control of the Company. Upon re-election of each independent director at the June 12, 2014 annual stockholders' meeting, the Company measured and began recognizing director compensation expense for the 1,000 shares of restricted stock granted, subject to the vesting period. One-third of the shares of restricted stock, or 667 shares, for each of the Company's independent directors, vested during the three months ended June 30, 2015. The fair value of both issuances was estimated at $10.28 per share, the then most recent price paid to acquire a share of the Company's common stock. All issuances of restricted stock are entitled to dividends upon vesting of the shares.
Upon re-election of each independent director at the June 16, 2015 annual stockholders' meeting, the Company granted 1,000 shares of restricted common stock to each of the independent directors. The fair value of such issuance was estimated at $10.40 per share, the then most recent price paid to acquire a share of the Company's common stock related to the DRP Offering. Immediately upon granting the restricted common shares, the Company measured and began recognizing director compensation expense, subject to the same vesting period discussed above.
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;

17
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

•
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, 2015 consisted of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and other accrued expenses, and mortgage payable and other borrowings, as defined in Note 5, Debt. With the exception of the mortgage loans in the table below, the amounts of the financial instruments presented in the consolidated financial statements substantially approximate their fair value as of June 30, 2015 and December 31, 2014, including the Unsecured Term Loan (May 2014) and Unsecured Revolver (May 2014), both of which originated under the Unsecured Credit Agreement (May 2014), as discussed in Note 5, Debt, and the TW Telecom Loan. The fair value of the seven mortgage loans in the table below is estimated by discounting each loan’s principal balance over the remaining term of the mortgage using current borrowing rates available to the Company for debt instruments with similar terms and maturities. The Company determined that the mortgage debt valuation in its entirety is classified in Level 2 of the fair value hierarchy, as the fair value is based on current pricing for debt with similar terms as the in-place debt, and there were no transfers into and out of fair value measurement levels during the six months ended June 30, 2015 and year ended December 31, 2014.
 
June 30, 2015
 
December 31, 2014
 
Fair Value
 
Carrying Value (1)
 
Fair Value
 
Carrying Value (1)
Plainfield
$
20,460

 
$
19,467

 
$
20,994

 
$
19,638

Emporia Partners
4,178

 
3,933

 
4,434

 
4,108

LTI
32,053

 
31,764

 
32,742

 
32,128

TransDigm
6,599

 
6,504

 
6,748

 
6,576

Ace Hardware
25,589

 
23,472

 
26,424

 
23,648

Midland Mortgage loan
103,098

 
105,600

 
105,155

 
105,600

AIG Loan
118,143

 
110,640

 
122,062

 
110,640

(1)
The carrying value of the LTI, TransDigm, and Ace Hardware mortgage debt does not include the debt premium of $1.7 million and $1.9 million as of June 30, 2015 and December 31, 2014, respectively. See Note 5, Debt, for details.
Income Taxes
The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a REIT, the Company must meet certain organizational and operational requirements. The Company intends to adhere to these requirements and maintain its REIT status for the current year and subsequent years. As a REIT, the Company generally will not be subject to federal income taxes on taxable income that is distributed to stockholders. However, the Company may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed taxable income, if any. If the Company fails to qualify as a REIT in any taxable year, the Company will then be subject to federal income taxes on the taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the IRS grants the Company relief under certain statutory provisions. Such an event could materially adversely affect net income and net cash available for distribution to stockholders. As of June 30, 2015, the Company satisfied the REIT requirements and distributed all of its taxable income. 
Pursuant to the Code, the Company has elected to treat its corporate subsidiary as a taxable REIT subsidiary (“TRS”). In general, the TRS may perform non-customary services for the Company’s tenants and may engage in any real estate or non real estate-related business. The TRS will be subject to corporate federal and state income tax. As of June 30, 2015, the TRS had not commenced operations.
Per Share Data
The Company reports earnings per share for the period as (1) basic earnings per share computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period,

18
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

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, 2015 and December 31, 2014, there were no common stock equivalents that would have a dilutive effect on earnings (loss) per share for common stockholders.
Distributions declared and paid per common share assumes each share was issued and outstanding each day during the three months ended June 30, 2015. Distributions declared per common share was based on daily declaration and record dates selected by the Company’s board of directors of $0.001901096 per day per share on the outstanding shares of common stock.
Segment Information
ASC Topic 280, Segment Reporting, establishes standards for reporting financial and descriptive information about a public entity’s reportable segments. The Company internally evaluates all of the properties and interests therein as one reportable segment.
Unaudited Data
Any references to the number of buildings, square footage, number of leases, occupancy, and any amounts derived from these values in the notes to the consolidated financial statements are unaudited and outside the scope of the Company's independent registered public accounting firm's review of its consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board.
Recently Issued Accounting Pronouncements
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU No. 2014-08"). ASU No. 2014-08 raises the threshold for disposals of components of an entity to qualify as discontinued operations. Under ASU No. 2014-08, a discontinued operation is (i) a component of an entity or group of components that has been disposed of by sale, that has been disposed of other than by sale, or that is classified as held for sale that represents a strategic shift that has or will have a major effect on an entity's operations and financial results or (ii) an acquired business or nonprofit activity that is classified as held for sale on the date of the acquisition. A strategic shift that has or will have a major effect on an entity's operations and financial results could include the disposal of (i) a major line of business, (ii) a major geographic area, (iii) a major equity method investment, or (iv) other major parts of an entity. Under current GAAP, an entity is prohibited from reporting a discontinued operation if it has certain continuing cash flows or involvement with the component after the disposal. ASU No. 2014-08 eliminates this criteria and is effective for public companies during the interim and annual periods, beginning after December 15, 2014. The Company elected to early adopt the provisions in ASU No. 2014-08 as of December 31, 2014. As a result, the Company presented the results of operations for the College Park property, which was classified as held for sale as of December 31, 2014 and subsequently sold on February 20, 2015, in continuing operations on the consolidated statements of operations, as such disposal does not represent a strategic shift in the Company's operations. The Company expects the adoption of ASU No. 2014-08 to result in fewer real estate sales qualifying as discontinued operations reported in its consolidated financial statements and accompanying notes.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”). ASU No. 2014-09 replaces substantially all industry-specific revenue recognition requirements and converges areas under this topic with International Financial Reporting Standards. ASU No. 2014-09 implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. ASU No. 2014-09 also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers. Other major provisions in ASU No. 2014-09 include capitalizing and amortizing certain contract costs, ensuring the time value of money is considered in the applicable transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. On April 1, 2015, the FASB voted to defer the effective date of ASU No. 2014-09, which if the proposed deferral is approved, adoption would be required for annual reporting periods beginning after December 15, 2017. On July 9, 2015, the FASB affirmed its proposal to defer the effective date to annual reporting periods beginning after December 15, 2017, and early adoption is prohibited. ASU No. 2014-09 does not apply to lease contracts accounted for under Leases (Topic 840). The Company is currently evaluating the potential impact of the pending adoption of this new guidance on its consolidated financial statements.

19
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

In February 2015, the FASB issued ASU No. 2015-02, Consolidation: Amendments to the Consolidation Analysis ("ASU No. 2015-02"), which amended the existing accounting standards for consolidation under both the variable interest model and the voting model. Under ASU No. 2015-02, companies will need to re-evaluate whether an entity meets the criteria to be considered a VIE, whether companies still meet the definition of primary beneficiaries, and whether an entity needs to be consolidated under the voting model. ASU No. 2015-02 may be applied using a modified retrospective approach or retrospectively, and is effective for reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the potential impact of the pending adoption of this new guidance on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30) (“ASU 2015-03”) to amend the accounting guidance for the presentation of debt issuance costs. The standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for public business entities for fiscal years beginning after December 15, 2015 and retrospective application is required. Early adoption of the guidance is permitted. The Company is currently evaluating the potential impact of the pending adoption of this new guidance on its consolidated financial statements.

20
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

3.
Real Estate
As of June 30, 2015, the Company’s real estate portfolio consisted of 70 properties in 20 states consisting substantially of office, warehouse, and manufacturing facilities with a combined acquisition value of $2.6 billion, including the allocation of the purchase price to above and below-market lease valuation.
2015 Acquisitions and SOR Merger
During the six months ended June 30, 2015, the Company acquired 2 properties from unaffiliated third parties. The aggregate purchase price of the acquisitions was $143.0 million.
As previously discussed in Note 1, the SOR Merger closed on June 10, 2015, and as part of the SOR Merger, the Company assumed 15 buildings located on 13 properties in 8 states, comprising a total of approximately 2.6 million square feet. The properties assumed in the SOR Merger have been allocated a combined preliminary value of $607.1 million.
A summary of the preliminary fair value of the assets and liabilities assumed on June 10, 2015 in exchange for approximately 41.8 million shares is shown in the table below:
Cash assumed
$
8,557

Land
72,614

Building and improvements
435,651

Tenant origination and absorption cost
89,424

Above market leases
14,324

Other assets
2,477

Total assets
$
623,047

 
 
Unsecured debt (1)
$
173,000

Below market leases
4,913

Accounts payable and other liabilities
11,644

Total liabilities
189,557

Equity consideration for SOR Merger
433,490

Total liabilities and equity
$
623,047

(1)
The unsecured debt was terminated simultaneously with the closing of the SOR Merger with borrowings from the Company's Unsecured Credit Facility (May 2014).





21
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

The aggregate value of the 15 properties related to the acquisitions and SOR Merger was $750.1 million as shown below:
Property
 
Location
 
Tenant/Major Lessee
 
Acquisition/Merger
Date
 
Purchase
Price
 
Approx. Square
Feet
 
Acquisition
Fees and
Reimbursable
Expenses
Paid to the
Advisor (1)
 
Unsecured Credit
Facility
(May 2014)
 
Year of
Lease
Expiration
(for Major Lessee)
 
2015
Annualized
Net Rent (3)
GE Aviation
 
West Chester, OH
 
General Electric Company
 
2/19/2015
 
$
66,000

 
409,800

 
$
1,980

 
$
50,000

(2) 
2020
 
$
4,879

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

 
225,500

 
2,310

 
76,100

(2) 
2026
 
4,863

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

(4) 
94,400

 
(4) 

 
(5) 

 
2021
 
1,469

Bloomingdale
 
Bloomingdale, IL
 
BFS Retail & Commercial Operations, LLC
 
6/10/2015
 
6,500

(4) 
71,100

 
(4) 

 
(5) 

 
2018
 
1,277

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

(4) 
200,600

 
(4) 

 
(5) 

 
2019
 
4,333

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

(4) 
182,900

 
(4) 

 
(5) 

 
2017
 
3,861

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

(4) 
164,600

 
(4) 

 
(5) 

 
2022
 
2,254

Miramar
 
Miramar, FL
 
Humana Medical Plan Inc.
 
6/10/2015
 
25,000

(4) 
96,400

 
(4) 

 
(5) 

 
2017
 
1,855

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

(4) 
119,600

 
(4) 

 
(5) 

 
2026
 
210

Frisco
 
Frisco, TX
 
T-Mobile West Corporation
 
6/10/2015
 
59,800

(4) 
284,200

 
(4) 

 
(5) 

 
2017
 
4,313

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

(4) 
242,400

 
(4) 

 
(5) 

 
2022
 
5,649

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

(4) 
144,000

 
(4) 

 
(5) 

 
2018
 
2,918

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

(4) 
583,500

 
(4) 

 
(5) 

 
2023
 
7,514

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

(4) 
268,200

 
(4) 

 
(5) 

 
2019
 
7,315

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

(4) 
171,500

 
(4) 

 
(5) 

 
2017
 
3,309

 
 
 
 
 
 
 
 
$
750,100

 
3,258,700

 
$
4,290

 
$
126,100

 
 
 
$
56,019

(1)
The Advisor is entitled to receive acquisition fees equal to 2.5% and acquisition expense reimbursement of up to 0.5% of the contract purchase price for each property acquired. The total is included in acquisition fees and expenses to affiliates on the consolidated statements of operations.
(2)
Represents borrowings from the Unsecured Revolver (May 2014) discussed in Note 5, Debt. The remaining purchase price was funded with net proceeds raised in the Follow-On Offering.
(3)
Net rent represents contractual rental payments pursuant to the lease terms for the 12 month-period subsequent to June 30, 2015.

22
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

(4)
Represents a property assumed through the SOR Merger. Purchase price represents purchase price allocations based on preliminary real estate value of $607.1 million. In conjunction with the SOR Merger on June 10, 2015, the Advisor received acquisition fees equal to 2.5%, or approximately $15.2 million, of the preliminary real estate value of $607.1 million. In addition, the Advisor also received actual expense reimbursements of $2.8 million, which was included in due to affiliates on the accompanying consolidated balance sheets as of June 30, 2015 and paid on July 14, 2015.
(5)
In connection with the SOR Merger on June 10, 2015, the Company, through the Operating Partnership, borrowed $173.0 million from the Unsecured Revolver to repay the outstanding SOR debt, as discussed in Note 5, Debt.

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

 
$
52,211

 
$
9,470

 
$
(81
)
 
$
66,000

Westgate III (1)
 
3,209

 
60,852

 
15,085

 
(2,146
)
 
$
77,000

Total acquisitions
 
$
7,609

 
$
113,063

 
$
24,555

 
$
(2,227
)
 
$
143,000

Lisle (1)
 
2,791

 
11,201

 
4,996

 
512

 
$
19,500

Bloomingdale (1)
 
936

 
4,289

 
395

 
880

 
$
6,500

Columbia (1)
 
6,989

 
42,690

 
4,185

 
4,266

 
$
58,130

Denver (1)
 
9,948

 
22,714

 
1,174

 
1,164

 
$
35,000

Columbus (1)
 
3,044

 
14,462

 
8,020

 
2,074

 
$
27,600

Miramar (1)
 
4,561

 
18,507

 
1,797

 
135

 
$
25,000

Irving Carpenter (1)
 
1,842

 
19,479

 
2,573

 
(394
)
 
$
23,500

Frisco (1)
 
8,314

 
47,738

 
4,136

 
(388
)
 
$
59,800

Houston Westway II (1)
 
4,092

 
69,627

 
8,914

 
(133
)
 
$
82,500

Houston Westway I (1)
 
6,677

 
28,316

 
2,240

 
467

 
$
37,700

Atlanta Perimeter (1)
 
9,410

 
59,968

 
36,264

 
(3,972
)
 
$
101,670

Herndon (1)
 
9,667

 
66,303

 
7,794

 
3,536

 
$
87,300

Deerfield (1)
 
4,343

 
30,357

 
6,936

 
1,264

 
$
42,900

Total SOR Merger
 
$
72,614

 
$
435,651

 
$
89,424

 
$
9,411

 
$
607,100

Total acquisitions and SOR Merger
 
$
80,223

 
$
548,714

 
$
113,979

 
$
7,184

 
$
750,100

(1)
As of June 30, 2015, the purchase price allocation for the Westgate III property and properties assumed through the SOR Merger had not been finalized.



23
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

Pro Forma Financial Information    
The following condensed pro forma operating information is presented as if the Company’s properties acquired in 2015 had been included in operations as of January 1, 2014. The pro forma operating information excludes certain nonrecurring adjustments, such as acquisition fees and expenses incurred, to reflect the pro forma impact these acquisitions would have on earnings on a continuous basis:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
75,235

 
$
67,888

 
$
150,950

 
$
136,552

Net income
$
11,425

 
$
7,428

 
$
28,682

 
$
20,955

Net income attributable to noncontrolling interests
$
27

 
$
70

 
$
340

 
$
357

Distributions to redeemable noncontrolling interests attributable to common stockholders
$
(89
)
 
$
(89
)
 
$
(177
)
 
$
(175
)
Net income attributable to common stockholders (1)
$
976

 
$
2,529

 
$
13,145

 
$
10,996

Net income attributable to common stockholders per share, basic and diluted
$
0.01

 
$
0.02

 
$
0.07

 
$
0.08

(1)
Amount is net of net income attributable to noncontrolling interests and distributions to redeemable noncontrolling interests attributable to common stockholders.
Future Minimum Contractual Rent Payments
The future minimum contractual rent payments pursuant to the lease terms, with lease expirations ranging from 2015 to 2030, are shown in the table below:
Remaining 2015
$
112,486

2016
231,367

2017
225,876

2018
211,449

2019
182,681

Thereafter
748,882

Total
$
1,712,741


Revenue Concentration
No lessee or property, based on annualized net rent for the 12-month period subsequent to June 30, 2015, pursuant to the respective in-place leases, was greater than 5% as of June 30, 2015.
The percentage of annualized net rent for the 12-month period subsequent to June 30, 2015, by state, based on the respective in-place leases, is as follows:

24
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

State
 
Annualized
Net Rent
 
Number of
Properties
 
Percentage of
Annualized
Net Rent
Texas
 
$
25,934

 
8

 
12.7
%
Illinois
 
21,140

 
9

 
10.4

Ohio
 
20,998

 
8

 
10.4

Georgia
 
19,803

 
4

 
9.7

California
 
19,758

 
6

 
9.7

Colorado
 
18,147

 
6

 
8.9

Arizona
 
12,349

 
4

 
6.1

New Jersey
 
11,082

 
3

 
5.4

All others (1)
 
54,225

 
22

 
26.7

Total
 
$
203,436

 
70

 
100.0
%
(1)     All others account for less than 5% of total annualized net rent on an individual basis.
The percentage of annualized net rent for the 12-month period subsequent to June 30, 2015, by industry, based on the respective in-place leases, is as follows: 
Industry (1)
 
Annualized
Net Rent
 
Number of
Lessees
 
Percentage of
Annualized
Net Rent
Manufacturing
 
$
60,824

 
26

 
29.9
%
Finance & Insurance
 
51,817

 
28

 
25.5

Information (2)
 
31,296

 
10

 
15.4

Professional, Scientific & Technical Services (3)
 
22,742

 
7

 
11.2

All others (4)
 
36,757

 
20

 
18.0

Total
 
$
203,436

 
91

 
100.0
%

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

25
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

The tenant lease expirations by year based on annualized net rent for the 12-month period subsequent to June 30, 2015 are as follows:
Year of Lease Expiration
 
Annualized
Net Rent
 
Number of
Lessees
 
Approx. Square Feet
 
Percentage of
Annualized
Net Rent
2015
 
$
532

 
2

 
35,500

 
0.3
%
2016
 
249

 
2

 
21,800

 
0.1
%
2017
 
17,048

 
9

 
932,600

 
8.4
%
2018
 
22,050

 
10

 
2,445,600

 
10.8
%
2019
 
29,504

 
10

 
1,786,500

 
14.5
%
2020
 
19,621

 
10

 
1,771,900

 
9.6
%
2021
 
10,933

 
6

 
1,077,500

 
5.4
%
2022
 
20,780

 
10

 
1,513,300

 
10.2
%
2023
 
15,698

 
6

 
1,157,800

 
7.7
%
2024
 
20,288

 
10

 
1,503,000

 
10.0
%
2025
 
20,073

 
8

 
1,479,700

 
9.9
%
2026
 
12,003

 
5

 
747,100

 
5.9
%
2027
 
1,898

 
1

 
81,600

 
0.9
%
2029
 
6,416

 
1

 
249,400

 
3.2
%
2030
 
6,343

 
1

 
430,000

 
3.1
%
Vacant
 
—

 
—

 
700,200

 
—
%
Total
 
$
203,436

 
91

 
15,933,500

 
100.0
%
Tenant and Portfolio Risk
The Company monitors the credit of all tenants to stay abreast of any material changes in credit quality. The Company monitors tenant credit by (1) reviewing the credit ratings of tenants (or their parent companies or lease guarantors) that are rated by nationally recognized rating agencies; (2) reviewing financial statements and related metrics and information that are publicly available or that are required to be provided pursuant to the lease; (3) monitoring news reports and press releases regarding the tenants (or their parent companies or lease guarantors), and their underlying business and industry; and (4) monitoring the timeliness of rent collections.
 On January 24, 2014, after World Kitchen, LLC ("World Kitchen"), the tenant at the Will Partners property in Monee, Illinois, vacated such property, the Company agreed to and executed a termination agreement with World Kitchen in which World Kitchen agreed to pay the Company a termination fee of $7.125 million, which is included in rental income on the consolidated statements of operations for the year ended December 31, 2014, and a restoration amount of approximately $0.5 million. The Company financed the termination fee, net of certain adjustments and the initial payment, for a total of $6.7 million at 5.5% over an approximate 5.5 year term, with payments made quarterly in arrears. As of June 30, 2015, $1.3 million had been collected resulting in a net balance of $5.4 million. In return, the Company released World Kitchen, LLC from any and all obligations under the lease in place. During the year ended December 31, 2014, and as a result of the termination, the Company wrote off approximately $3.4 million of unamortized in-place lease intangible assets that were recorded as part of the purchase price allocation when the property was acquired and approximately $0.3 million of deferred rent.
Tenant security deposits as of June 30, 2015 and December 31, 2014, which were included in the accounts payable and other liabilities balance on the consolidated balance sheets, totaled $0.9 million and $0.3 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, which the Company deemed to be fully collectible, totaled $0.2 million and $0.4 million as of June 30, 2015 and December 31, 2014, respectively.
In conjunction with certain assets contributed to the Company in exchange for limited partnership units of the Operating Partnership, the Company effected tax protection agreements in favor of the contributor whereby the Company would be liable

26
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

to reimburse the contributor, through a special distribution, for any tax liability incurred by the contributor as a result of the disposal of the contributed asset, for a time period specified in the tax protection agreement. As of June 30, 2015, the Company has not been obligated to any contributor for a tax liability incurred as a result of an asset disposition.
Sale of College Park Property
On February 20, 2015, the Company sold the College Park property located in Indianapolis, Indiana for total proceeds of $14.3 million, less closing costs and other closing credits of approximately $2.5 million. The carrying value of the College Park property on the closing date was approximately $8.2 million, which was comprised of $6.4 million of real estate assets, net, $0.8 million of deferred rent, and $1.0 million of other leasing costs, such as leasing commissions. Upon the sale of the College Park property, the Company recognized a gain of $3.6 million. In conjunction with the sale, the Advisor was paid a disposition fee of approximately $0.1 million, in accordance with the Advisory Agreement. The Company elected to complete the sale as part of a tax-deferred exchange of real estate as permitted by Section 1031 of the Internal Revenue Code, and thus, the proceeds of the sale of the College Park property were deposited with a qualified intermediary. The funds were subsequently released upon the Company's acquisition of the GE Aviation property.
Asset Held for Sale
On April 13, 2015, the Company received an unsolicited offer to purchase the Will Partners property located in Monee, Illinois, and thus, entered into a purchase and sale agreement, which was amended on May 13, 2015 and further amended and reinstated on July 20, 2015. The Company classified the Will Partners property as held for sale, net, on the consolidated balance sheets at the lower of its (i) carrying amount or (ii) fair value less costs to sell as of June 30, 2015. In addition, the Will Partners property is included in continuing operations in the consolidated statements of operations based on the Company's early adoption of ASU No. 2014-08 as it did not meet the prerequisite requirements to be classified as discontinued operations. On August 7, 2015, the Company sold the Will Partners property for total proceeds of $22.0 million, less closing costs and other closing credits. See Note 10, Subsequent Events.
The following summary presents the major components of assets and liabilities related to the real estate held for sale as of the six months ended June 30, 2015 and year ended December 31, 2014:
 
Balance as of
 June 30, 2015
 
Balance as of
December 31, 2014
Restricted Cash
$
848

 
$
847

Real estate:
 
 
 
Land
1,494

 
2,231

Building
18,654

 
23,920

Tenant origination and absorption costs
—

 
1,397

Construction in Progress
174

 
258

Total real estate
20,322

 
27,806

Less: accumulated depreciation and amortization
(2,367
)
 
(3,182
)
Total real estate, net
17,955

 
24,624

Deferred Rent
—

 
565

Other Assets
143

 
1,156

Total Assets
$
18,946

 
$
27,192

 
 
 
 
Accounts Payable and Other Liabilities
$
453

 
$
550

Due to Affiliates
12

 
25

Restricted Reserves
436

 
436

Total Liabilities
$
901

 
$
1,011


27
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

The following is a summary of the income (loss) included in the Company's income from continuing operations for the three and six months ended June 30, 2015 and 2014, from assets classified as held for sale subsequent to the Company's adoption of the new ASU, which includes both the Will Partners and College Park properties:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Total revenues
$
523

 
$
838

 
$
896

 
$
7,805

Operating expenses
(350
)
 
(779
)
 
(903
)
 
(1,447
)
   Total revenues less operating expenses from assets
     classified as "held for sale," not qualifying as
     discontinued operations
173

 
59

 
(7
)
 
6,358

Depreciation and amortization expense
(117
)
 
(451
)
 
(235
)
 
(1,136
)
Interest expense
—

 
(71
)
 
—

 
(107
)
   Income (loss) from assets classified as "held for sale,"
     not qualifying as discontinued operations
$
56

 
$
(463
)
 
$
(242
)
 
$
5,115

Intangibles
The Company allocated a portion of the acquired and contributed real estate asset value to in-place lease valuation and tenant origination and absorption cost, as discussed above and as shown below, net of the write-off of intangibles related to the College Park and Eagle Rock properties as of June 30, 2015 and December 31, 2014, respectively. In-place leases were measured against comparable leasing information and the present value of the difference between the contractual, in-place rent, and the fair market rent was calculated using, as the discount rate, the capitalization rate utilized to compute the value of the real estate at acquisition or contribution. The discount rate used to compute the present value of the intangible assets for the Westinghouse property was adjusted to consider the potential risk that the tenant would exercise the termination option pursuant to the lease.
 
 
Balance as of
June 30, 2015
 
Balance as of
December 31, 2014
In-place lease valuation (above market)
$
41,426

 
$
27,102

In-place lease valuation (above market) - accumulated amortization
(7,030
)
 
(4,986
)
In-place lease valuation (above market), net
34,396

 
22,116

Ground leasehold interest (below market)
2,254

 
2,254

Ground leasehold interest (below market) - accumulated amortization
(40
)
 
(26
)
Ground leasehold interest (below market), net
2,214

 
2,228

Intangible assets, net
$
36,610

 
$
24,344

In-place lease valuation (below market)
$
(55,588
)
 
$
(48,448
)
In-place lease valuation (below market) - accumulated amortization
11,153

 
8,054

In-place lease valuation (below market), net
$
(44,435
)
 
$
(40,394
)
Tenant origination and absorption cost
$
493,398

 
$
379,419

Tenant origination and absorption cost - accumulated amortization
(86,266
)
 
(61,999
)
Tenant origination and absorption cost, net
$
407,132

 
$
317,420

The intangible assets are amortized over the remaining lease term of each property, which on a weighted-average basis, was approximately 6.8 years and 7.9 years as of June 30, 2015 and December 31, 2014, respectively. The amortization of the intangible assets and other leasing costs for the respective periods is as follows:

28
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

 
Amortization (income) expense for the six months ended June 30,
 
2015
 
2014
In-place lease valuation
$
(1,055
)
 
$
785

Tenant origination and absorption cost
$
24,267

 
$
19,745

Ground leasehold amortization (below market)
$
14

 
$
13

Other leasing costs amortization
$
112

 
$
36

The following table sets forth the estimated annual amortization (income) expense for in-place lease valuation, net, tenant origination and absorption costs, ground leasehold improvements, and other leasing costs as of June 30, 2015 for the next five years:
Year
In-place lease valuation, net
 
Tenant origination and absorption costs
 
Ground leasehold improvements
 
Other leasing costs
 Remaining 2015
$
(234
)
 
$
31,007

 
$
14

 
$
139

2016
$
(830
)
 
$
61,818

 
$
27

 
$
286

2017
$
(709
)
 
$
58,077

 
$
27

 
$
286

2018
$
(1,136
)
 
$
51,876

 
$
27

 
$
286

2019
$
(2,974
)
 
$
44,658

 
$
27

 
$
286

Restricted Cash
In conjunction with the contribution of certain assets, as required by certain lease provisions or certain lenders in conjunction with an acquisition or debt financing, or credits received by the seller of certain assets, the Company assumed or funded reserves for specific property improvements and deferred maintenance, re-leasing costs, and taxes and insurance, which are included on the consolidated balance sheets as restricted cash. Additionally, an ongoing replacement reserve is funded by certain tenants pursuant to each tenant’s respective lease as follows: 
Description
Balance as of
December 31, 2014
 
Additions
 
Deductions
 
Balance as of
June 30, 2015
Tenant improvement reserves (1)
$
37,533

 
$
52

 
$
(16,948
)
 
$
20,637

Midland Mortgage loan repairs reserves (2)
453

 
—

 
—

 
453

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

 
655

 
—

 
1,729

Property insurance reserve (Emporia Partners) (3)
251

 
251

 
—

 
502

Restricted deposits
20

 
—

 
—

 
20

Midland Mortgage loan restricted lockbox (4)
2,023

 
1,853

 
(2,023
)
 
1,853

Restricted rent receipts (5)
—

 
2,825

 
—

 
2,825

Total
$
41,354

 
$
5,636

 
$
(18,971
)
 
$
28,019


(1)
Additions represent tenant improvement reserves funded by the tenant and held by the lender. Deductions represent tenant improvement reimbursements made to certain tenants during the current period.
(2)
Represents a deferred maintenance reserve funded by the Company as part of the refinancing that occurred on February 28, 2013, whereby certain properties became collateral for the Midland Mortgage loan.
(3)
Addition represents monthly funding of real estate taxes and insurance by the tenant during the current period.
(4)
As part of the terms of the Midland Mortgage loan, rent collections from the eight properties which serve as collateral thereunder are received in a designated cash collateral account which is controlled by the lender until the designated payment date, as defined in the loan agreement, and the excess cash is transferred to the operating account.
(5)
Additions represent rent and prepaid rent received from the GE Aviation property from March through July, which was to be held in escrow pending a tax-deferred real estate exchange, as permitted by Section 1031 of the Internal Revenue Code, with the sale of the Will Partners property. On July 21, 2015, the Company acquired the DreamWorks property (see Note 10, Subsequent Events), which replaced the GE Aviation property in the exchange, thus, releasing any restrictions on the GE Aviation rent receipts.

29
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

4.
Investments
Investments in Unconsolidated Entities
On April 10, 2013, a Delaware Statutory Trust (“DST”) affiliated with the Sponsor acquired a two-building, single-story office campus located in Nashville, Tennessee (the “HealthSpring property”) for a purchase price of $36.4 million. The DST was then syndicated for $39.6 million which consisted of mortgage debt of $23.6 million and an equity contribution of $16.0 million. The HealthSpring property is leased in its entirety pursuant to a triple-net lease to HealthSpring, Inc. (“HealthSpring”), obligating HealthSpring to all costs and expenses to operate and maintain the property, including certain capital expenditures. On the acquisition date, the remaining term was approximately nine years. On April 12, 2013, the Company, through the Operating Partnership, acquired a 10% beneficial ownership interest in the DST, net of a 10% discount associated with offering expenses. The Operating Partnership has two exchange rights in which it can acquire additional beneficial interests in the DST . The initial exchange right, which may be exercised at any point after the beneficial owners have held their interest in the DST for at least one year, allows each investor to sell or retain its interest in the DST or exchange its interest in the DST for units in the Operating Partnership. The secondary exchange right, which may not be exercised until at least five years after the date of the agreement, allows each investor to either exchange its interest in the DST for units in the Operating Partnership or cash. If a beneficial owner elects to contribute their beneficial interest in the DST for limited partnership units of the Operating Partnership, such exchange will be dilutive to the existing limited partnership unit holders. As of June 30, 2015, the Company had begun the process of exercising its initial exchange right to acquire additional beneficial interests in the DST.
On September 9, 2014, the Company, through a special purpose entity ("SPE"), wholly-owned by the Operating Partnership, acquired an 80% interest in a joint venture with an affiliate of Digital Realty Trust, Inc. for $68.4 million, which was funded with equity proceeds raised in the Public Offering. The gross acquisition value of the property was $187.5 million, plus closing costs, which was partially financed with debt of $102.0 million. The joint venture was created for purposes of directly or indirectly acquiring, owning, financing, operating and maintaining a data center facility located in Ashburn, Virginia (the "Property"). The Property consists of approximately 132,300 square feet. The data center consists of certain data processing and communications equipment that is fully leased to a social media company and a financial services company with an average remaining lease term of approximately seven years.
The joint venture currently uses an interest rate swap to manage its interest rate risk associated with its variable rate debt. The interest rate swap is designated as an interest rate hedge of its exposure to the volatility associated with interest rates. As a result of the hedge designation and in satisfying the requirement for cash flow hedge accounting, the joint venture records changes in the fair value in accumulated other comprehensive loss. In conjunction with the investment in the joint venture discussed above, the Company recognized its 80% share, or $0.1 million, of other comprehensive loss for the six months ended June 30, 2015.
The interests discussed above are deemed to be a variable interest in a VIE, and, based on an evaluation of the variable interest against the criteria for consolidation, the Company determined that it is not the primary beneficiary of the investments, as the Company does not have power to direct the activities of the entity that most significantly affect its performance. As such, the interests in the VIEs are recorded using the equity method of accounting in the accompanying consolidated financial statements. Under the equity method, the investments in the unconsolidated entities are stated at cost and adjusted for the Company’s share of net earnings or losses and reduced by distributions. Equity in earnings of real estate ventures is generally recognized based on the allocation of cash distributions upon liquidation of the investment at book value in accordance with the joint venture agreements.
As of June 30, 2015, the balance of the investments totaled $61.6 million as shown below:
 

HealthSpring DST
 
Digital Realty
Joint Venture
 

Total
Balance December 31, 2014
$
1,351

 
$
64,898

 
$
66,249

Other comprehensive loss
—

 
(131
)
 
(131
)
Net income (loss)
16

 
(762
)
 
(746
)
Distributions
(43
)
 
(3,717
)
 
(3,760
)
Balance June 30, 2015
$
1,324

 
$
60,288

 
$
61,612



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

Investments in Joint Ventures
Effective June 16, 2014, WRRH Patterson, LLC (an affiliate of Weeks Robinson Properties) and Griffin Capital JVII Patterson, LLC, a wholly-owned SPE of the Operating Partnership, entered into an operating agreement as Managing Member and Investor Member, respectively, for purposes of forming WR Griffin Patterson, LLC ("WR Griffin"). WR Griffin's purpose is to acquire, own, develop, construct, and otherwise invest and manage a development project located in Patterson, California (the "Project") in which a warehouse and distribution facility consisting of approximately 1.5 million square feet will be developed and constructed (the "Restoration Hardware property"). The Restoration Hardware property is leased to Restoration Hardware, Inc. and Restoration Hardware Holdings, Inc. as co-tenants (collectively, "Restoration Hardware") pursuant to a 15-year triple-net lease, obligating Restoration Hardware to all costs and expenses to operate and maintain the property, including certain capital expenditures. The lease term commences upon completion of the project, which is expected to occur in the second half of 2015. The business and affairs of WR Griffin will be managed by the Managing Member. However, all major decisions, as provided in the operating agreement, must be approved by both the Managing Member and Investor Member. Additionally, the Managing Member interest in the purchase and sale agreement has been assigned to the Investor Member in exchange for a mandatory redemption fee. As a result of the assignment, the Managing Member will transfer all membership interest to the Investor Member upon completion of the project.
On June 20, 2014, the Company, through WR Griffin, entered into a real estate development agreement with Weeks Robinson Development & Management, LLC ("Weeks Robinson"), to develop and construct the Restoration Hardware property. On June 20, 2014, the land on which the property will be constructed was purchased by WR Griffin for approximately $15.2 million, including closing costs. The Company determined that control of the joint venture lies with its wholly-owned SPE. As such, the Company, in consolidation with the joint venture, included the following amounts on its consolidated balance sheet as of June 30, 2015 and December 31, 2014:
 
Balance as of
June 30, 2015
 
Balance as of
December 31, 2014
Cash on hand
$
10

 
$
6,985

Other assets
2,260

 
—

Construction in progress - paid by the joint venture
71,369

 
34,739

Construction in progress - paid by the Company
2

 
70

Construction in progress - capitalized interest
930

 
—

Leasing commissions
375

 
375

Land
15,185

 
15,185

Construction in progress payable
(12,132
)
 
(13,423
)
Noncontrolling interest
(7,656
)
 
(7,656
)
Total investment
$
70,343

 
$
36,275



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

5.
Debt
As of June 30, 2015 and December 31, 2014, the Company’s debt consisted of the following:
 
 
Balance as of
June 30, 2015
 
Balance as of December 31, 2014
 
Contractual Interest Rate (1)
 
Payment Type
 
Loan Maturity
 
Plainfield Mortgage Loan
$
19,467

 
$
19,638

 
6.65%

Principal and 
Interest
 
November 2017
 
Emporia Partners Mortgage Loan
3,933

 
4,108

 
5.88%

Principal and 
Interest
 
September 2023
 
LTI Mortgage Loan
31,764

 
32,128

 
5.80%

Principal and 
Interest
 
March 2016
 
LTI Mortgage Loan Premium
57

 
102

 
—

—
 
—
 
TransDigm Mortgage Loan
6,504

 
6,576

 
5.98%

Principal and 
Interest
 
June 2016
 
TransDigm Mortgage Loan Premium
49

 
75

 
—

—
 
—
 
Ace Hardware Mortgage Loan
23,472

 
23,648

 
5.588%

Principal and 
Interest
 
October 2024
 
Ace Hardware Mortgage Loan Premium
1,595

 
1,681

 
—

—
 
—
 
Midland Mortgage Loan
105,600

 
105,600

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

 
110,640

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

 
21,500

 
LIBO Rate + 2.45%
(2)
Interest Only
through July
2015/Principal and
Interest thereafter
 
August 2019
 
Mortgage Loan Total
324,581

 
325,696

 

 
 
 
 
 
Unsecured Term Loan
300,000

 
300,000

 
LIBO Rate + 1.45%
(2)
Interest Only
 
May 2019
 
Unsecured Revolver
490,100

 
—

 
LIBO Rate + 1.50%
(2)
Interest Only
 
May 2019
(3)
Total
$
1,114,681


$
625,696

 
 
 
 
 
 
 
(1)
The weighted average interest rate as of June 30, 2015 was 2.6% for the Company’s fixed-rate and variable-rate debt combined and approximately 5.0% for the Company’s fixed-rate debt only.
(2)
The LIBO Rate as of June 30, 2015 was 0.19%.
(3)
The Unsecured Revolver (May 2014), per the Unsecured Credit Agreement (May 2014), as discussed below, allows for a one-year extension. Maturity date assumes the one-year extension is exercised. However, the Unsecured Credit Facility (May 2014) was retired in full on July 20, 2015, as the Company entered into the Unsecured Credit Facility (July 2015). See Note 10, Subsequent Events.
AIG Loan
On January 24, 2014, the Company, through five SPEs wholly owned by the Operating Partnership, entered into various loan agreements (the “AIG Loan Documents”) with National Union Fire Insurance Company and The Variable Annuity Life Insurance Company of Pittsburgh, Pa. (collectively, the “Lenders”), pursuant to which the Lenders provided such SPEs with a loan in the aggregate amount of $110.64 million (the “AIG Loan”). The funds were utilized to refinance five of the properties previously serving as security for the KeyBank credit facility. The AIG Loan is secured by cross-collateralized and cross-

32
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

defaulted first mortgage liens or first lien deeds of trust and second mortgage liens or second lien deeds of trust on the Verizon, Avnet, Northrop, Schlumberger, and UTC properties. The AIG Loan has a term of 15 years, maturing on February 1, 2029. The AIG Loan bears interest at a fixed rate of 4.96% and requires monthly payments of interest only for the first three years and fixed monthly payments based on a 360-month amortization period of principal and interest thereafter.
Unsecured Credit Facility (May 2014)
On May 8, 2014, the Company, through the Operating Partnership, entered into an unsecured credit agreement (the "Unsecured Credit Agreement (May 2014)") co-led by KeyBank National Association ("KeyBank") and Bank of America, N.A. ("Bank of America") with KeyBank as administrative agent and Bank of America as syndication agent, along with a syndicate of lenders. Pursuant to the Unsecured Credit Agreement (May 2014), the Company was provided with a $750.0 million senior unsecured credit facility (the "Unsecured Credit Facility (May 2014)"), consisting of a $450.0 million senior unsecured revolver (the "Unsecured Revolver (May 2014)") and a $300.0 million senior unsecured term loan (the "Unsecured Term Loan (May 2014)"). The Unsecured Credit Facility (May 2014) could be increased up to $500.0 million for a maximum of $1.25 billion by increasing the Unsecured Revolver (May 2014), the Unsecured Term Loan (May 2014) or a combination of both. On June 9, 2015, the Company, through the Operating Partnership, exercised its right under the credit agreement and increased the Unsecured Revolver (May 2014) to $500.0 million. The Unsecured Revolver (May 2014) had an initial term of four years, maturing on May 8, 2018 and could be extended for a one-year period if certain conditions were met. The Unsecured Term Loan (May 2014) had a term of five years, maturing on May 8, 2019. Availability under the Unsecured Credit Agreement (May 2014) was limited to the lesser of a (i) a specified leverage ratio applied to a portfolio real estate pool value computed as adjusted net operating income divided by specified capitalization rate; or (ii) debt service coverage ratio ("DSCR") calculation, all as set forth in the Unsecured Credit Agreement (May 2014).
The Unsecured Revolver (May 2014) and Unsecured Term Loan (May 2014) both had an interest rate based on the leverage ratio reported with quarterly compliance certificate, as discussed below, and calculated based on the LIBO Rate plus the applicable LIBO Rate margin, as provided in the Unsecured Credit Agreement (May 2014), or Base Rate plus the applicable base rate margin, as provided in the Unsecured Credit Agreement (May 2014). The Base Rate was calculated as the greater of (i) the KeyBank Prime rate or (ii) the Federal Funds rate plus 0.50%. Payments under the Unsecured Credit Facility (May 2014) were interest only and were due on the first day of each quarter.
In connection with the acquisitions and SOR Merger during the six months ended June 30, 2015, the Company, through the Operating Partnership, made draws totaling $126.1 million and $173.0 million, respectively, under the Unsecured Revolver (May 2014). In addition, the Company, through the Operating Partnership, also made a draw of $191.0 million under the Unsecured Revolver (May 2014) to satisfy the redemption of 75% of the Preferred Units, plus 1.81% of the Liquidation Preference, which had been outstanding for 18 months (see Note 6, Equity). As of June 30, 2015, there was an outstanding balance of $300.0 million and $490.1 million on the Unsecured Term Loan (May 2014) and Unsecured Revolver (May 2014), respectively.
The Unsecured Credit Facility (May 2014) was retired in full on July 20, 2015, and the Company entered into the Unsecured Credit Facility (July 2015). See Note 10, Subsequent Events.
Debt Covenant Compliance
Pursuant to the terms of the Midland Mortgage loan, the Operating Partnership is required to maintain a debt service coverage ratio (as defined in therein), of 1.60 to 1 and must maintain a minimum net worth of $75.0 million.
Pursuant to the terms of the AIG Loan, the Operating Partnership is required to maintain (1) a minimum debt service coverage ratio, as defined in the loan agreement, for the secured properties of 1.60x; (2) a maximum loan-to-value ratio of 60%; (3) minimum annual base rent of $14.75 million; and (4) minimum net worth of $110.6 million.
Pursuant to the terms of the Unsecured Credit Facility (May 2014), the Operating Partnership, in consolidation with the Company, was subject to certain loan compliance covenants including, but not limited to (as defined in the Unsecured Credit Agreement (May 2014)), (1) a maximum consolidated leverage ratio (60% or 65% for two consecutive quarters following a material acquisition); (2) a minimum fixed charges coverage ratio (1.5 to 1); (3) a minimum tangible net worth of at least $861,987,871 plus 75% of the net proceeds generated by any common or preferred share issuances plus 75% of units issued in connection with the contribution of any properties; (4) a maximum secured debt ratio (40%); (5) a maximum secured recourse debt ratio (5%); (6) a maximum unhedged variable rate debt (30%); (7) a maximum payout ratio of 95% of distribution to core funds from operations, as defined in the Unsecured Credit Agreement (May 2014); (8) minimum unencumbered asset pool

33
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

DSCR (1.35 to 1); and (9) maximum unencumbered asset pool leverage ratio (60% or 65% for two consecutive quarters following a material acquisition).
Pursuant to the terms of the TW Telecom Loan, the Operating Partnership is required to maintain a minimum debt service coverage ratio, as defined in the loan agreement, for the property 1.60x beginning with the quarter ended December 31, 2014.
The Company was in compliance with all debt covenants as of June 30, 2015.
The following summarizes the future principal repayments of all loans as of June 30, 2015 per the loan terms discussed above:
 
June 30, 2015
 
2015
$
974

  
2016
39,745

(1) 
2017
23,198

(2) 
2018
5,347

 
2019
813,772

(3) 
Thereafter
229,944

(4) 
Total principal
1,112,980

  
Unamortized debt premium
1,701

  
Total
$
1,114,681

  
(1)    Amount includes payment of the balances of the LTI and TransDigm property mortgage loans which mature in 2016. Principal repayments on both
mortgage loans do not include the unamortized valuation premium of $0.1 million.
(2)
Amount includes payment of the balance of the Plainfield property mortgage loan which matures in 2017.
(3)
Amount includes payment of the balance of the TW Telecom Loan and the Unsecured Term Loan (May 2014), both of which mature in 2019, as well as the balance of the Unsecured Revolver (May 2014) which matures in 2019, assuming the one-year extension is exercised. However, the Unsecured Credit Facility (May 2014) was retired in full on July 20, 2015, as the Company entered into the Unsecured Credit Facility (July 2015). See Note 10, Subsequent Events.
(4)
Amount includes payment of the balances of:
•
the Midland Mortgage loan and Emporia Partners Mortgage Loan, both of which mature in 2023,
•
the Ace Hardware Mortgage Loan, which matures in 2024, and
•
the AIG Loan, which matures in 2029.
Principal repayments on the Ace Hardware Mortgage Loan do not include the unamortized valuation premium of $1.6 million.


6.    Equity
Preferred Equity
On November 5, 2013, in connection with the acquisition of the Investment Grade Portfolio, a portfolio of 18 properties, the Operating Partnership entered into a purchase agreement with an affiliate (the “Preferred Equity Investor”) of Starwood Property Trust (“Starwood”), pursuant to which Starwood provided a $250.0 million equity investment in the Operating Partnership in exchange for 24,319,066 Series A Cumulative Exchangeable Preferred Units of limited partnership interest (the “Preferred Units”) of the Operating Partnership. The Preferred Equity Investor is entitled to monthly distributions calculated as follows:
•
From November 5, 2013 through October 31, 2015, a rate of LIBO plus 7.25% per annum of the Liquidation Preference (defined below) per Preferred Unit;
•
From November 1, 2015 through October 31, 2016, a rate of LIBO plus 8.25% per annum of the Liquidation Preference per Preferred Unit;
•
From November 1, 2016 through October 31, 2017, a rate of LIBO plus 9.25% per annum of the Liquidation Preference per Preferred Unit;
•
From November 1, 2017 through October 31, 2018, a rate of LIBO plus 10.25% per annum of the Liquidation Preference per Preferred Unit.

At all times, LIBOR will be subject to a minimum floor of 0.25%.

34
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

The Preferred Units may be redeemed by the Operating Partnership, in whole or in part, at any time. The redemption price for the Preferred Units will be equal to the sum of (i) $10.28 per Preferred Unit, plus all accumulated and unpaid distributions (the “Liquidation Preference”); (ii) 1.81% of the Liquidation Preference; and (iii) all accumulated and unpaid distributions through the date of redemption, plus interest thereon. Pursuant to the terms of the purchase agreement, on May 14, 2015, the Company, through the Operating Partnership, exercised its right to redeem 75% of the outstanding Preferred Units. The Company recognized a redemption charge of $7.4 million to net income during the three months ended June 30, 2015, including the write-off of original issuance costs of approximately $4.0 million related to the Preferred Units. There were 6,079,766 Series A Cumulative Exchangeable Preferred Units outstanding at June 30, 2015. The Operating Partnership intends to redeem the remaining 25% of the Preferred Units on October 31, 2015, pursuant to the purchase agreement.
Pursuant to the terms of the purchase agreement with Starwood, the Operating Partnership, in consolidation with the Company, is subject to certain covenants including, but not limited to, covenants that limit the Operating Partnership’s discretion in utilizing cash flows and require that distributions on the Preferred Units be given priority over other disbursements, including distributions on Common Units and redemptions of the Company's shares. In addition, the covenants require (1) a maximum Senior Loan-to-Value Ratio on the Company's aggregate property portfolio of 54% during the 12 month period following the date the Preferred Units were issued and 50% thereafter; and (2) a minimum Debt Yield of at least 13.5%. After the 24th month, the Preferred Equity Investor may cause the Operating Partnership to begin redeeming the investment if certain covenants are not met, as defined in the underlying agreements. Should an event of default occur, or the investment remains outstanding on the 60th month, the Preferred Equity Investor will have the right to appoint a majority to the board of directors of the Company. In addition, the Preferred Equity Investor will have the right to convert any amount of the limited partnership units to preferred stock of the Company. The Company caused certain amended documents to be placed into escrow that could become effective upon an event of default or the investment remains outstanding on the 60th month, at the Preferred Equity Investor's discretion. The Company was in compliance with all of the covenants as of June 30, 2015.
Common Equity
As of June 30, 2015, the Company had received aggregate gross offering proceeds of approximately $1.3 billion from the sale of shares in the Private Offering, the Public Offerings, and the DRP Offering, as discussed in Note 1, Organization. There were 173,715,536 shares outstanding at June 30, 2015, including shares issued pursuant to the DRP, less shares redeemed pursuant to the share redemption plan discussed below.
Distribution Reinvestment Plan (DRP)
As of June 30, 2015 and December 31, 2014, $83.6 million and $57.7 million in shares, respectively, had been issued under the DRP, pursuant to the Private Offering, the Public Offerings, and the DRP Offering, of which $2.5 million and $1.2 million in redemptions payable subsequent to quarter end, respectively, were reclassified from redeemable common stock to accounts payable and accrued liabilities in the consolidated balance sheets. See Note 1, Organization.
Share Redemption Program
The Company has adopted a share redemption program ("SRP") that enables stockholders to sell their stock to the Company in limited circumstances. As long as the common stock is not listed on a national securities exchange or over-the-counter market, stockholders who have held their stock for at least one year may, under certain circumstances, be able to have all or any portion of their shares of stock redeemed by the Company. The Company may redeem, on a quarterly basis, the shares of stock presented for redemption for cash to the extent that there are sufficient funds available to fund such redemptions. In no event shall the Company redeem more than 5.0% of the weighted average shares outstanding during the prior calendar year, and the cash available for redemption will be limited to the proceeds from the sale of shares pursuant to the DRP. Effective March 17, 2013, the redemption price per share shall be as shown below, which is based upon the number of years the stock is held:
Period of Time Held
 
Redemption Price
At least one year
 
Lower of $9.25 or the price paid by the stockholder
At least two years
 
Lower of $9.50 or the price paid by the stockholder
At least three years
 
Lower of $9.75 or the price paid by the stockholder
At least four years
 
Lower of $10.28 or the price paid by the stockholder

35
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

As the use of the proceeds from the DRP for redemptions is outside the Company’s control, the net proceeds from the DRP are considered to be temporary equity and are presented as common stock subject to redemption on the accompanying consolidated balance sheets. The cumulative proceeds from the DRP, net of any redemptions, will be computed at each reporting date and will be classified as temporary equity on the Company’s consolidated balance sheets. As noted above, the redemption is limited to proceeds from new permanent equity from the sale of shares pursuant to the DRP.
Redemption requests will be honored on the last business day of the month following the end of each quarter. Requests for redemption must be received on or prior to the end of the quarter in order for the Company to repurchase the shares as of the end of the following month. Since inception through June 30, 2015, the Company had redeemed 664,337 shares of common stock for approximately $6.5 million at a weighted average price per share of $9.83 pursuant to the SRP. As of June 30, 2015, there were 253,581 shares totaling $2.5 million subject to redemption requests. On July 31, 2015, the Company satisfied all of the eligible redemption requests at a weighted average price per share of $9.79, with the exception of one redemption request that was satisfied on August 7, 2015. The Company’s board of directors may choose to amend, suspend or terminate the SRP upon 30 days' written notice at any time.
Noncontrolling Interests
Noncontrolling interests represent limited partnership interests in the Operating Partnership in which the Company is the general partner. General partnership units and limited partnership units of the Operating Partnership were issued as part of the initial capitalization of the Operating Partnership, and limited partnership units were issued in conjunction with management's contribution of certain assets, as discussed in Note 1, Organization. As of June 30, 2015, noncontrolling interests were approximately 2% of total shares outstanding and approximately 3% of weighted average shares outstanding (both measures assuming limited partnership units were converted to common stock). The Company has evaluated the terms of the limited partnership interests in the Operating Partnership and as a result, has classified limited partnership interests issued in the initial capitalization and in conjunction with the contributed assets as noncontrolling interests, which are presented as a component of permanent equity, except as discussed below.
The Company evaluates individual noncontrolling interests for the ability to recognize the noncontrolling interest as permanent equity on the consolidated balance sheets at the time such interests are issued and on a continual basis. Any noncontrolling interest that fails to qualify as permanent equity has been reclassified as temporary equity and adjusted to the greater of (a) the carrying amount, or (b) its redemption value as of the end of the period in which the determination is made.
The Operating Partnership issued 4.8 million limited partnership units to affiliated parties and unaffiliated third parties in exchange for certain properties and 0.2 million limited partnership units to unaffiliated third parties unrelated to property contributions. To the extent the contributors should elect to redeem all or a portion of their Operating Partnership units, pursuant to the terms of the respective contribution agreement, such redemption shall be at a per unit value equivalent to the price at which the contributor acquired its limited partnership units in the respective transaction.
Operating partnership units issued pursuant to the Will Partners REIT, LLC (Will Partners property) contribution are not included in permanent equity on the consolidated balance sheets. The partners holding these units can cause the general partner to redeem the units for the cash value, as defined in the operating partnership agreement. As the general partner does not control these redemptions these units are presented on the consolidated balance sheets as noncontrolling interest subject to redemption at their redeemable value. The net income (loss) and distributions attributed to these limited partners is allocated proportionately between common stockholders and other noncontrolling interests that are not considered redeemable.
The limited partners of the Operating Partnership will have the right to cause the general partner of the Operating Partnership, the Company, to redeem their limited partnership units for cash equal to the value of an equivalent number of shares, or, at the Company’s option, purchase their limited partnership units by issuing one share of the Company’s common stock for the original redemption value of each limited partnership unit redeemed. These rights may not be exercised under certain circumstances which could cause the Company to lose its REIT election. There were no redemption requests during the six months ended June 30, 2015 and the year ended December 31, 2014. 
Noncontrolling interests include Weeks Robinson's interest in the joint venture, the real estate developer engaged to develop and construct the Restoration Hardware property. See Note 3, Real Estate. The interest in the joint venture is deemed to be a variable interest in a VIE and based on an evaluation of the variable interest against the criteria for consolidation, the Company determined that it is the primary beneficiary of the investment. As such, the interest in the VIE is recorded using the consolidation method of accounting in the accompanying consolidated financial statements. Under the consolidation method,

36
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

the company includes the assets, liabilities, noncontrolling interests, and results of activities of the VIE in its consolidated financial statements as shown in Note 4, Investments.
The following summarizes the activity for noncontrolling interests for the six months ended June 30, 2015 and the year ended December 31, 2014:
 
Six Months Ended
June 30, 2015
 
Year Ended December 31, 2014
Beginning balance
$
17,478

 
$
19,736

Contribution/issuance of noncontrolling interests
—

 
1,504

Distributions to noncontrolling interests
(1,524
)
 
(3,050
)
Allocated distributions to noncontrolling interests subject to redemption
(6
)
 
(14
)
Net loss
(458
)
 
(698
)
Ending balance
$
15,490

 
$
17,478


7.
Related Party Transactions
The following table summarizes the related party costs and fees incurred, paid and due to affiliates as of June 30, 2015 and December 31, 2014:
 
Year Ended December 31, 2014
 
Six Months Ended June 30, 2015
 
Payable
 
Incurred
 
Paid
 
Payable
Advisor and Property Manager fees
 
 
 
 
 
 
 
Acquisition fees and expenses
$
—

 
$
22,271

 
$
19,267

 
$
3,004

Operating expenses
202

 
305

 
353

 
154

Asset management fees
1,233

 
7,977

 
7,619

 
1,591

Property management fees
495

 
3,040

 
3,025

 
510

Disposition fees
—

 
133

 
133

 
—

Costs advanced by the Advisor
—

 
43

 
—

 
43

Dealer Manager fees
—

 
—

 
—

 
—

Total, net of real estate assets held for sale
$
1,930

 
$
33,769

 
$
30,397

 
$
5,302

Asset management fees related to real estate held for sale
21

 
83

 
92

 
12

Property management fees related to real estate held for sale
4

 
24

 
28

 
—

Total
$
1,955

 
$
33,876

 
$
30,517

 
$
5,314

Advisory and Dealer Manager Agreements
The Company does not currently expect to have any employees. The Advisor will be primarily responsible for managing the business affairs and carrying out the directives of the Company’s board of directors. The Company entered into an advisory agreement with the Advisor and a dealer manager agreement with the Dealer Manager for the Public Offerings. The dealer manager agreement was terminated in accordance with its terms upon the termination of the Follow-On Offering. The Advisory Agreement entitles the Advisor to specified fees and incentives upon the provision of certain services with regard to the Public Offerings and investment of funds in real estate properties, among other services, as well as reimbursement for organizational and offering costs incurred by the Advisor on the Company’s behalf and reimbursement of certain costs and expenses incurred by the Advisor in providing services to the Company.
The Advisory Agreement requires, upon termination of the Public Offerings, that any organizational and offering costs, including sales commissions and dealer manager fees, incurred above 15% of gross equity raised in the Company’s Public Offerings and that any organizational and offering costs, not including sales commissions and dealer manager fees, incurred above 3.5% of gross equity raised in the Company’s Public Offerings shall be reimbursed to the Company. Upon termination of

37
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

the Public Offerings, organizational and offering costs did not exceed the limitations for organizational and offering costs the Advisor is subject to, as discussed in Note 2, Basis of Presentation and Summary of Significant Accounting Policies — Organizational and Offering Costs.
Management Compensation
The following table summarizes the compensation and fees the Company has paid or may pay to the Advisor, the Property Manager, the Sponsor and other affiliates, including amounts to reimburse costs for providing services.
Type of Compensation
(Recipient)
  
   Determination of
    Amount
Acquisition Fees and Expenses
(Advisor)
  
Under the Advisory Agreement the Advisor receives acquisition fees equal to 2.5%, and reimbursement for actual acquisition related expenses incurred by the Advisor of up to 0.50% of the contract purchase price, as defined therein, of each property acquired by the Company, and reimbursement for actual acquisition expenses incurred on the Company's behalf, including certain payroll costs for acquisition-related efforts by the Advisor's personnel, as defined in the agreements. In addition, the Company pays acquisition expenses to unaffiliated third parties equal to approximately 0.60% of the purchase price of the Company's properties. The acquisition fee and acquisition expenses paid by the Company shall be reasonable and in no event exceed an amount equal to 6.0% of the contract purchase price, unless approved by a majority of the independent directors.
 
 
 
Disposition Fee
(Advisor)
 
In the event that the Company sells any or all of its properties (or a portion thereof), or all or substantially all of the business or securities of the Company are transferred or otherwise disposed of by way of a merger or other similar transaction, the Advisor will be entitled to receive a disposition fee if the Advisor or an affiliate provides a substantial amount of the services (as determined by a majority of the Company's directors, including a majority of the independent directors) in connection with such transaction. The disposition fee the Advisor or such affiliate shall be entitled to receive at closing will be equal to the lesser of: (1) 3% of the Contract Sales Price, as defined in the Advisory Agreement or (b) 50% of the Competitive Commission, as defined in the Advisory Agreement; provided, however, that in connection with certain types of transactions described further in the Advisory Agreement, the disposition fee shall be subordinated to Invested Capital (as defined in the operating partnership agreement). The disposition fee may be paid in addition to real estate commissions or other commissions paid to non-affiliates, provided that the total real estate commissions or other commissions (including the disposition fee) paid to all persons by the Company or the operating partnership shall not exceed an amount equal to the lesser of (i) 6% of the aggregate Contract Sales Price or (ii) the Competitive Commission.
 
 
 
Asset Management Fee
(Advisor)
  
The Advisor receives an annual asset management fee for managing the Company’s assets equal to 0.75% of the Average Invested Assets, defined as the aggregate carrying value of the assets invested before reserves for depreciation. The fee will be computed based on the average of these values at the end of each month. The asset management fees are earned monthly.
 
 
 
Operating Expenses
(Advisor)
  
The Advisor and its affiliates are entitled to reimbursement, at cost, for actual expenses incurred by them on behalf of the Company in connection with their provision of administrative services, including related personnel costs; provided, however, the Advisor must reimburse the Company for the amount, if any, by which total operating expenses (as defined), including advisory fees, paid during the previous 12 months then ended exceeded the greater of: (i) 2% of the Company’s average invested assets for that 12 months then ended; or (ii) 25% of the Company’s net income, before any additions to reserves for depreciation, bad debts or other expenses connected with the acquisition and disposition of real estate interests and before any gain from the sale of the Company’s assets, for that fiscal year, unless the Company’s board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors. Approximately $0.1 million and $0.3 million for the three months ended June 30, 2015 and 2014, respectively, and approximately $0.3 million and $0.5 million, respectively, for the six months ended June 30, 2015 and 2014, of operating expenses incurred by the Advisor were allocated to the Company in each period. Such costs are allocated using methodologies meant to fairly allocate such costs based upon the related activities and in accordance with the agreement.
 
 
 

38
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

Type of Compensation
(Recipient)
  
   Determination of
    Amount
Property Management Fees
(Property Manager)
  
The Property Manager is entitled to receive a fee for its services in managing the Company’s properties up to 3% of the gross monthly revenues from the properties plus reimbursement of the costs of managing the properties. The Property Manager, in its sole and absolute discretion, can waive all or a part of any fee earned. In the event that the Property Manager assists with the development or redevelopment of a property, the Company may pay a separate market-based fee for such services. In the event that the Company contracts directly with a non-affiliated third-party property manager with respect to a particular property, the Company will pay the Property Manager an oversight fee equal to 1% of the gross revenues of the property managed. In no event will the Company pay both a property management fee to the Property Manager and an oversight fee to the Property Manager with respect to a particular property.
 
In addition, the Company may pay the Property Manager or its designees a leasing fee in an amount equal to the fee customarily charged by others rendering similar services in the same geographic area. The Company may also pay the Property Manager or its designees a construction management fee for planning and coordinating the construction of any tenant directed improvements for which the Company is responsible to perform pursuant to lease concessions, including tenant-paid finish-out or improvements. The Property Manager shall also be entitled to a construction management fee of 5% of the cost of improvements.
 
 
 
Subordinated Share of Net Sale Proceeds (Advisor) (1)
  
Payable to the Advisor in cash upon the sale of a property after the Company's stockholders receive a return of capital plus a 6% cumulative, non-compounded return. The share of net proceeds from the sale of property is 5% if stockholders are paid a return of capital plus 6% to 8% annual cumulative non-compounding return, 10% if stockholders are paid a return of capital plus 8% to 10% annual cumulative non-compounding return, or 15% if stockholders are paid a return of capital plus 10% or more annual cumulative non-compounding return.
 
 
 
Subordinated Incentive Listing Distribution (Advisor) (1)
 
Payable to the Advisor no earlier than 7 months and no later than 19 months following a listing of the shares on a national securities exchange, based upon the market value of the Company's shares during a period of 30 trading days commencing after the first day of the 6th month, but no later than the last day of the 18th month following a listing, the commencement date of which shall be chosen by the Advisor in its sole discretion, and after the Company's stockholders receive a return of capital plus a 6% cumulative, non-compounded return. The distribution share is 5% if stockholders are paid a return of capital plus 6% to 8% annual cumulative non-compounding return, 10% if stockholders are paid a return of capital plus 8% to 10% annual cumulative non-compounding return, or 15% if stockholders are paid a return of capital plus 10% or more annual cumulative non-compounding return, and is payable in cash, shares of the Company's stock, units of limited partnership interest in the Operating Partnership, or a combination thereof.
 
 
 
Subordinated Distribution Due Upon Termination
(Advisor)
 
Payable to the Advisor (in cash, shares of the Company's stock, units of limited partnership interest in the Operating Partnership, or a combination thereof), 1/3rd within 30 days of the date of involuntary termination of the Advisory Agreement, 1/3rd upon the one year anniversary of such date, and 1/3rd upon the two year anniversary of such date. Calculated based upon appraised value of properties less the fair value of the underlying debt, and plus or minus net current assets or net current liabilities, respectively, and payable after the Company's stockholders receive a return of capital plus a 6% cumulative, non-compounded return. The distribution share is 5% if stockholders are paid a return of capital plus 6% to 8% annual cumulative non-compounding return, 10% if stockholders are paid a return of capital plus 8% to 10% annual cumulative non-compounding return, or 15% if stockholders are paid a return of capital plus 10% or more annual cumulative non-compounding return.

Upon a voluntary termination of the Advisory Agreement, the Advisor will not be entitled to receive the Subordinated Distribution Due Upon Termination but instead will be entitled to receive at the time of the applicable liquidity event a distribution equal to the applicable Subordinated Share of Net Sale Proceeds, Subordinated Incentive Listing Distribution, or Subordinated Distribution Due Upon Extraordinary Transaction.
 
 
 

39
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

Type of Compensation
(Recipient)
  
   Determination of
    Amount
Subordinated Distribution Due Upon Extraordinary Transaction
(Advisor) (1)
 
Payable to the Advisor upon the closing date of an Extraordinary Transaction (as defined in the Operating Partnership Agreement); payable in cash, shares of the Company's stock, units of limited partnership in the Operating Partnership, or a combination thereof after the Company's stockholders receive a return of capital plus a 6% cumulative, non-compounded return. The distribution share is 5% if stockholders are paid a return of capital plus 6% to 8% annual cumulative non-compounding return, 10% if stockholders are paid a return of capital plus 8% to 10% annual cumulative non-compounding return, or 15% if stockholders are paid a return of capital plus 10% or more annual cumulative non-compounding return.
 
 
 
Sponsor Break-Even Amount
(Sponsor)
 
In the event of a merger of the Advisor into the Company or one of its affiliates in anticipation of listing or a merger with an already-listed entity, any merger consideration paid to the Company's sponsor or its affiliates in excess of unreturned and unreimbursed capital invested by the Company's sponsor and its affiliates into the Company, the Advisor, the Company's dealer manager, or affiliates, relating in any way to the business organization of the Company, the Operating Partnership, or any offering of the Company, shall be subordinated to the return of stockholders' invested capital. Such excess merger consideration shall be paid in stock that may not be traded for one year from the date of receipt, and such stock shall be held in escrow pending the occurrence of certain conditions outlined further in the Operating Partnership Agreement.
(1)
The Advisor cannot earn more than one incentive distribution. Any receipt by the Advisor of subordinated share of net sale proceeds (for anything other than a sale of the entire portfolio) will reduce the amount of the subordinated distribution due upon termination, the subordinated incentive listing distribution and the subordinated distribution due upon extraordinary transaction.
Conflicts of Interest
The Sponsor, Advisor, Property Manager and their officers and certain of their key personnel and their respective affiliates currently serve as key personnel, advisors, managers and sponsors or co-sponsors to some or all of 12 other real estate programs affiliated with the Sponsor, including Griffin Capital Essential Asset REIT II, Inc. ("GCEAR II"), a publicly-registered, non-traded REIT that focuses on business essential office and industrial properties, Griffin-American Healthcare REIT III, Inc. ("GAHR III"), also a publicly-registered, non-traded REIT, Griffin-Benefit Street Partners BDC Corp. ("GB-BDC"), a non-traded business development company regulated under the 1940 Act, and Griffin Institutional Access Real Estate Fund ("GIREX"), a non-diversified, closed-end management investment company that is operated as an interval fund under the 1940 Act. Because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between the Company’s business and these other activities.
Some of the material conflicts that the Sponsor, Advisor, and Property Manager and their key personnel and their respective affiliates will face are (1) competing demand for time of the Advisor’s executive officers and other key personnel from the Sponsor and other affiliated entities; (2) determining if certain investment opportunities should be recommended to the Company or another program sponsored or co-sponsored by the Sponsor; and (3) influence of the fee structure under the Advisory Agreement and the distribution structure under the Operating Partnership Agreement that could result in actions not necessarily in the long-term best interest of the Company’s stockholders. The board of directors has adopted the Sponsor’s acquisition allocation policy as to the allocation of acquisition opportunities among the Company and GCEAR II, which is based on the following factors:
•
the investment objectives of each program;
•
the amount of funds available to each program;
•
the financial impact of the acquisition on each program, including each program’s earnings and distribution ratios;
•
various strategic considerations that may impact the value of the investment to each program;
•
the effect of the acquisition on diversification of each program’s investments; and
•
the income tax effects of the purchase to each program.
If, after consideration of these factors, the investment opportunity is suitable for the Company and for GCEAR II, then:
•
the Company will have priority for investment opportunities of $75 million or greater; and

40
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

•
GCEAR II will have priority for investment opportunities of $35 million or less, until such time as GCEAR II reaches $500 million in aggregate assets (based on contract purchase price).
In the event all acquisition allocation factors have been exhausted and an investment opportunity remains equally suitable for the Company and GCEAR II, the Sponsor will offer the investment opportunity to the REIT that has had the longest period of time elapse since it was offered an investment opportunity.
If the Sponsor no longer sponsors the Company, then, in the event that an investment opportunity becomes available that is suitable, under all of the factors considered by the Advisor, for both GCEAR II and one or more other entities affiliated with the Sponsor, the Sponsor has agreed to present such investment opportunities to GCEAR II first, prior to presenting such opportunities to any other programs sponsored by or affiliated with the Sponsor. In determining whether or not an investment opportunity is suitable for more than one program, the Advisor, subject to approval by the board of directors, shall examine, among others, the following factors:
•
anticipated cash flow of the property to be acquired and the cash requirements of each program;
•
effect of the acquisition on diversification of each program’s investments;
•
policy of each program relating to leverage of properties;
•
income tax effects of the purchase to each program;
•
size of the investment; and
•
amount of funds available to each program and the length of time such funds have been available for investment.
Economic Dependency
The Company will be dependent on the Advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase and disposition of properties and other investments, management of the daily operations of the Company’s real estate portfolio, and other general and administrative responsibilities. In the event that the Advisor is unable to provide the services, the Company will be required to obtain such services from other resources.

8.
Commitments and Contingencies
Ground Lease Obligations
The Company acquired a property on January 16, 2014 that is subject to a ground lease with an expiration date of December 31, 2095. The Company incurred rent expense of $0.1 million and $0.2 million for the three and six months ended June 30, 2015, respectively, related to the ground lease. As of June 30, 2015, the remaining required payments under the terms of the ground lease are as follows:
 
June 30, 2015
Remaining 2015
$
90

2016
180

2017
198

2018
198

2019
198

Thereafter
34,246

Total
$
35,110

Litigation
From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. The Company is not a party to any material legal proceedings, nor is the Company aware of any pending or threatened litigation that would have a material adverse effect on the Company’s business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.


41
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

9.
Declaration of Distributions
During the quarter ended June 30, 2015, the Company paid distributions in the amount of $0.001901096 per day per share on the outstanding shares of common stock payable to stockholders of record at the close of business on each day during the period from April 1, 2015 through June 30, 2015. Such distributions were paid on a monthly basis, on or about the first day of the month, for the month then-ended.
On June 16, 2015, the Company’s board of directors declared distributions in the amount of $0.001901096 per day per share on the outstanding shares of common stock payable to stockholders of record at the close of business on each day during the period from July 1, 2015 through September 30, 2015. Such distributions payable to each stockholder of record during a month will be paid on such date of the following month as the Company’s Chief Executive Officer may determine.

10.    Subsequent Events
Offering Status
As of August 11, 2015, the Company had issued approximately 6,451,100 shares of the Company’s common stock pursuant to the DRP Offering for approximately $65.1 million.
Unsecured Credit Facility (July 2015)
On July 20, 2015, the Company, through the Operating Partnership, entered into a credit agreement (the "Unsecured Credit Agreement (July 2015)") with a syndicate of lenders, co-led by KeyBank, Bank of America, Fifth Third Bank ("Fifth Third"), and BMO Harris Bank, N.A. ("BMO Harris"), under which KeyBank serves as administrative agent and Bank of America, Fifth Third, and BMO Harris serve as co-syndication agents, and KeyBanc Capital Markets ("KeyBank Capital markets"), Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Fifth Third, and BMO Capital Markets serve as joint bookrunners and joint lead arrangers. Pursuant to the Unsecured Credit Agreement (July 2015), the Company was provided with a $1.14 billion senior unsecured credit facility (the "Unsecured Credit Facility (July 2015)"), consisting of a $500.0 million senior unsecured revolver (the "Revolver Loan (July 2015)") and a $640.0 million senior unsecured term loan (the "Term Loan (July 2015)"). The Unsecured Credit Facility (July 2015) may be increased up to $860.0 million, in minimum increments of $50.0 million, for a maximum of $2.0 billion by increasing either the Revolver Loan (July 2015), the Term Loan (July 2015), or both. The Revolver Loan (July 2015) has an initial term of four years, maturing on July 20, 2019, and may be extended for a one-year period if certain conditions are met and upon payment of an extension fee. The Term Loan (July 2015) has a term of five years, maturing on July 20, 2020.
The Unsecured Credit Facility (July 2015) has an interest rate calculated based on LIBOR plus the applicable LIBOR margin or Base Rate plus the applicable Base Rate margin, both as provided in the Unsecured Credit Agreement (July 2015). The applicable LIBOR margin and Base Rate margin are dependent on whether the interest rate is calculated prior to or after the Company has received an investment grade senior unsecured credit rating of BBB-/Baa3 from Standard & Poors, Moody's, or Fitch, and the Company has elected to utilize the investment grade pricing list, as provided in the Unsecured Credit Agreement (July 2015). Otherwise, the applicable LIBOR margin will be based on a leverage ratio computed in accordance with the Company's quarterly compliance package and communicated to KeyBank. The Base Rate is calculated as the greater of (i) the KeyBank Prime rate or (ii) the Federal Funds rate plus 0.50%. Payments under the Unsecured Credit Facility (July 2015) are interest only and are due on the first day of each quarter.
In addition, the Company, through the Operating Partnership, executed three interest rate swap contracts to hedge the variable cash flows associated with a portion of the Company's existing LIBOR-based variable debt. The first interest rate swap contract was effective on July 9, 2015 for a notional amount of $425.0 million at a fixed rate of 1.687% for five years. The second interest rate swap contract will become effective on January 1, 2016, with a notional amount of $300.0 million at a fixed rate of 1.320% for three years. The third interest rate swap contract will become effective on July 1, 2016, with a notional amount of $100.0 million at a fixed rate of 1.495% for two years. The applicable borrowing margin will be added to the fixed pay rates noted above to calculate the all-in interest rate on the hedged component of the debt.
At closing, the Company's existing $800.0 million Unsecured Credit Facility (May 2014) with KeyBank was retired in full.
Acquisition of DreamWorks Property
On July 21, 2015, the Company, through the Operating Partnership, acquired a five-building office campus located in Glendale, California (the "DreamWorks property"). The DreamWorks property is leased in its entirety pursuant to an absolute

42
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited; dollars in thousands unless otherwise noted)

triple net lease to DreamWorks Animation SKG, Inc. On the acquisition date, the remaining term of the lease was approximately 20 years.
The purchase price of the DreamWorks property was $215.0 million, which, along with other closing fees and expenses, including acquisition fees and expense reimbursement paid to the Advisor, was funded with cash on hand and draws of $45.0 million and $160.0 million from the Revolver Loan (July 2015) and Term Loan (July 2015), respectively, both of which are discussed above.
Sale of Will Partners Property
On August 7, 2015, the Company sold the Will Partners property located in Monee, Illinois, for total proceeds of $22.0 million, less closing costs and other closing credits. The carrying value of the Will Partners property on the closing date was approximately $18.0 million, which was primarily comprised of real estate assets, net. Upon the sale of the property, the Company recognized a gain of approximately $3.3 million. In conjunction with the sale, the Advisor was paid a disposition fee of approximately $0.2 million, in accordance with the Advisory Agreement. The Company elected to complete the sale as part of a tax-deferred exchange of real estate as permitted by Section 1031 of the Internal Revenue Code, and thus, the proceeds of the sale of the property were deposited with a qualified intermediary. The Will Partners property was classified as real estate held for sale on the consolidated balance sheets as of June 30, 2015.
Pending Acquisition of Griffin Capital (Highway 94) Investors, DST
The Company's Sponsor also sponsored Griffin Capital (Highway 94) Investors, DST ("Highway 94"), which was sold in a private placement to accredited investors. The Highway 94 private placement memorandum provides the Operating Partnership with the option to acquire the interests held by individual investors in exchange for cash or Operating Partnership units. The Operating Partnership has notified the investors of its intent to acquire such interests, which is scheduled to close in the third or fourth quarter of 2015. The Highway 94 property is a 660,000 square foot manufacturing facility located in Jefferson City, Missouri, and leased in its entirety to ABB Inc., which lease terminates on August 31, 2024.






43

ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the Company’s consolidated financial statements and the notes thereto contained in Part I of this Quarterly Report on Form 10-Q, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations, Consolidated Financial Statements, and the notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. See also “Cautionary Note Regarding Forward Looking Statements” preceding Part I. As used herein, “we,” “us,” and “our” refer to Griffin Capital Essential Asset REIT, Inc.
Overview
We are a public, non-traded REIT that invests primarily in business essential properties significantly occupied by a single tenant, diversified by corporate credit, physical geography, product type and lease duration. As described in more detail in Item 1 of this report, we were formed on August 28, 2008 and commenced operations on May 6, 2009. We have no employees and are externally advised and managed by an affiliate, Griffin Capital Essential Asset Advisor, LLC, our Advisor.
Under our initial public offering, we offered a maximum of 82,500,000 shares of common stock to the public, consisting of 75,000,000 shares (the “Primary Public Offering”) and 7,500,000 shares for sale pursuant to our distribution reinvestment plan (together with the Primary Public Offering, the “Initial Public Offering”). We issued approximately 19,200,570 total shares of our common stock for gross proceeds of approximately $191.5 million in our Initial Public Offering, which terminated on April 25, 2013, of which 585,533 shares, or $5.6 million, were issued pursuant to the distribution reinvestment plan (“DRP”).
On April 26, 2013, we began to offer, in a follow-on offering, up to $1.0 billion in shares of common stock, consisting of approximately 97.2 million shares at $10.28 per share (the “Primary Follow-On Offering” and together with the Primary Public Offering, the “Primary Public Offerings”) and $100 million in shares of common stock, consisting of approximately 10.2 million shares, pursuant to the DRP (together with the Primary Follow-On Offering, the “Follow-On Offering” and, collectively with the Initial Public Offering, the “Public Offerings”). On April 22, 2014, we announced that we were no longer accepting subscriptions in the Follow-On Offering, as we expected to reach the maximum offering amount following our transfer agent's reconciliation of pending subscriptions. We issued 107,144,337 total shares of our common stock for gross proceeds of approximately $1.1 billion in our Follow-On Offering, including 1,774,208 shares, or $17.3 million, issued pursuant to the DRP.
On May 7, 2014, we filed a Registration Statement on Form S-3 with the SEC for the registration of $75.0 million in shares for sale pursuant to the DRP (the “DRP Offering”). On December 15, 2014, we announced a revised offering price for shares pursuant to the DRP Offering of $10.40 per share, effective December 27, 2014. The DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders. In connection with our DRP Offering, we had issued 6,021,352 shares of our common stock for gross proceeds of approximately $60.7 million through June 30, 2015. As of June 30, 2015, we redeemed 664,337 shares of common stock for approximately $6.5 million at a weighted average price per share of $9.83.
On November 21, 2014, we entered into a merger agreement with Signature Office REIT, Inc. ("SOR"). In connection with the merger (the "SOR Merger"), (1) SOR merged into a wholly-owned subsidiary of the Company, and (2) each share of common stock of SOR issued and outstanding was converted into 2.04 shares of our common stock. On June 10, 2015, we issued approximately 41.8 million shares of common stock upon the consummation of the SOR Merger. The assets and liabilities of SOR are included in our consolidated financial statements as of the closing date, June 10, 2015. See Note 3, Real Estate, to the consolidated financial statements for further discussion.

44

As of June 30, 2015, we owned a fee simple interest, except as discussed in footnote 6 below, in 70 properties, as shown in the table below, encompassing approximately 15.9 million rentable square feet (dollar amounts shown in thousands):
 
Property
 
Location
 
Tenant/Major Lessee
 
Acquisition
Date
 
Purchase Price
 
Approx. Square Feet
 
% Leased by Major Lessee (1)
 
% Leased
 
Property
Type
 
Year of Lease Expiration
(for Major Lessee)
 
2015 Annualized Net Rent (2)
Renfro
 
Clinton, SC
 
Renfro Corporation
 
6/18/2009
 
$
21,700

 
566,500

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

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

 
176,000

 
100%
 
100%
 
 Office/Laboratory
 
2022
 
2,587

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

 
700,200

 
N/A
 
N/A
 
Manufacturing/
Distribution
 
N/A
 
—

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

 
320,800

 
100%
 
100%
 
Manufacturing/
Distribution
 
2020
 
916

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

 
35,800

 
100%
 
100%
 
 Office
 
2022
 
699

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

 
169,800

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

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

 
328,700

 
100%
 
100%
 
 Office/
Flex Facility
 
2022
 
4,437

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

 
155,800

 
100%
 
100%
 
 Office/
Data Center
 
2019
 
3,300

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

 
118,000

 
100%
 
100%
 
 Engineering Facility
 
2025
 
2,946

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

 
114,300

 
100%
 
100%
 
 Assembly/
Manufacturing
 
2018
 
1,174

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

 
131,000

 
100%
 
100%
 
 Office
 
2024
 
1,395

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

 
193,700

 
100%
 
100%
 
 Manufacturing
 
2022
 
1,327

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

 
99,200

 
100%
 
100%
 
 Office
 
2019
 
1,510

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

 
145,900

 
100%
 
100%
 
 Office
 
2022
 
2,218

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

 
157,300

 
100%
 
100%
 
 Office
 
2021
 
2,376

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

 
70,100

 
100%
 
100%
 
 Office
 
2017
 
1,029

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

 
149,700

 
100%
 
100%
 
 Office
 
2024
 
3,112

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

 
198,900

 
100%
 
100%
 
 Office
 
2025
 
2,647


45

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

 
231,400

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

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

 
232,600

 
100%
 
100%
 
 Office
 
2023
 
3,747

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

 
214,200

 
100%
 
100%
 
 Office
 
2025
 
2,261

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

 
210,500

 
100%
 
100%
 
 Office
 
2020
 
3,492

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

 
81,600

 
100%
 
100%
 
 Office
 
2027
 
1,898

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

 
315,900

 
94%
 
100%
 
 Office
 
2018
 
4,899

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

 
250,000

 
60%
 
100%
 
 Office
 
2019
 
3,010

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

 
265,100

 
100%
 
100%
 
 Office
 
2025
 
4,379

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

 
223,500

 
100%
 
100%
 
 Office
 
2019
 
2,445

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

 
78,200

 
100%
 
100%
 
 Office
 
2019
 
939

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

 
388,700

 
100%
 
100%
 
 Office
 
2025
 
3,177

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

 
322,700

 
88%
 
100%
 
 Office
 
2020
 
4,221

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

 
139,400

 
87%
 
98%
 
 Office
 
2020
 
1,468

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

 
253,300

 
98%
 
100%
 
 Office
 
2024
 
3,402

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

 
169,200

 
100%
 
100%
 
 Office
 
2020
 
1,244

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

 
229,600

 
100%
 
100%
 
 Office
 
2019
 
2,224

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

 
538,800

 
33%
 
99%
 
 Office
 
2026
 
6,288

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

 
114,100

 
100%
 
100%
 
 Office
 
2017
 
2,338

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

 
87,400

 
100%
 
100%
 
 Office
 
2017
 
1,816

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

 
70,400

 
100%
 
100%
 
 Office
 
2024
 
1,030

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

 
188,500

 
100%
 
100%
 
 Office
 
2018
 
2,838

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

 
102,000

 
100%
 
100%
 
 Office
 
2024
 
1,454

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

 
1,380,100

 
100%
 
100%
 
 Industrial
 
2018
 
6,076


46

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

 
430,000

 
100%
 
100%
 
 Office
 
2030
 
6,343

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

 
131,800

 
100%
 
100%
 
 Office
 
2023
 
1,979

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

 
157,000

 
100%
 
100%
 
 Office
 
2021
 
4,275

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

 
249,400

 
100%
 
100%
 
 Office
 
2029
 
6,416

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

 
206,000

 
100%
 
100%
 
 Office
 
2024
 
2,833

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

 
94,000

 
100%
 
100%
 
 Office
 
2023
 
1,128

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

 
337,400

 
100%
 
100%
 
 Office
 
2019
 
3,865

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

 
207,900

 
100%
 
100%
 
 Office
 
2020
 
6,232

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

 
224,600

 
100%
 
100%
 
 Office
 
2024
 
2,459

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

 
83,200

 
100%
 
100%
 
 Office
 
2025
 
1,210

Level 3 (7)
 
Lone Tree, CO
 
Level 3 Communications, Inc.
 
8/1/2014
 
43,000

 
166,700

 
100%
 
100%
 
Office
 
2024
 
2,956

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

 
99,300

 
100%
 
100%
 
Office
 
2024
 
1,085

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

 
213,000

 
100%
 
100%
 
Office
 
2026
 
1,573

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

 
155,600

 
100%
 
100%
 
Office
 
2025
 
2,692

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

 
409,800

 
100%
 
100%
 
Office
 
2020
 
4,879

Westgate III (8)
 
Houston, TX
 
Wood Group Mustang, Inc.
 
4/1/2015
 
77,000

 
225,500

 
100%
 
100%
 
Office
 
2026
 
4,863

Lisle (8)
 
Lisle, IL
 
McCain Foods USA, Inc.
 
6/10/2015
 
19,500

 
94,400

 
100%
 
100%
 
Office
 
2021
 
1,469

Bloomingdale (8)
 
Bloomingdale, IL
 
BFS Retail & Commercial Operations, LLC
 
6/10/2015
 
6,500

 
71,100

 
98%
 
98%
 
Office
 
2018
 
1,277

Columbia (8)
 
Columbia, MD
 
Leidos Holdings, Inc.
 
6/10/2015
 
58,130

 
200,600

 
84%
 
85%
 
Office
 
2019
 
4,333

Denver (8)
 
Denver, CO
 
Jackson National Life Insurance Company
 
6/10/2015
 
35,000

 
182,900

 
100%
 
100%
 
Office
 
2017
 
3,861

Columbus (8)
 
Dublin, OH
 
Qwest Communications Company, LLC
 
6/10/2015
 
27,600

 
164,600

 
100%
 
100%
 
Office
 
2022
 
2,254

Miramar (8)
 
Miramar, FL
 
Humana Medical Plan Inc.
 
6/10/2015
 
25,000

 
96,400

 
100%
 
100%
 
Office
 
2017
 
1,855


47

Property
 
Location
 
Tenant/Major Lessee
 
Acquisition
Date
 
Purchase Price
 
Approx. Square Feet
 
% Leased by Major Lessee (1)
 
% Leased
 
Property
Type
 
Year of Lease Expiration
(for Major Lessee)
 
2015 Annualized Net Rent (2)
Irving Carpenter (8)
 
Irving, TX
 
NEC Corporation of America
 
6/10/2015
 
23,500

 
119,600

 
100%
 
100%
 
Office
 
2026
 
210

Frisco (8)
 
Frisco, TX
 
T-Mobile West Corporation
 
6/10/2015
 
59,800

 
284,200

 
90%
 
97%
 
Office
 
2017
 
4,313

Houston Westway II (8)
 
Houston, TX
 
VetcoGray, Inc. (GE Oil & Gas, Inc.)
 
6/10/2015
 
82,500

 
242,400

 
77%
 
100%
 
Office
 
2022
 
5,649

Houston Westway I (8)
 
Houston, TX
 
Cameron Solutions
 
6/10/2015
 
37,700

 
144,000

 
89%
 
100%
 
Office
 
2018
 
2,918

Atlanta Perimeter (8)
 
Atlanta, GA
 
State Farm Mutual Automobile Insurance Company
 
6/10/2015
 
101,670

 
583,500

 
86%
 
94%
 
Office
 
2023
 
7,514

Herndon (8)
 
Herndon, VA
 
Time Warner Cable Southeast, LLC
 
6/10/2015
 
87,300

 
268,200

 
100%
 
100%
 
Office
 
2019
 
7,315

Deerfield (8)
 
Deerfield, IL
 
CF Industries Holdings, Inc.
 
6/10/2015
 
42,900

 
171,500

 
50%
 
100%
 
Office
 
2017
 
3,309

Total real estate portfolio
 
 
 
 
 
 
 
$
2,597,446

 
15,933,500

 

 
 
 
 
 
 
 
$
203,436

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

 
132,300

 
73%
 
100%
 
Data Center
 
2020
 
14,035

Total
 
 
 
 
 
 
 
$
2,745,846

 
16,065,800

 
 
 
 
 
 
 
 
 
$
217,471

(1)    The portfolio is approximately 94% and 95% occupied and leased, respectively, based on total square feet.
(2)
Net rent is based on (1) the contractual base rental payments assuming the lease requires the tenant to reimburse us for certain operating expenses; or (2) contractual rent payments less certain operating expenses that are our responsibility for the 12-month period subsequent to June 30, 2015 and includes assumptions that may not be indicative of the actual future performance of a property, including the assumption that the tenant will perform its obligations under its lease agreement during the next 12 months.
(3)
In June 2013, World Kitchen, LLC vacated the Will Partners property and on January 24, 2014, we executed a termination agreement with World Kitchen, LLC as discussed in Note 3, Real Estate, to the consolidated financial statements. As of June 30, 2015, the property was classified as real estate held for sale on the consolidated balance sheets, as the property was placed under contract for sale on July 20, 2015 and closed on August 7, 2015.
(4)
In connection with the acquisition of the General Electric and Farmers properties, we were assigned and assumed a leasehold estate and the rights to a payment in lieu of taxes agreement (the “PILOT Program”) with the municipalities which own the underlying leased fee estate and subsequently leased the ground to us. The ground lease arrangements were put in place to provide real estate tax abatements, which is facilitated through the issuance of a municipal bond. Payments on the bonds, which are owned by us as lessee, are funded solely from the payments on the ground leases. The bonds can only be transferred to any successor to us, or any affiliate, as a lessee under the lease, including but not limited to any purchaser of our leasehold interest. Upon termination of the lease, we have the obligation to purchase the land for a nominal amount. The bonds, ground lease obligations and purchase options were measured at fair value at acquisition in accordance with ASC 805 and, due to their inseparability, are presented as a component of land on the consolidated balance sheets.
(5)
The DigitalGlobe property is leased entirely to the previous owner, Avaya, Inc., through June 2015, immediately after which a lease with DigitalGlobe, Inc. will commence.
(6)
The land associated with the property is subject to a ground lease with the State of Arizona expiring on December 31, 2095.
(7)
In October 2014, Level 3 Communications, Inc. announced its acquisition of tw telecom holdings, inc. The property name has been updated to represent the surviving company, Level 3, as noted above.
(8)
As of June 30, 2015, the purchase price allocation for the Westgate III property and properties assumed through the SOR Merger had not been finalized.
(9)
We acquired an 80% ownership interest in a joint venture with Digital Realty Trust for an initial investment of $68.4 million, for which the interest in the joint venture is recorded using the equity method of accounting. The table above reflects the impact of our 80% ownership interest in the acquisition value, and net rental revenue, on our portfolio. See Note 4, Investments, to the consolidated financial statements.


48

Acquisition Indebtedness
For a discussion of our acquisition indebtedness, see Note 3, Real Estate, and Note 5, Debt, to the consolidated financial statements.
Significant Accounting Policies and Estimates
We have established accounting policies which conform to generally accepted accounting principles (“GAAP”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”). The preparation of our consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different estimates would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may use different estimates and assumptions that may impact the comparability of our financial condition and results of operations to those companies.
We believe the accounting policies listed below are the most critical in the preparation of our consolidated financial statements. These policies are described in greater detail in Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to the consolidated financial statements:
•
Real Estate - Valuation and purchase price allocation, depreciation and amortization, assets held for sale (Discontinued Operations and Disposals of Components of an Entity), impairment of real estate and related intangible assets;
•
Revenue Recognition;
•
Investments - Consolidation;
•
Noncontrolling Interests in Consolidated Subsidiaries and Noncontrolling Interests Subject to Redemption;
•
Fair Value Measurements;
•
Income Taxes - Deferred tax assets and related valuation allowance, REIT qualification; and
•
Organizational and Offering Costs - Related party transactions.
Recently Issued Accounting Pronouncements
See Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to the consolidated financial statements.
Results of Operations
We are not aware of any material trends or uncertainties, other than national economic conditions affecting real estate in general, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition, management and operations of properties other than those listed in Part I, Item 1A. Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2014.
Same Store Analysis
Comparison of the Three Months Ended June 30, 2015 and 2014
For the quarter ended June 30, 2015, our "Same Store" portfolio consisted of 44 properties, encompassing approximately 10.6 million square feet and an acquisition value of $1.4 billion. Our "Same Store" portfolio includes properties which were held for a full period for the periods presented. The following table provides a comparative summary of the results of operations for the 44 properties for the three months ended June 30, 2015 and 2014 (dollars in thousands):

49

 
Three Months Ended June 30,
 
Increase/(Decrease)
 
Percentage
Change
 
2015
 
2014
 
Rental income
$
33,976

 
$
33,729

 
$
247

 
1
 %
Property expense recoveries
8,213

 
8,227

 
(14
)
 
—
 %
Asset management fees to affiliates
2,596

 
2,597

 
(1
)
 
—
 %
Property management fees to affiliates
1,223

 
1,208

 
15

 
1
 %
Property operating expense
5,935

 
6,255

 
(320
)
 
(5
)%
Property tax expense
5,423

 
5,175

 
248

 
5
 %
Rental Income
The increase in rental income is primarily due to an increase of $0.3 million related to a lease commencement at the Northpointe Corporate Center II property on January 1, 2015.
Property Operating Expense and Property Tax Expense
The decrease in property operating expense is primarily due to an approximately $0.4 million decrease related to certain properties which became self-managed in the prior year.
The increase in property tax expense is due to property reassessments for the current taxable year for the Will Partners, Fox Head, and Waste Management properties, as well as six of the Investment Grade Portfolio properties.
Comparison of the Six Months Ended June 30, 2015 and 2014
For the six months ended June 30, 2015, our "Same Store" portfolio consisted of 40 properties, encompassing approximately 8.5 million square feet, with an acquisition value of $1.2 billion. The following table provides a comparative summary of the results of operations for the 40 properties for the six months ended June 30, 2015 and 2014 (dollars in thousands):
 
Six Months Ended June 30,
 
Increase/(Decrease)
 
Percentage
Change
 
2015
 
2014
 
Rental income
$
58,271

 
$
57,766

 
$
505

 
1
 %
Property expense recoveries
15,624

 
15,675

 
(51
)
 
—
 %
Asset management fees to affiliates
4,347

 
4,353

 
(6
)
 
—
 %
Property management fees to affiliates
2,146

 
2,119

 
27

 
1
 %
Property operating expense
11,264

 
12,044

 
(780
)
 
(6
)%
Property tax expense
9,628

 
9,229

 
399

 
4
 %
Rental Income
The increase in rental income is primarily due to (1) an increase of $0.2 million related to a lease commencement at the One Century Place property in the prior period, for which there were three full months of rent in the prior year compared to six full months in the current period; (2) an increase of $0.6 million related to a lease commencement at the Northpointe Corporate Center II property in the current period; less (3) $0.2 million in base rent not earned in the current period as a result of the World Kitchen, LLC lease termination, which was effective on January 24, 2014. For comparability purposes, the rental income for the six months ended June 30, 2014 excludes $7.125 million of termination income and write-offs of unamortized in-place lease valuation ($0.9 million) and deferred rent asset ($0.3 million) related to the World Kitchen, LLC lease termination, which are included in rental income on the consolidated statements of operations.
Property Operating Expense and Property Tax Expense
The decrease in property operating expense is primarily due to a decrease of $0.6 million related to certain properties which became self-managed in the prior year, offset by a $0.1 million increase related to the Will Partners property.
The increase in property tax expense is a result of property reassessments for the current taxable year for the Fox Head property and nine of the Investment Grade Portfolio properties.
Portfolio Analysis

50

As of June 30, 2014, we owned 53 properties, and, as shown in the table above, as of June 30, 2015, we owned 70 properties. As of June 30, 2015, we have completed the offering stage of our life cycle, and continue to deploy capital raised in our Public Offerings, along with draws from our Unsecured Credit Facility (May 2014), to acquire assets that adhere to our investment criteria. Therefore, our results of operations for our entire portfolio for the three and six months ended June 30, 2015 are not directly comparable to those for the same period in the prior year as the variances are substantially the result of portfolio growth, specifically in rental income, operating expenses, acquisition fees and reimbursable expenses and depreciation and amortization expenses. See Same Store analysis above for properties held for the same period of time.
Comparison of the Three Months Ended June 30, 2015 and 2014
The following table provides summary information about our results of operations for the three months ended June 30, 2015 and 2014 (dollars in thousands):
 
Three Months Ended June 30,
 
Increase/(Decrease)
 
Percentage
Change
 
2015
 
2014
 
Rental income
$
49,633

 
$
38,149

 
$
11,484

 
30
 %
Property expense recoveries
11,930

 
9,136

 
2,794

 
31
 %
Asset management fees to affiliates
4,273

 
2,941

 
1,332

 
45
 %
Property management fees to affiliates
1,590

 
1,328

 
262

 
20
 %
Property management fees to non-affiliates
54

 
—

 
54

 
—
 %
Property operating expense
8,172

 
6,910

 
1,262

 
18
 %
Property tax expense
7,857

 
5,782

 
2,075

 
36
 %
Acquisition fees and expenses to non-affiliates
441

 
2,171

 
(1,730
)
 
(80
)%
Acquisition fees and expenses to affiliates
20,291

 
10,180

 
10,111

 
99
 %
General and administrative expenses
1,934

 
1,979

 
(45
)
 
(2
)%
Depreciation and amortization
22,418

 
16,892

 
5,526

 
33
 %
Interest expense
6,392

 
7,292

 
(900
)
 
12
 %
Rental Income
Rental income for the three months ended June 30, 2015 is comprised of base rent of $45.9 million, adjustments to straight-line contractual rent of $3.2 million and in-place lease valuation amortization, net, of $0.5 million. Rental income for the three months ended June 30, 2015 increased by $11.5 million compared to the same period a year ago primarily as a result of (1) approximately $6.0 million of additional rental income related to the real estate acquired in 2014, after April 1, which includes a full quarter of activity for the three months ended June 30, 2015; (2) $5.8 million of additional rental income related to the properties acquired in the current year; (3) $0.3 million of additional rental income due to a lease commencement at the Northpointe Corporate Center II property in the current year; and (4) approximately $0.3 million in in-place lease valuation amortization; less (5) $0.9 million of decreased rental income due to the sale of the Eagle Rock and College Park properties, which were sold on December 17, 2014 and February 20, 2015, respectively.
Property Expense Recoveries
Also included as a component of revenue is the recovery of property operating expenses, including repairs and maintenance, property taxes and insurance and certain capital expenses (collectively "Recoverable Expenses"), which increased by $2.8 million compared to the same period in the prior year primarily as a result of (1) $0.8 million in property tax recoveries as a result of increases in property tax expense, of which $0.6 million related to properties acquired during the year ended December 31, 2014 and $0.2 million related to the Westgate III property acquired during the current period; and (2) $2.0 million in recoverable property operating expense related to (A) $1.6 million for the properties acquired during the current period; (B) $0.6 million for properties acquired during the year ended December 31, 2014; offset by (C) $0.1 million for properties acquired during the year ended December 31, 2013, primarily as a result of two properties that became self-managed in the prior year; and (D) approximately $0.1 million in net over collections which resulted from tenant reimbursement reconciliations.
Management Fees (Asset and Property)
Asset Management and Property Management fees for the three months ended June 30, 2015 and 2014 totaled $5.9 million and $4.3 million, respectively. The total increase of $1.6 million compared to the same period a year ago is primarily a result of (1) $0.8 million and $0.2 million in asset management and property management fees, respectively, related to the acquisitions made during the year ended December 31, 2014 and the investment in an unconsolidated joint venture discussed in

51

Note 4, Investments, to the consolidated financial statements; and (2) $0.5 million and $0.1 million in asset management and property management fees, respectively, related to the properties acquired during the six months ended June 30, 2015.
Property Operating Expense and Property Tax Expense
Property expenses for the three months ended June 30, 2015 and 2014 totaled $16.0 million and $12.7 million, respectively, consisting of property operating expenses and property taxes. Property operating expenses include insurance, repairs and maintenance, security, janitorial, landscaping and other administrative expenses incurred to operate our properties. The total increase of $3.3 million compared to the same period a year ago is primarily a result of (1) $2.1 million in property taxes, of which $1.3 million related to real estate acquired during the year ended December 31, 2014 and $0.8 million related to real estate acquired during the current period; (2) $1.4 million in property operating expenses related to certain real estate for which we paid operating expenses on behalf of the tenant and recovered through estimated monthly recoverable expense reimbursements; (3) $0.2 million in property operating expenses related to certain properties that are leased pursuant to modified gross leases in which we recovered, through estimated monthly recoverable expense reimbursements, any portion of the operating expenses that exceeded the specified operating expenses (base year or expense stop) as set forth in the lease; less (4) $0.4 million in property operating expenses related to certain properties for which it is our responsibility to cover such expenses.
Acquisition Fees and Expenses
Real estate acquisition fees and expenses to non-affiliates, which totaled $0.4 million for the three months ended June 30, 2015, decreased by $1.7 million compared to the three months ended June 30, 2014 due to decreased acquisition activity in the current period. Real estate acquisition fees and expenses to affiliates of $20.3 million represent the acquisition fees and expense reimbursement earned by our Advisor for the Westgate III property, with an acquisition value of $77.0 million, and the 13 properties assumed through the SOR Merger, with a combined preliminary acquisition value of $607.1 million. In comparison, real estate acquisition fees and expenses to affiliates for the same period in the prior year totaled $10.2 million, which was based on a total acquisition value of $339.3 million.
Depreciation and Amortization Expense
Depreciation and amortization expense for the three months ended June 30, 2015 consisted of depreciation of building and building improvements of our properties of $9.5 million and amortization of the contributed and acquired values allocated to tenant origination and absorption costs of $12.9 million, which increased $5.5 million as compared to the three months ended June 30, 2014, as a result of additional depreciation and amortization of (1) $3.0 million related to the acquisitions made during the six months ended June 30, 2015; (2) $2.9 million related to the acquisitions made during the year ended December 31, 2014, which includes three full months of activity for the properties acquired subsequent to April 1, 2014 compared to partial months of activity during the three months ended June 30, 2014; and (3) $0.3 million related to improvements at certain properties; less (4) $0.7 million in absorption costs, primarily related to the sale of the Eagle Rock and College Park properties, which were sold on December 17, 2014 and February 20, 2015 and a lease expiration at the One Century Place property.
Interest Expense
Interest expense for the three months ended June 30, 2015 decreased by $0.9 million compared to the same period in 2014 primarily due to the following: (1) approximately $1.6 million increase in interest expense related to the Unsecured Credit Facility (May 2014); less (2) $0.5 million in interest expense related to the previously existing KeyBank term loan, which was terminated on May 8, 2014; (3) $1.6 million in amortization of deferred financing costs due to write-offs related to the unamortized deferred financing costs associated with the previously existing KeyBank credit facility, which was refinanced through the AIG Loan on January 24, 2014, and the KeyBank term loan which was terminated in conjunction with the execution of the Unsecured Term Loan (May 2014) on May 8, 2014; and (4) $0.4 million of capitalized interest related to the Restoration Hardware real estate development, which is expected to be completed in the second half of 2015.


52

Comparison of the Six Months Ended June 30, 2015 and 2014
The following table provides summary information about our results of operations for the six months ended June 30, 2015 and 2014 (dollars in thousands):
 
Six Months Ended June 30,
 
Increase/(Decrease)
 
Percentage
Change
 
2015
 
2014
 
Rental income
$
94,348

 
$
77,618

 
$
16,730

 
22
 %
Property expense recoveries
22,428

 
17,659

 
4,769

 
27
 %
Asset management fees to affiliates
8,060

 
5,463

 
2,597

 
48
 %
Property management fees to affiliates
3,064

 
2,540

 
524

 
21
 %
Property management fees to non-affiliates
54

 
—

 
54

 
—
 %
Property operating expense
15,071

 
13,773

 
1,298

 
9
 %
Property tax expense
14,735

 
11,006

 
3,729

 
34
 %
Acquisition fees and expenses to non-affiliates
845

 
2,886

 
(2,041
)
 
(71
)%
Acquisition fees and expenses to affiliates
22,271

 
16,915

 
5,356

 
32
 %
General and administrative expenses
3,058

 
3,194

 
(136
)
 
(4
)%
Depreciation and amortization
41,883

 
32,099

 
9,784

 
30
 %
Interest expense
11,820

 
12,864

 
(1,044
)
 
8
 %
Rental Income
Rental income for the six months ended June 30, 2015 is comprised of base rent of $86.9 million, adjustments to straight-line contractual rent of $6.4 million, and in-place lease valuation amortization, net, of approximately $1.0 million. Rental income for the six months ended June 30, 2015 increased by $16.7 million compared to the same period a year ago primarily as a result of (1) $0.7 million of additional rental income related to the real estate acquired during the year ended December 31, 2013, of which $0.6 million is due to a lease commencement at the Northpointe Corporate Center II property in the current period; (2) $16.6 million of additional rental income related to the real estate acquired during the year ended December 31, 2014, which includes a full period of activity for the six months ended June 30, 2015; (3) $6.3 million of additional rental income related to properties acquired in the current period; and (4) $1.8 million in in-place lease valuation amortization; less (5) approximately $7.125 million in termination income related to the World Kitchen, LLC lease termination in the prior period; and (6) $1.7 million of decreased rental income due to the sale of the Eagle Rock and College Park properties, which were sold on December 17, 2014 and February 20, 2015, respectively.
Property Expense Recoveries
Also included as a component of revenue is the recovery of property operating expenses, including repairs and maintenance, property taxes and insurance and certain capital expenses (collectively "Recoverable Expenses"), which increased by $4.8 million compared to the same period in the prior year primarily as a result of (1) $2.0 million in property tax recoveries as a result of increases in property tax expense, of which $1.9 million related to properties acquired during the year ended December 31, 2014; and (2) $2.8 million in recoverable property operating expense related to (A) $1.9 million for properties acquired during the current period; (B) $1.5 million for properties acquired during the year ended December 31, 2014; offset by (C) approximately $0.3 million for properties acquired during the year ended December 31, 2013, primarily as a result of two properties which became self-managed in the prior year; and (D) approximately $0.3 million in net over collections which resulted from tenant reimbursement reconciliations.
Management Fees (Asset and Property)
Asset Management and Property Management fees for the six months ended June 30, 2015 and 2014 totaled $11.2 and $8.0 million, respectively. The total increase of $3.2 million compared to the same period a year ago is primarily the result of (1) approximately $2.1 million and $0.4 million in asset management and property management fees, respectively, related to the acquisitions made during the year ended December 31, 2014; and (2) approximately $0.6 million and $0.1 million in asset management and property management fees, respectively, related to the acquisitions made during the six months ended June 30, 2015.
Property Operating Expense and Property Tax Expense
Property expenses for the six months ended June 30, 2015 and 2014 totaled $29.8 million and $24.8 million, respectively, consisting of property operating expenses and property taxes. Property operating expenses include insurance, repairs and maintenance, security, janitorial, landscaping and other administrative expenses incurred to operate our properties. The total

53

increase of $5.0 million compared to the same period a year ago is primarily a result of (1) $3.7 million in property taxes, of which $2.9 million related to real estate acquired during the year ended December 31, 2014 and $0.8 million related to real estate acquired during the current period; (2) $1.6 million in property operating expenses related to certain real estate for which we paid operating expenses on behalf of the tenant and recovered through estimated monthly recoverable expense reimbursements; (3) $0.5 million in property operating expenses related to certain properties that are leased pursuant to modified gross leases in which we recovered, through estimated monthly recoverable expense reimbursements, any portion of the operating expenses that exceeded the specified operating expenses (base year or expense stop) as set forth in the lease; less (4) $0.8 million in property operating expenses related to certain properties for which it is our responsibility to cover such expenses.
Acquisition Fees and Expenses
Real estate acquisition fees and expenses to non-affiliates, which totaled $0.8 million for the six months ended June 30, 2015, decreased by $2.0 million compared to the six months ended June 30, 2014 due to decreased acquisition activity in the current period. Real estate acquisition fees and expenses to affiliates of $22.3 million represent the acquisition fees and expense reimbursement earned by our Advisor for the GE Aviation and Westgate III properties, with a combined acquisition value of $143.0 million, and the 13 properties assumed through the SOR Merger, with a combined preliminary acquisition value of $607.1 million. In comparison, real estate acquisition fees and expenses to affiliates for the same period in the prior year totaled $16.9 million, which was based on a total acquisition value of $563.8 million.
Depreciation and Amortization Expense
Depreciation and amortization expense for the six months ended June 30, 2015 consisted of depreciation of building and building improvements of our properties of $17.5 million and amortization of the contributed and acquired values allocated to tenant origination and absorption costs of $24.4 million. The increase of $9.8 million as compared to the six months ended June 30, 2014 is primarily the result of additional depreciation and amortization of (1) $3.4 million related to the acquisitions made during the six months ended June 30, 2015; (2) $7.8 million related to the acquisitions made during the year ended December 31, 2014, which includes six full months of activity compared to partial months of activity during the six months ended June 30, 2014; and (3) $0.3 million related to improvements at certain properties; less (4) $1.8 million in absorption costs related to the sale of the Eagle Rock and College Park properties, which were sold on December 17, 2014 and February 20, 2015, respectively, and two lease expirations at the One Century Place property.
Interest Expense
Interest expense for the six months ended June 30, 2015 decreased by $1.0 million compared to the same period in 2014 primarily due to the following: (1) a $3.0 million increase in interest expense related to the Unsecured Credit Facility (May 2014); and (2) approximately $1.0 million in mortgage interest expense related to the AIG Loan, the Ace Hardware Mortgage Loan, which was assumed upon acquisition on April 24, 2014, and the TW Telecom Loan, which was entered into upon acquisition on August 1, 2014; less (3) $2.1 million in interest expense related to the KeyBank credit facility and KeyBank term loan, both of which were terminated on May 8, 2014; (4) $1.8 million in amortization of deferred financing costs including $1.7 million of write-offs related to the unamortized deferred financing costs associated with the KeyBank credit facility and the KeyBank term loan, which were terminated in conjunction with the execution of the Unsecured Term Loan (May 2014) on May 8, 2014; and (5) $0.9 million of capitalized interest related to the Restoration Hardware real estate development, which is expected to be completed in the second half of 2015.
Funds from Operations and Modified Funds from Operations
Our management believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient. Additionally, publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start-up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases.
In order to provide a more complete understanding of the operating performance of a REIT, the National Association of Real Estate Investment Trusts (“NAREIT”) promulgated a measure known as funds from operations (“FFO”). FFO is defined as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, adding back asset impairment write-downs, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships, joint ventures and preferred distributions. Because FFO calculations

54

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

55

pursuant to the in-place leases and (b) management's estimate of fair market lease rates for the corresponding in-place leases over a period equal to the remaining non-cancelable term of the lease for above-market leases. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities and amortized as an adjustment to rental income over the remaining terms of the respective leases. As this item is a non-cash adjustment and is included in historical earnings, FFO is adjusted for the effect of the amortization of in-place lease valuation to arrive at MFFO as a means of determining operating results of our portfolio.
•
Acquisition-related costs. We were organized primarily with the purpose of acquiring or investing in income-producing real property in order to generate operational income and cash flow that will allow us to provide regular cash distributions to our stockholders. In the process, we incur non-reimbursable affiliated and non-affiliated acquisition-related costs, which in accordance with GAAP, are expensed as incurred and are included in the determination of income (loss) from operations and net income (loss). These costs have been and will continue to be funded with cash proceeds from our Primary Public Offerings or included as a component of the amount borrowed to acquire such real estate. If we acquire a property after all offering proceeds from our Public Offerings have been invested, there will not be any offering proceeds to pay the corresponding acquisition-related costs. Accordingly, unless our Advisor determines to waive the payment of any then-outstanding acquisition-related costs otherwise payable to our Advisor, such costs will be paid from additional debt, operational earnings or cash flow, net proceeds from the sale of properties, or ancillary cash flows. In evaluating the performance of our portfolio over time, management employs business models and analyses that differentiate the costs to acquire investments from the investments’ revenues and expenses. Acquisition-related costs may negatively affect our operating results, cash flows from operating activities and cash available to fund distributions during periods in which properties are acquired, as the proceeds to fund these costs would otherwise be invested in other real estate related assets. By excluding acquisition-related costs, MFFO may not provide an accurate indicator of our operating performance during periods in which acquisitions are made. However, it can provide an indication of our on-going ability to generate cash flow from operations and continue as a going concern after we cease to acquire properties on a frequent and regular basis, which can be compared to the MFFO of other non-listed REITs that have completed their acquisition activity and have similar operating characteristics to ours. Management believes that excluding these costs from MFFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management.
•
Financed termination fee. We believe that a fee received from a tenant for terminating a lease is appropriately included as a component of rental revenue and therefore included in MFFO. If, however, the termination fee is to be paid over time, we believe the recognition of such termination fee into income should not be included in MFFO. Alternatively, we believe that the periodic amount paid by the tenant in subsequent periods to satisfy the termination fee obligation should be included in MFFO.
•
Gain or loss from the extinguishment of debt. We use debt as a partial source of capital to acquire properties in our portfolio. As a term of obtaining this debt, we will pay financing costs to the respective lender. Financing costs are capitalized as a component of total assets on the consolidated balance sheets and amortized into interest expense on a straight-line basis over the term of the debt. We consider the amortization expense to be a component of operations if the debt was used to acquire properties. From time to time, we may cancel certain debt obligations and replace these canceled debt obligations with new debt at more favorable terms to us. In doing so, we are required to write off the remaining capitalized financing costs associated with the canceled debt, which we consider to be a cost, or loss, on extinguishing such debt. Management will no longer consider the effect of amortization of these financing costs in operating models and also believes that this loss is considered an isolated event not associated with our operations, and therefore, deems this write off to be an exclusion from MFFO.
•
Preferred units redemption premium. Preferred units were issued as a partial source of capital to acquire properties. As a term of the purchase agreement, we paid issuance costs to the investor that were capitalized as a component of equity on the consolidated balance sheets. Further, the purchase agreement allows us to exercise our right to redeem the outstanding preferred units, and, in doing so, we will be obligated to pay a redemption fee. In conjunction with the redemption, GAAP requires us to write off the issuance costs on a proportional basis of the redeemed preferred units to the total amount of preferred units issued. The write off of the issuance costs would be reflected on the statement of operations as a loss due to preferred unit redemptions. Management believes the loss, similar to the extinguishment of debt, is considered an isolated event not associated with our continuing operations, and therefore, deems it an exclusion from MFFO.
For all of these reasons, we believe the non-GAAP measures of FFO and MFFO, in addition to income (loss) from operations, net income (loss) and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful to investors in evaluating the performance of our real estate portfolio. However, a material limitation associated with FFO and MFFO is that they are not indicative of our cash available to fund distributions since other

56

uses of cash, such as capital expenditures at our properties and principal payments of debt, are not deducted when calculating FFO and MFFO. Additionally, MFFO has limitations as a performance measure in an offering such as ours where the price of a share of common stock is a stated value. The use of MFFO as a measure of long-term operating performance on value is also limited if we do not continue to operate under our current business plan as noted above. MFFO is useful in assisting management and investors in assessing our on-going ability to generate cash flow from operations and continue as a going concern in future operating periods, and in particular, after the offering and acquisition stages are complete and NAV is disclosed. However, MFFO is not a useful measure in evaluating NAV because impairments are taken into account in determining NAV but not in determining MFFO. Therefore, FFO and MFFO should not be viewed as more prominent a measure of performance than income (loss) from operations, net income (loss) or to cash flows from operating activities and each should be reviewed in connection with GAAP measurements.
Neither the SEC, NAREIT, nor any other applicable regulatory body has opined on the acceptability of the adjustments contemplated to adjust FFO in order to calculate MFFO and its use as a non-GAAP performance measure. In the future, the SEC or NAREIT may decide to standardize the allowable exclusions across the REIT industry, and we may have to adjust the calculation and characterization of this non-GAAP measure.
Our calculation of FFO and MFFO is presented in the following table for the three and six months ended June 30, 2015 and 2014 (in thousands):

57

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(11,655
)
 
$
(7,990
)
 
(554
)
 
$
(5,250
)
Adjustments:
 
 
 
 
 
 
 
Depreciation of building and improvements
9,473

 
6,654

 
17,490

 
12,305

Amortization of leasing costs and intangibles
12,938

 
10,231

 
24,379

 
19,781

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

 
14

 
1,226

 
28

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

 
16

 
2,400

 
32

Gain from sale of depreciable operating property
—

 
—

 
(3,613
)
 
—

FFO
$
12,569

 
$
8,925

 
$
41,328

 
$
26,896

Distributions to redeemable preferred unit holders
(2,904
)
 
(4,740
)
 
(7,591
)
 
(9,427
)
Distributions to noncontrolling interests
(858
)
 
(858
)
 
(1,707
)
 
(1,683
)
Preferred units redemption premium
(7,429
)
 
—

 
(7,429
)
 
—

FFO, adjusted for redeemable preferred and noncontrolling interest distributions and preferred units redemption premium
$
1,378

 
$
3,327

 
$
24,601

 
$
15,786

Reconciliation of FFO to MFFO:
 
 
 
 
 
 
 
Adjusted FFO
$
1,378

 
$
3,327

 
$
24,601

 
$
15,786

Adjustments:
 
 
 
 
 
 
 
Acquisition fees and expenses to non-affiliates
441

 
2,171

 
845

 
2,886

Acquisition fees and expenses to affiliates
20,291

 
10,180

 
22,271

 
16,915

Revenues in excess of cash received (straight-line rents)
(3,251
)
 
(2,881
)
 
(6,436
)
 
(5,067
)
Amortization of above/(below) market rent
(504
)
 
(150
)
 
(1,055
)
 
785

Amortization of ground leasehold interests (below market)
7

 
7

 
14

 
13

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

 
—

 
—

 
(7,125
)
Financed termination fee payments received
263

 
249

 
523

 
540

Loss on extinguishment of debt - write-off of deferred financing costs
—

 
1,755

 
—

 
1,755

Equity interest of revenues in excess of cash received (straight-line rents) - unconsolidated entities
(321
)
 
(5
)
 
(667
)
 
(11
)
Equity interest of amortization of above/(below) market rent - unconsolidated entities
750

 
5

 
1,500

 
10

Preferred units redemption premium
7,429

 
—

 
7,429

 
—

MFFO to common stockholders
$
26,483

 
$
14,658

 
$
49,025

 
$
26,487


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Liquidity and Capital Resources
Long-Term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds will be for the payment of operating and capital expenses, including costs associated with re-leasing a property, and distributions, and for the payment of debt service on our outstanding indebtedness, including repayment of the Unsecured Term Loan (May 2014) and Unsecured Revolver (May 2014), both of which are a component of the Unsecured Credit Facility (May 2014) and property secured mortgage loans discussed below, and other investments, including preferred equity distributions and redemptions pursuant to the purchase agreement with the Preferred Equity Investor as discussed in Note 6, Equity, to the consolidated financial statements. Generally, cash needs for items, other than property acquisitions, will be met from operations. Proceeds raised in our Follow-On Offering have not been fully deployed towards the acquisition of additional properties which could result in a delay in the benefits to our stockholders, if any, of returns generated from our investments. Our Advisor will evaluate potential additional property acquisitions and engage in negotiations with sellers on our behalf. After a purchase contract is executed that contains specific terms, the property will not be purchased until the successful completion of due diligence, which includes review of the title insurance commitment, an appraisal and an environmental analysis. In some instances, the proposed acquisition will require the negotiation of final binding agreements, which may include financing documents. During this period, we may decide to repay debt as allowed under the loan agreements or temporarily invest any proceeds from our Follow-On Offering not deployed into certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions.
Unsecured Credit Facility (May 2014)
On May 8, 2014, we, through our Operating Partnership, entered into a credit agreement (the "Unsecured Credit Agreement (May 2014)") with KeyBank National Association ('KeyBank") as administrative agent, Bank of America, N.A. ("Bank of America") as syndication agent and a syndicate of lenders. Pursuant to the Unsecured Credit Agreement (May 2014), we were provided with a $750.0 million senior unsecured credit facility (the "Unsecured Credit Facility (May 2014)"), consisting of a $450.0 million senior unsecured revolver (the "Unsecured Revolver (May 2014)") and a $300.0 million senior unsecured term loan (the "Unsecured Term Loan (May 2014)"). The Unsecured Credit Facility (May 2014) may be increased by up to $500.0 million for a maximum of $1.25 billion by increasing the Unsecured Revolver (May 2014), the Unsecured Term Loan (May 2014) or a combination of both. On June 9, 2015, we, through our Operating Partnership, increased the Unsecured Revolver (May 2014) to $500.0 million. The Unsecured Revolver (May 2014) has an initial term of four years, maturing on May 8, 2018 and may be extended for a one-year period if certain conditions are met. The Unsecured Term Loan (May 2014) has a term of five years, maturing on May 8, 2019. Availability under the Unsecured Credit Agreement (May 2014) is limited to the lesser of a (i) specified leverage ratio applied to a portfolio real estate pool value computed as adjusted net operating income divided by specified capitalization rate; or (ii) debt service coverage ratio ("DSCR") calculation, all as set forth in the Unsecured Credit Agreement (May 2014).
The Unsecured Credit Facility (May 2014) has an interest rate based on the leverage ratio reported with quarterly compliance certificate, as discussed below, and calculated based on the LIBO Rate plus the applicable LIBO Rate margin, as provided in the Unsecured Credit Agreement (May 2014), or Base Rate plus the applicable base rate margin, as provided in the Unsecured Credit Agreement (May 2014). The Base Rate is calculated as the greater of (i) the KeyBank Prime rate or (ii) the Federal Funds rate plus 0.50%. Payments under the Unsecured Credit Facility (May 2014) are interest only and are due on the first day of each quarter.
The Unsecured Credit Facility (May 2014) was retired in full on July 20, 2015 upon our entry into the Unsecured Credit Facility (July 2015). See Note 10, Subsequent Events, to the consolidated financial statements.
AIG Loan
On January 24, 2014, we, through five SPEs wholly-owned by our Operating Partnership, entered into various loan agreements (the “AIG Loan Documents”) with National Union Fire Insurance Company and The Variable Annuity Life Insurance Company of Pittsburgh, Pa. (collectively, the “Lenders”), pursuant to which the Lenders provided such SPEs with a loan in the aggregate amount of $110.64 million (the “AIG Loan”). The funds were utilized to refinance five of the properties previously serving as security for the KeyBank credit facility. The AIG Loan is secured by cross-collateralized and cross-defaulted first mortgage liens or first lien deeds of trust and second mortgage liens or second lien deeds of trust on the Verizon, Avnet, Northrop, Schlumberger, and UTC properties. The AIG Loan has a term of 15 years, maturing on February 1, 2029. The AIG Loan bears interest at a fixed rate of 4.96% and requires monthly payments of interest only for the first three years and fixed monthly payments based on a 360-month amortization period of principal and interest thereafter.
Midland Mortgage Loan

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On February 28, 2013, certain property-owning SPEs wholly-owned by our Operating Partnership, entered into a fixed-rate mortgage loan agreement with Midland National Life Insurance Company (the “Midland Mortgage Loan”), whereby certain properties, which previously served as security for the KeyBank credit facility, were refinanced in the amount of $105.6 million and now serve as collateral for the Midland Mortgage Loan. The Midland Mortgage Loan has a fixed interest rate of 3.94%, a term of 10 years and requires monthly interest-only payments for the first four years of the term, followed by principal and interest payments based on a 30-year amortization schedule with all remaining principal and unpaid interest due at maturity. The Midland Mortgage Loan is secured by a first lien on and individual security agreements with the Operating Partnership’s underlying interest in the SPEs owning certain properties, along with individual fixture filings, and assignments of leases, rents, income and profits related to each such property.
Preferred Equity
On November 5, 2013, in connection with the acquisition of the Investment Grade Portfolio, our Operating Partnership entered into a purchase agreement with an affiliate (the “Preferred Equity Investor”) of Starwood Property Trust (“Starwood”), pursuant to which Starwood provided a $250.0 million equity investment in our Operating Partnership in exchange for 24,319,066 Series A Cumulative Exchangeable Preferred Units of limited partnership interest (the “Preferred Units”) of our Operating Partnership. The Preferred Equity Investor is entitled to monthly distributions calculated as follows:
•
From November 5, 2013 through October 31, 2015, a rate of LIBO plus 7.25% per annum of the Liquidation Preference (defined below) per Preferred Unit;
•
From November 1, 2015 through October 31, 2016, a rate of LIBO plus 8.25% per annum of the Liquidation Preference per Preferred Unit;
•
From November 1, 2016 through October 31, 2017, a rate of LIBO plus 9.25% per annum of the Liquidation Preference per Preferred Unit;
•
From November 1, 2017 through October 31, 2018, a rate of LIBO plus 10.25% per annum of the Liquidation Preference per Preferred Unit.
At all times, LIBOR will be subject to a minimum floor of 0.25%.
The Preferred Units may be redeemed by our Operating Partnership, in whole or in part, at any time. The redemption price for the Preferred Units will be equal to the sum of (i) $10.28 per Preferred Unit, plus all accumulated and unpaid distributions (the “Liquidation Preference”); (ii) 1.81% of the Liquidation Preference; (iii) all accumulated and unpaid distributions through the date of redemption, plus interest thereon. No redemptions had been made as of June 30, 2015. Our Operating Partnership may, however, redeem up to 75% of the Preferred Units after the units have been outstanding for 18 months and the remaining 25% of the outstanding Preferred Units on the 24th month. Pursuant to the terms of the purchase agreement, on May 14, 2015, the Company, through the Operating Partnership, exercised its right to redeem 75% of the outstanding Preferred Units. We recognized a redemption charge of $7.4 million to net income during the three months ended June 30, 2015, including the write-off of original issuance costs of approximately $4.0 million related to the Preferred Units. There were 6,079,766 Series A Cumulative Exchangeable Preferred Units outstanding at June 30, 2015. We intend to redeem the remaining 25% of the Preferred Units on October 31, 2015, pursuant to the purchase agreement.
Other Potential Future Sources of Capital
Other potential future sources of capital include proceeds from potential private or public offerings of our stock or limited partnership units of our Operating Partnership, proceeds from secured or unsecured financings from banks or other lenders, including debt assumed in a real estate acquisition transaction, proceeds from the sale of properties and undistributed funds from operations. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures. To the extent we are not able to secure additional financing in the form of a credit facility or other third party source of liquidity, we will be heavily dependent upon our current financing, our DRP Offering, income from operations, and, to a lesser extent, the remaining proceeds from our Follow-On Offering.
Short-Term Liquidity and Capital Resources
We expect to meet our short-term operating liquidity requirements with remaining proceeds raised in our DRP Offering, operating cash flows generated from our properties, and draws from our credit facility. All advances from our Advisor will be repaid, without interest, as funds are available after meeting our current liquidity requirements, subject to the limitations on reimbursement.
Our cash and cash equivalent balances decreased by approximately $28.0 million during the six months ended June 30, 2015 and were used in or provided by the following:

60

Operating Activities. Cash flows provided by operating activities are primarily dependent on the occupancy level, the rental rates of our leases, the collectability of rent and recovery of operating expenses from our tenants, and the timing of acquisitions. Net cash provided by operating activities for the six months ended June 30, 2015 increased to $32.8 million, compared to $26.5 million for the six months ended June 30, 2014. Net cash provided by operating activities before changes in operating assets and liabilities for the six months ended June 30, 2015 increased by $13.2 million to $32.0 million, compared to $18.8 million for the six months ended June 30, 2014. The increase is primarily related to the acquisition of 30 properties from January 1, 2014 through June 30, 2015, partially offset by the sale of two non-strategic properties over the same period.
Changes in operating assets and liabilities decreased by $6.8 million from cash provided of approximately $7.6 million for the six months ended June 30, 2014 compared to cash provided of $0.8 million for the six months ended June 30, 2015. The $6.8 million decrease in changes in operating assets and liabilities is primarily related to the following:
•
a $6.7 million increase in the change in other assets mainly due to (1) $2.2 million in the current period for the Restoration Hardware land development related to racking costs billed back to the tenant; (2) $3.2 million related to 2013 equity sales received in the prior year, of which there were none in the current period, and (3) $1.9 million related to a tenant improvement reimbursement for the Atlanta Wildwood property, which was received from the tenant in the prior year; less (4) a $1.4 million decrease in deferred leasing costs, primarily related to a $1.0 million write-off as a result of the College Park property sale in the current period;
•
a $3.2 million increase related to rent collections received in a designated cash collateral account controlled by the lender, pursuant to the loan agreement, as well as the GE Aviation rent, which was to be held in escrow pending a tax-deferred real estate exchange, as permitted by Section 1031 of the Internal Revenue Code, with the sale of the Will Partners property. On July 21, 2015, the Company acquired the DreamWorks property (see Note 10, Subsequent Events, to the consolidated financial statements), which replaced the GE Aviation property in the exchange, thus, releasing any restrictions on the rent receipts;
•
a $4.5 million increase in the change in rent abatement and property tax reserves due to a decrease in rent earned during the period, as a result of fewer tenants with abatements compared to the prior year, and additions made in the current period for the TW Telecom property;
•
an $8.2 million decrease in the change in reserves for tenant improvements due to disbursements made in the current period partially offset by the addition related to the Westgate III property, which was acquired in the current period;
•
a $5.3 million decrease in the change in accounts payable as a result of (1) a $4.9 million decrease in prepaid rent received in the current period; and (2) a $0.9 million decrease due to an increase in property tax payments during the current period, which resulted in a decrease in the change in accrued property taxes; partially offset by (3) a $0.4 million increase related to tenant deposits, primarily as a result of a $0.6 million deposit for the new tenant at the SoftBank property; and
•
a $4.7 million increase in the change in due to affiliates as a result of increases in acquisition expense reimbursements and asset and property management fees and dealer manager fees as there were 15 acquisitions in the current period compared to 11 acquisitions during the same period in the prior year, offset by a decrease in dealer manager fees as there were no equity sales in the current period.
Investing Activities. During the six months ended June 30, 2015, we used $152.8 million in cash for investing activities, compared to $544.3 million used during the same period in 2014. The $391.5 million decrease in changes in cash used in investing activities is related to the following:
•
a $43.1 million increase related to payments for construction-in-progress and tenant improvements; and
•
$4.1 million related to acquisition deposits utilized in the prior period; offset by
•
a $397.0 million decrease as a result of less cash used for acquisitions;
•
a $7.5 million decrease related to the investment in a land development joint venture, of which there was none in the current period;
•
$3.7 million in distributions from the investment in unconsolidated entities primarily related to the Digital Realty joint venture, which was entered into on September 9, 2014;
•
$8.6 million in cash assumed through the SOR Merger;
•
$10.1 million related to the proceeds received from the sale of the Eagle Rock property, as discussed in Note 3, Real Estate, to the consolidated financial statements, which were released to us upon completion of the 1031 exchange in the current period; and

61

•
$11.8 million related to the sale of the College Park property.
Financing Activities. During the six months ended June 30, 2015, we generated $92.0 million in financing activities, compared to $754.5 million generated during the same period in 2014, a decrease in cash provided by financing activities of $662.5 million. The decrease in cash generated is the net result of a $460.8 million decrease in cash provided by financing activities compared to the prior year and a $201.7 million increase in cash used in financing activities compared to the prior year. For the six months ended June 30, 2015, the $460.8 million decrease is comprised of the following:
•
a $148.9 million decrease in proceeds from borrowings on the KeyBank credit facility of which there were none during the six months ended June 30, 2015;
•
a $110.64 million decrease in proceeds from borrowings on the AIG Loan discussed above, of which there were none during the six months ended June 30, 2015;
•
a $300.0 million decrease in proceeds from borrowings on the Unsecured Term Loan (May 2014) discussed above, of which there were none during the six months ended June 30, 2015;
•
$490.1 million in proceeds from borrowings on the Unsecured Revolver (May 2014), which was drawn upon in connection with the GE Aviation and Westgate III acquisitions made during the current period, the 75% redemption of the Preferred Units discussed above, and the pay-off of the SOR debt simultaneously with the SOR Merger (see below);
•
$193.4 million in prior year principal repayments on the KeyBank credit facility, which was fully paid as of June 30, 2014;
•
$282.0 million in prior year principal repayments on the KeyBank term loan from proceeds from borrowings on the Unsecured Term Loan (May 2014) discussed above;
•
$173.0 million for the pay-off of the debt assumed through the SOR Merger;
•
a $5.8 million decrease in deferred financing costs primarily related to the AIG Loan and Unsecured Term Loan (May 2014), both discussed above;
•
a $76.5 million decrease in offering costs as a result of the termination of the Follow-On Offering in the prior year;
•
a $774.7 million decrease in the issuance of common stock, of which there was none during the six months ended June 30, 2015; and
•
a $1.4 million decrease in the issuance of limited partnership units, of which there was none during the six months ended June 30, 2015.
For the six months ended June 30, 2015, the $201.7 million increase in cash used consists of the following:
•
$190.9 million in preferred unit repurchases
•
$2.3 million in common stock repurchases;
•
$6.7 million in distribution payments to common stockholders and noncontrolling interests due to an increase in shares issued; and
•
$2.3 million in deposits, primarily related to the AIG Loan discussed above, which were paid in 2013 and applied during the six months ended June 30, 2014; offset by
•
$0.7 million in dividend payments on preferred units as a result of the 75% redemption in the current period.
Distributions and Our Distribution Policy
Distributions will be paid to our stockholders as of the record date selected by our board of directors. We expect to continue to pay distributions monthly based on daily declaration and record dates. We expect to pay distributions regularly unless our results of operations, our general financial condition, general economic conditions, or other factors inhibit us from doing so. Distributions will be authorized at the discretion of our board of directors, which will be directed, in substantial part, by its obligation to cause us to comply with the REIT requirements of the Internal Revenue Code. The funds we receive from operations that are available for distribution may be affected by a number of factors, including the following:
•
our operating and interest expenses;
•
the amount of distributions or dividends received by us from our indirect real estate investments;
•
our ability to keep our properties occupied;
•
our ability to maintain or increase rental rates;

62

•
tenant improvements, capital expenditures and reserves for such expenditures;
•
the issuance of additional shares; and
•
financings and refinancings.
We have funded distributions with operating cash flow from our properties and offering proceeds raised in our Public Offerings. To the extent that we do not have taxable income, distributions paid will be considered a return of capital to stockholders. The following table shows distributions paid during the six months ended June 30, 2015 (dollars in thousands, except share data):
 
 
 
 
 
 
Distributions Paid (3)
 
 
Period
 
Distributions Declared (1) (4)
 
Distributions Declared Per Common Share (1)(2)
 
Cash (4)
 
Reinvested
 
Total
 
Cash Flow from Operating Activities
First Quarter 2015
 
$
27,794

 
$
0.17

 
$
14,819

 
$
12,896

 
$
27,715

 
$
18,518

Second Quarter 2015
 
$
31,526

 
$
0.17

 
$
18,099

 
$
13,055

 
$
31,154

 
$
14,287

(1)
Distributions for the period from January 1, 2015 through June 30, 2015 were based on daily record dates and were calculated at a rate of $0.001901096 per share per day.
(2)
Assumes shares were issued and outstanding each day during the period presented.
(3)
Distributions for all record dates of a given month are paid on a monthly basis, on or about the first business day of the following month.
(4)
Includes distributions paid to noncontrolling interests and preferred unit holders.
For the six months ended June 30, 2015, we paid and declared distributions of approximately $46.6 million to common stockholders including shares issued pursuant to the DRP, and approximately $9.3 million to the limited partners of our Operating Partnership, including those distributions paid to the preferred unit holders, as compared to FFO, adjusted for redeemable preferred and noncontrolling interest distributions, and MFFO to common stockholders for the six months ended June 30, 2015 of $24.6 million and $49.0 million, respectively. The payment of distributions from sources other than FFO or MFFO may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds.
Contractual Commitments and Contingencies
The following is a summary of our contractual obligations as of June 30, 2015 (in thousands):
 
Payments Due During the Years Ending December 31,
 
Total
 
2015
 
2016-2017
 
2018-2019
 
Thereafter
Outstanding debt obligations (1)
$
1,112,980

 
$
974

 
$
62,943

 
$
819,119

(3) 
$
229,944

Interest on outstanding debt obligations (2)
172,247

  
13,674

 
41,811

 
54,213

 
62,549

Ground lease obligations
35,110

 
90

 
378

 
396

 
34,246

Total
$
1,320,337

  
$
14,738

 
$
105,132

 
$
873,728

 
$
326,739

(1)
Amounts only include principal payments. The payments on our mortgage debt do not include the premium of $1.7 million.
(2)
Projected interest payments are based on the outstanding principal amounts at June 30, 2015. Projected interest payments on the Unsecured Revolver (May 2014) and Unsecured Term Loan (May 2014) are based on the interest rate in effect at June 30, 2015.
(3)
Amount includes payment of the balance of the TW Telecom Loan and the Unsecured Term Loan (May 2014), both of which mature in 2019, as well as the balance of the Unsecured Revolver (May 2014) which matures in 2019, assuming the one-year extension is exercised. However, the Unsecured Credit Facility (May 2014) was retired in full on July 20, 2015, as the Company entered into the Unsecured Credit Facility (July 2015). See Note 10, Subsequent Events, to the consolidated financial statements.
Off-Balance Sheet Arrangements
As of June 30, 2015, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.
Subsequent Events
See Note 10, Subsequent Events, to the consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risks include risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market-sensitive instruments. We expect that the primary market risk to which we will be exposed is interest rate risk, including the risk of changes in the underlying rates on our variable rate debt.

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As of June 30, 2015, our debt consisted of (1) long term fixed-rate mortgage loans of $324.6 million, secured by real estate, which include $1.7 million in debt premiums; (2) the Unsecured Revolver (May 2014) of $490.1 million; and (3) the Unsecured Term Loan (May 2014) of $300.0 million.
In the future, we may be exposed to the effects of interest rate changes primarily as a result of borrowings used to maintain liquidity and fund acquisition, expansion, and financing of our real estate investment portfolio and operations. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve our objectives, we may borrow at fixed rates or variable rates that are lower than our current borrowing cost. In order to mitigate our interest rate risk on certain financial instruments, we may enter into interest rate hedge instruments, such as interest rate swap or cap agreements, and in order to mitigate our risk to foreign currency exposure we may enter into foreign currency hedges. We will not enter into derivative or interest rate transactions for speculative purposes.
Unsecured Credit Facility (May 2014)
On May 8, 2014, we, through our Operating Partnership, entered into the Unsecured Credit Agreement (May 2014), in which were provided with the $750.0 million Unsecured Credit Facility (May 2014), consisting of the $450.0 million Unsecured Revolver (May 2014) and the $300.0 million Unsecured Term Loan (May 2014).
The Unsecured Credit Facility (May 2014) has an interest rate based on the leverage ratio reported with quarterly compliance certificate, as discussed below, and calculated based on the LIBO Rate plus the applicable LIBO Rate margin, as provided in the Unsecured Credit Agreement (May 2014), or Base Rate plus the applicable base rate margin, as provided in the Unsecured Credit Agreement (May 2014). The Base Rate is calculated as the greater of (i) the KeyBank Prime rate or (ii) the Federal Funds rate plus 0.50%. Payments under the Unsecured Credit Facility (May 2014) are interest only and are due on the first day of each quarter. An increase in the LIBO Rate may have an impact on our future earnings or cash flows as the current interest rate on the Unsecured Credit Facility (May 2014) is tied to this index. If the LIBO Rate increased by 1.00%, the interest expense on the Unsecured Revolver (May 2014) and Unsecured Term Loan (May 2014) would have potentially increased by approximately $0.7 million and $1.5 million, respectively, for the six months ended June 30, 2015.
AIG Loan
In conjunction with the refinancing of certain properties that previously served as security for the KeyBank credit facility, certain property-owning SPEs wholly-owned by our Operating Partnership, entered into the AIG Loan for $110.64 million as discussed in Note 5, Debt, to the consolidated financial statements. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.
Midland Mortgage Loan
In conjunction with the refinancing of certain properties that previously served as security for the KeyBank credit facility, certain property-owning SPEs wholly-owned by our Operating Partnership, entered into the Midland Mortgage Loan for $105.6 million. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.
TW Telecom Mortgage Debt
In conjunction with the acquisition of the TW Telecom property, we, through a wholly-owned subsidiary of our Operating Partnership, entered into a credit agreement with Mutual of Omaha Bank. The TW Telecom Loan has an interest rate based on the LIBO Rate plus 2.45% adjusted on the first banking day of each month. An increase in the LIBO Rate may have an impact on our future earnings or cash flows as the current interest rate on the TW Telecom Loan is tied to this index. If the LIBO Rate increased by 1.00%, the interest expense on the TW Telecom Loan would have potentially increased by approximately $0.1 million for the six months ended June 30, 2015.
Ace Hardware Mortgage Debt
In conjunction with the acquisition of the Ace Hardware property, we, through a wholly-owned subsidiary of our Operating Partnership, assumed $23.9 million in debt. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.
TransDigm Mortgage Debt
In conjunction with the acquisition of the TransDigm property, we, through a wholly-owned subsidiary of our Operating Partnership, assumed $6.9 million in debt. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.


64

LTI Mortgage Debt
In conjunction with the contribution of the LTI property, we, through a wholly-owned subsidiary of our Operating Partnership, assumed $34.4 million in debt. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.
Emporia Partners Mortgage Debt
In conjunction with the contribution of the Emporia Partners property, we, through a wholly-owned subsidiary of our Operating Partnership, assumed $5.4 million in debt. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.
Plainfield Mortgage Debt
In conjunction with the contribution of the Plainfield property, we, through a wholly-owned subsidiary of our Operating Partnership, assumed $21.2 million in debt. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.
Preferred Equity
In connection with the investment in the Preferred Units of our Operating Partnership, the Preferred Equity Investor is entitled to monthly distributions calculated as follows:
•
From November 5, 2013 through October 31, 2015, a rate of LIBO plus 7.25% per annum of the Liquidation Preference (defined in Note 6, Equity, to the consolidated financial statements) per Preferred Unit;
•
From November 1, 2015 through October 31, 2016, a rate of LIBO plus 8.25% per annum of the Liquidation Preference per Preferred Unit;
•
From November 1, 2016 through October 31, 2017, a rate of LIBO plus 9.25% per annum of the Liquidation Preference per Preferred Unit;
•
From November 1, 2017 through October 31, 2018, a rate of LIBO plus 10.25% per annum of the Liquidation Preference per Preferred Unit.
At all times, LIBOR will be subject to a minimum floor of 0.25%.
If the LIBO Rate increased by 1.00%, the distribution payments on the Preferred Units would potentially increase by approximately $1.0 million for the six months ended June 30, 2015.
 
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, management, with the participation of our principal executive and principal financial officers, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Securities and Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.

65


ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
None.
(b)
We registered 82.5 million shares of our common stock in our Initial Public Offering (SEC File No. 333-159167, effective November 6, 2009), of which we registered 75.0 million shares to be offered to the public in our primary offering at an offering price of $10.00 per share (later revised to $10.28 per share) and 7.5 million shares to be offered to investors pursuant to our DRP at $9.50 per share (later revised to approximately $9.77 per share). Our Initial Public Offering was terminated on April 25, 2013. On April 26, 2013, we registered and began to offer $1.0 billion in shares of our common stock in our Follow-On Offering (SEC File No. 333-183614) at $10.28 per share and the DRP reflected a price equal to 95% of the share offering price, or approximately $9.77 per share. On April 22, 2014, we announced that we were no longer accepting subscriptions in our Follow-On Offering, as we expected to reach the maximum offering amount following our transfer agent's reconciliation of pending subscriptions. On May 7, 2014, we filed a Registration Statement on Form S-3 (SEC File No. 333-195765) for the registration of $75.0 million in shares for sale pursuant to the DRP Offering. On December 15, 2014, we announced a revised offering price for shares pursuant to the DRP Offering of $10.40 per share, effective December 27, 2014. The DRP Offering may be terminated at any time upon 10 days' prior written notice to stockholders. Our equity raise pursuant to the Public Offerings and the DRP Offering as of June 30, 2015 resulted in the following (in thousands, except share amounts):
Common shares issued in our Initial Offering (including shares issued in our DRP)
19,200,570

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

Common shares issued pursuant to our DRP Offering
6,021,352

Common shares redeemed pursuant to our SRP for our Initial and Follow-On Offerings
(664,337
)
Total common shares outstanding in our Initial, Follow-On and DRP Offerings
131,701,922

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

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

Gross proceeds from shares issued pursuant to our DRP Offering
60,669

Total gross proceeds from our Initial, Follow-On and DRP Offerings
1,350,142

Redemption of common shares pursuant to our SRP for the Initial and Follow-On Offerings
(6,532
)
Selling commissions and dealer manager fees paid
(123,638
)
Reimbursement to our Advisor of O&O costs paid
(5,369
)
Net proceeds from our Initial, Follow-On and DRP Offerings
$
1,214,603

The net offering proceeds raised in our Initial, Follow-On and DRP Offerings were used primarily to fund:
•
Repayment of mezzanine, bridge, term and credit facility debt of $410.4 million;
•
Payment of deferred financing costs of $18.0 million;
•
Acquisition of real property and investment in joint ventures of $705.0 million;
•
Acquisition fees paid to the Advisor of $74.2 million; and
•
Other company and business obligations, including, but not limited to, the payment of a portion of cash distributions to stockholders, of $7.0 million.
(c)
As noted in Note 6, Equity – Share Redemption Program, in the notes to the financial statements contained in this report, our board of directors adopted a share redemption program on February 20, 2009, which enables our stockholders to have their shares redeemed by us, subject to the significant conditions and limitations. Our share redemption program has no set termination date, but our ability to redeem shares under the program is limited as described in Note 6.
As of June 30, 2015 and December 31, 2014, $83.6 million and $57.7 million in shares of common stock, respectively, were eligible for redemption, of which $2.5 million and $1.2 million, respectively, were reclassified from redeemable common stock to accounts payable and accrued liabilities in the consolidated balance sheets as of June 30, 2015 and December 31, 2014. During the six months ended June 30, 2015, we redeemed 308,438 shares of common stock for approximately $3.0 million at a weighted average price per share of $9.81. Since inception through June 30, 2015, we redeemed 664,337 shares of common stock for approximately $6.5 million at a weighted average price per share of

66

$9.83 pursuant to the SRP. As of June 30, 2015, there were 253,581 shares totaling $2.5 million subject to redemption requests. On July 31, 2015, we satisfied all of the eligible redemption requests at a weighted average price per share of $9.79, with the exception of one redemption request that was satisfied on August 7, 2015. Our board of directors may choose to amend, suspend or terminate our share redemption program upon 30 days’ written notice at any time.
During the quarter ended June 30, 2015, we redeemed shares as follows:
For the Month Ended
Total
Number of
Shares
Redeemed
 
Average
Price Paid
per Share
 
Total Number of
Shares Redeemed as
Part of Publicly
Announced Plans or
Programs
 
Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that
May Yet Be Purchased
Under the Plans or
Programs
April 30, 2015
175,902

 
$
9.76

 
175,902

 
(1) 
May 31, 2015
6,780

 
10.28

 
6,780

 
(1) 
June 30, 2015
—

 
N/A

 
—

 
—
(1)
A description of the maximum number of shares that may be purchased under our share redemption program is included in Note 6, Equity, to the consolidated financial statements.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
(a)
During the quarter ended June 30, 2015, there was no information required to be disclosed in a report on Form 8-K which was not disclosed in a report on Form 8-K.
(b)
During the quarter ended June 30, 2015, there were no material changes to the procedures by which security holders may recommend nominees to our board of directors.
ITEM 6. EXHIBITS
The exhibits required to be filed with this report are set forth on the Exhibit Index hereto and incorporated by reference herein.
EXHIBIT INDEX
The following exhibits are included in this Quarterly Report on Form 10-Q for the period ended June 30, 2015 (and are numbered in accordance with Item 601 of Regulation S-K).

67

Exhibit
No.
  
Description
3.1
  
Third Articles of Amendment and Restatement of Griffin Capital Essential Asset REIT, Inc., incorporated by reference to Exhibit 3.1 to Pre-Effective Amendment No. 3 to the Registrant’s Registration Statement on Form S-11, filed on October 29, 2009, Commission File No. 333-159167
3.2
  
Bylaws of Griffin Capital Essential Asset REIT, Inc., incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-11, filed on May 12, 2009, Commission File No. 333-159167
3.3
  
Articles of Amendment to Third Articles of Amendment and Restatement of Griffin Capital Essential Asset REIT, Inc., incorporated by reference to Exhibit 3.3 to Post-Effective Amendment No. 6 to the Registrant’s Registration Statement on Form S-11, filed on July 12, 2011, Commission File No. 333-159167
3.4
  
Second Articles of Amendment to the Third Articles of Amendment and Restatement of Griffin Capital Essential Asset REIT, Inc., incorporated by reference to Exhibit 3.1 to the Registrant’s current report on Form 8-K filed on February 25, 2013, Commission File No. 000-54377
3.5
  
Third Articles of Amendment to the Third Articles of Amendment and Restatement of Griffin Capital Essential Asset REIT, Inc., incorporated by reference to Exhibit 3.1 to the Registrant’s current report on Form 8-K filed on June 14, 2013, Commission File No. 000-54377
4.1
 
Enrollment form for Distribution Reinvestment Plan, incorporated by reference to Appendix A to the prospectus contained in the Registrant's Registration Statement on Form S-3D, filed on May 7, 2014, Commission File No. 333-195765
10.1
 
Board Observer and Indemnification Agreement, incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on June 11, 2015, Commission File No. 000-54377
10.2
 
DreamWorks Purchase Agreement, incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on July 23, 2015, Commission File No. 000-54377
10.3
 
Unsecured Credit Agreement, incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on July 23, 2015, Commission File No. 000-54377
10.4
 
Revolving Loan Note, incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed on July 23, 2015, Commission File No. 000-54377
10.5
 
Term Loan Note, incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K filed on July 23, 2015, Commission File No. 000-54377
10.6
 
Guaranty, incorporated by reference to Exhibit 10.5 to the Registrant's Current Report on Form 8-K filed on July 23, 2015, Commission File No. 000-54377
10.7
 
Schedule of Omitted Documents, incorporated by reference to Exhibit 10.6 to the Registrant's Current Report on Form 8-K filed on July 23, 2015, Commission File No. 000-54377
31.1*
  
Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
  
Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
  
Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
  
Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002
101*
  
The following Griffin Capital Essential Asset REIT, Inc. financial information for the period ended June 30, 2015 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Comprehensive loss (unaudited), (iii) Consolidated Statements of Equity (unaudited), (iv) Consolidated Statements of Cash Flows (unaudited) and (v) Notes to Consolidated Financial Statements (unaudited).

*
Filed herewith.

68

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

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

69

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