5. Mortgage Notes Payable and Line of Credit

Our mortgage notes payable and line of credit as of December 31, 2013 and December 31, 2012 are summarized below (dollars in thousands):

 

								Principal Balance Outstanding
Date of Issuance/ Assumption		Principal Maturity Date		Stated Interest Rate at December 31, 2013 (1)				December 31, 2013				December 31, 2012
02/21/06		06/30/14			5.20	%		$	17,455			$	17,930
08/25/05		09/01/15			5.33	%			19,664				20,074
09/12/05		09/01/15			5.21	%			11,593				11,821
09/06/07		12/11/15			5.81	%			4,052				4,141
12/21/05		01/08/16			5.71	%			17,816				18,155
03/29/06		04/01/16			5.92	%			16,434				16,669
04/27/06		05/05/16			6.58	%			12,696				13,080
08/29/08		06/01/16			6.80	%			5,687				5,866
06/20/11		06/30/16			6.08	%			11,164				11,341
11/22/06		12/01/16			5.76	%			13,324				13,558
11/26/13		12/01/16			LIBOR +2.15	%(2)			8,200				—
12/22/06		01/01/17			5.79	%			20,376				20,731
02/08/07		03/01/17			6.00	%			13,775				13,775
06/05/07		06/08/17			6.11	%			13,999				14,163
10/15/07		11/08/17			6.63	%			14,848				15,072
09/26/12		07/01/18			5.75	%			10,478				10,707
11/18/11		11/01/18			4.50	%			4,155				4,256
12/06/11		12/06/19			6.00	%			8,031				8,272
10/28/11		11/01/21			6.00	%			6,938				7,068
04/05/12		05/01/22			6.10	%			18,467				18,821
06/21/12		07/06/22			5.05	%			4,608				4,712
08/03/12		07/31/22			5.00	%			2,911				2,979
07/24/12		08/01/22			5.60	%			9,361				9,661
10/01/12		10/01/22			4.86	%			33,133				33,888
11/21/12		12/06/22			4.04	%			18,525				19,000
03/28/13		04/06/23			4.16	%			3,638				—
07/03/13		08/01/23			5.00	%			8,163				—
07/10/13		08/01/23			4.20	%			8,852				—
07/09/13		08/06/23			4.81	%			35,093				—
12/27/13		01/01/24			5.28	%			4,380				—
12/15/10		12/10/26			6.63	%			9,496				9,983
05/16/12		12/31/26			4.30	%			2,829				2,897
11/08/12		02/01/27			5.69	%			13,864				14,145
05/30/12		05/10/27			6.50	%			4,653				4,883
06/27/12		07/01/29			5.10	%			1,905				1,984
12/18/13		01/06/39			4.74	%			11,315				—
02/21/06		12/01/13			5.91	%			—				8,658
Contractual Mortgage Notes Payable:								$	421,878			$	358,290
Premiums and (Discounts), net:									724				895
Total Mortgage Notes Payable:								$	422,602			$	359,185
Variable-Rate Line of Credit:
08/07/13		08/07/16			LIBOR +3.25	%		$	24,400			$	25,000
Total Mortgage Notes Payable and Line of Credit								$	447,002			$	384,185

 

(1)	The weighted average interest rate on all debt outstanding at December 31, 2013, was approximately 5.31%.

(2)	At December 31, 2013, one month LIBOR was approximately 0.17%.

 

Mortgage Notes Payable

As of December 31, 2013, we had 36 mortgage notes payable, collateralized by a total of 70 properties and the net book value of these collateralized properties was $561.5 million. Gladstone Commercial Corporation has limited recourse liabilities that could result from any one or more of the following circumstances: a borrower voluntarily filing for bankruptcy, improper conveyance of a property, fraud or material misrepresentation, misapplication or misappropriation of rents, security deposits, insurance proceeds or condemnation proceeds, or physical waste or damage to the property resulting from a borrower’s gross negligence or willful misconduct. We will also indemnify lenders against claims resulting from the presence of hazardous substances or activity involving hazardous substances in violation of environmental laws on a property. The weighted-average interest rate on the mortgage notes payable as of December 31, 2013 was 5.4%.

During the year ended December 31, 2013, we issued seven long-term mortgages, which are summarized below (dollars in thousands):

 

Date of Issuance		Issuing Bank		Borrowings				Interest Rate				Maturity Date
3/28/2013		Citigroup Global Markets Realty Corp.		$	3,700				4.16	%			4/6/2023
7/3/2013		Prudential Mortgage Capital Company LLC			8,200				5.00	%			8/1/2023
7/9/2013		Cantor Commercial Real Estate Lending			35,300				4.81	%			8/6/2023
7/10/2013		Synovus Bank			8,900				4.20	%			8/1/2023
11/26/2013		Wells Fargo			8,200				LIBOR +2.15	%			12/1/2016
12/18/2013		Guggenheim Partners			11,315				4.74	%			1/6/2039
12/27/2013		Key Bank			4,380				5.28	%			1/1/2024
				$	79,995

Scheduled principal payments of mortgage notes payable for the each of the five succeeding fiscal years and thereafter are as follows (dollars in thousands):

 

Year		Scheduled Principal Payments
2014		$	24,830
2015			42,415
2016			88,709
2017			66,749
2018			19,317
Thereafter			179,858
		$	421,878

Refinancing

On November 26, 2013, through a wholly-owned subsidiary, we refinanced our mortgage at our Champaign, Illinois property which was originally set to mature on December 1, 2013. We borrowed $8.2 million pursuant to a long-term note payable from Wells Fargo. The new loan is variable rate, in which the interest rate resets monthly and is calculated as the one month London Interbank Offered Rate, or LIBOR, plus a margin of 2.15%. The LIBOR rate is subject to a floor of 0.5% per annum, and minimum interest on this note is 2.65%. The new note has a maturity date of December 1, 2016, with four, one-year extension options at the behest of the borrower. We simultaneously entered into an interest rate cap with Wells Fargo to hedge against the variability of the LIBOR rate, at a cost of approximately $0.03 million through December 1, 2016. We will receive payments from Wells Fargo if the one month LIBOR rate increases above 3.0%.

Interest Rate Cap

We have entered into an interest rate cap agreement with Wells Fargo that caps the interest rate on the note payable for our Champaign, Illinois property. The agreement provides that the interest rate on the note payable for our Champaign, Illinois property is capped at a certain interest rate when one-month LIBOR is in excess of 3.0%. The fair value of the interest rate cap agreement is recorded in other assets on our accompanying Consolidated Balance Sheets. We record changes in the fair value of the interest rate cap agreement quarterly based on the current market valuations at quarter end as other income (loss) on our accompanying Consolidated Statements of Operations. Generally, we will estimate the fair value of our interest rate cap using estimates of value provided by the counterparty and our own assumptions in the absence of observable market data, including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. At December 31, 2013, our interest rate cap agreement was valued using Level 3 inputs. The following table summarizes the key terms of each interest rate cap agreement (dollars in thousands):

 

																		As of December 31, 2013
Interest Rate Cap		Notional Amount				LIBOR Cap				Effective Date				Maturity Date				Cost				Fair Value
November 26, 2013		$	8,200				3.00	%			December 31, 2013				December 1, 2016			$	31			$	22

Fair Value

The fair value of all mortgage notes payable outstanding as of December 31, 2013, was $421.8 million, as compared to the carrying value stated above of $421.9 million. The fair value is calculated based on a discounted cash flow analysis, using interest rates based on management’s estimate of market interest rates on long-term debt with comparable terms and loan to value ratios. The fair value was calculated using Level 3 inputs of the hierarchy established by ASC 820, “Fair Value Measurements and Disclosures.”

Line of Credit

In August 2013, we procured a new $60.0 million senior unsecured revolving credit facility, or the New Line of Credit, with Keybank National Association serving as a revolving lender, a letter of credit issuer and an administrative agent and Citizens Bank of Pennsylvania as an additional lender. On December 16, 2013, Comerica Bank was also added as an additional lender. The New Line of Credit initially matures in August 2016; however, we have a one-year extension option subject to the payment of an extension fee equal to 25 basis points on the initial maturity date and certain other customary conditions. The New Line of Credit replaced the Credit Agreement, dated as of December 28, 2010 with Capital One, N.A., as administrative agent, and the other lenders party thereto, or the Prior Line of Credit. The Prior Line of Credit provided for a senior secured revolving credit facility in the amount of $75.0 million and was originally scheduled to mature on December 28, 2013.

The New Line of Credit has a letter of credit sublimit of up to $20.0 million. In addition, we may expand the New Line of Credit up to a total of $75.0 million upon satisfaction of certain conditions, including obtaining commitments from any one or more lenders, whether or not currently a party to the New Line of Credit, to provide such increased amounts and payment of the associated up front and arrangement fees at the time of such increase. The interest rate per annum applicable to the New Line of Credit is equal to the LIBOR plus an applicable margin of up to 3.25%, depending upon our leverage. The leverage ratio used in determining the applicable margin for interest on the New Line of Credit is recalculated quarterly. We are subject to an annual maintenance fee of $0.03 million per year and an unused commitment fee of 25 basis points per year, which accrues quarterly. Our ability to access this source of financing is subject to our continued ability to meet customary lending requirements, such as compliance with financial and operating covenants and our meeting certain lending limits. One such covenant requires us to limit distributions to our stockholders to 100% of our FFO, with acquisition-related costs required to be expensed under ASC 805 added back to FFO. In addition, the maximum amount we may draw under the New Line of Credit is based on a percentage of the value of a pool of unencumbered properties which must meet agreed upon eligibility standards.

If and when long-term mortgages are arranged for properties in the unencumbered pool, the banks will reduce the availability under the New Line of Credit by the amount advanced against that property’s value. Conversely, as we purchase new properties meeting the eligibility standards, we may add these new properties to the unencumbered pool to obtain additional availability under the New Line of Credit. The availability under the New Line of Credit is also reduced by letters of credit used in the ordinary course of business. We may use the advances under the New Line of Credit for both general corporate purposes and the acquisition of new investments.

As of December 31, 2013, there was $24.4 million outstanding under our New Line of Credit at an interest rate of approximately 3.4% and $10.3 million outstanding under letters of credit at a weighted average interest rate of 3.4%. As of December 31, 2013, the maximum additional amount we could draw was $17.1 million. We were in compliance with all covenants under the New Line of Credit as of December 31, 2013. The amount outstanding on the New Line of Credit as of December 31, 2013 approximates fair value, because the debt is subject to a variable interest rate, determined by market forces, as well as a recently negotiated interest rate spread.