6. Mortgage Notes Payable and Line of Credit

Our mortgage notes payable and line of credit as of September 30, 2015 and December 31, 2014 are summarized below (dollars in thousands):

 

						Carrying Value at
		Encumbered properties at September 30, 2015				September 30, 2015				December 31, 2014				Stated Interest Rates at September 30, 2015 (4)				Scheduled Maturity Dates at September 30, 2015
Mortgage and Other Secured Loans:
Fixed rate mortgage loans			71			$	452,866			$	450,392				(1	)			(2	)
Variable rate mortgage loans			8				29,570				8,200				(3	)			(2	)
Premiums and discounts (net)			N/A				476				707				N/A				N/A
Total Mortgage Notes Payable			79			$	482,912			$	459,299				(5	)
Variable rate Line of Credit			20				55,500				43,300				LIBOR + 2.75	%(3)			8/1/2017
Total Mortgage Notes Payable and Line of Credit			99			$	538,412			$	502,599

 

(1)	Interest rates on our fixed rate mortgage notes payable vary from 3.75% to 6.80%.

(2)	We have 46 mortgage notes payable with maturity dates ranging from 12/11/2015 through 1/6/2039.

(3)	Interest rates on our variable rate mortgage notes payable vary from one month LIBOR + 2.15% to one month LIBOR + 2.25%. At September 30, 2015, one month LIBOR was approximately 0.19%.

(4)	The weighted average interest rate on all debt outstanding at September 30, 2015, was approximately 4.87%.

(5)	The weighted average interest rate on the mortgage notes outstanding at September 30, 2015, was approximately 5.10%.

N/A - Not Applicable

Mortgage Notes Payable

As of September 30, 2015, we had 46 mortgage notes payable, collateralized by a total of 79 properties with a net book value of $691.9 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.

During the nine months ended September 30, 2015, we issued six long-term mortgages, collateralized by seven properties, which are summarized below (dollars in thousands):

 

Date of Issuance		Issuing Bank		Debt Issued				Interest Rate				Maturity Date				Amortization Period (months)
3/6/2015		PNC Bank, NA		$	14,573				3.86	%			4/1/2025				300
5/28/2015		FC Bank			4,466				3.75	%			6/1/2022				85
6/16/2015		Guggenheim Partners			13,000				3.99	%			7/1/2045
6/29/2015		Synovus Bank			19,780				LIBOR + 2.25	%			7/1/2018	(1)
7/1/2015		Synovus Bank			1,700				LIBOR + 2.25	%			7/1/2018	(2)
7/15/2015		Prudential Mortgage Capital Company			7,540				4.53	%			8/1/2022
				$	61,059

 

(1)	We refinanced maturing debt on our Duncan, South Carolina and Charlotte, North Carolina properties which had aggregate balloon principal payments of $19.1 million. We completed this refinance on June 29, 2015.

(2)	We refinanced maturing debt on our Akron,Canton and Dayton, Ohio proerties, which had aggregate balloon principal payments of $11.3 million. We completed this refinance on July 1, 2015.

We made payments of $0.3 million and $1.2 million for deferred financing costs during the three and nine months ended September 30, 2015, respectively, and payments of $0.1 million and $0.7 million during the three and nine months ended September 30, 2014, respectively.

 

Scheduled principal payments of mortgage notes payable for the remainder of 2015, and each of the five succeeding fiscal years and thereafter are as follows (dollars in thousands):

 

Year		Scheduled Principal Payments
Three Months ending December 31, 2015		$	5,749	(1)
2016			100,279
2017			69,049
2018			40,908
2019			35,738
2020			7,828
Thereafter			222,885
		$	482,436	(2)

 

(1)	This figure includes one balloon principal payment that matures in fourth quarter 2015. We plan to refinance using a combination of new mortgage debt and equity.

(2)	This figure is exclusive of premiums and discounts (net) on assumed debt, which were $0.48 million as of September 30, 2015.

Refinancing

On July 1, 2015, through a wholly-owned subsidiary, we repaid our $11.3 million mortgage on our Canton, Dayton, and Akron, Ohio properties. The mortgage was originally set to mature on September 1, 2015. We borrowed $1.7 million pursuant to a long-term note payable from Synovus Bank to refinance a portion of this debt. The new loan is variable rate and we entered into an interest rate cap with Synovus Bank to hedge against the variability of the LIBOR rate, at a cost of approximately $0.07 million through July 1, 2018. We will receive payments from Synovus Bank if the one month LIBOR rate increases above 3.0%.

Interest Rate Cap

We have entered into interest rate cap agreements that caps the interest rate on certain of our notes payable when one-month LIBOR is in excess of 3.0%. The fair value of the interest rate cap agreements is recorded in other assets on our accompanying condensed consolidated balance sheets. We record changes in the fair value of the interest rate cap agreements quarterly based on the current market valuations at quarter end as interest expense on our accompanying condensed consolidated statements of operations. Generally, we will estimate the fair value of our interest rate caps, in the absence of observable market data, using estimates of value including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. At September 30, 2015 and December 31, 2014, our interest rate cap agreements were valued using Level 3 inputs. The following table summarizes the key terms of each interest rate cap agreement (dollars in thousands):

 

										As of September 30,												As of December 31,
										2015												2014
		LIBOR Cap				Maturity Date				Notional Amount				Cost				Fair Value				Notional Amount				Cost				Fair Value
Interest Rate Cap
Nov-13			3.00	%			Dec-16			$	8,200			$	31			$	—			$	8,200			$	31			$	4
Jul-15			3.00	%			Jul-18				21,370				68				19				—				—				—
										$	29,570			$	99			$	19			$	8,200			$	31			$	4

 

Fair Value

The fair value of all mortgage notes payable outstanding as of September 30, 2015 was $495.6 million, as compared to the carrying value stated above of $482.9 million. The fair value is calculated based on a discounted cash flow analysis, using 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.”

The amount outstanding under the Line of Credit approximates fair value as of September 30, 2015, because the debt is subject to a variable interest rate, determined by market forces, as well as a recently renewed interest rate spread.

Line of Credit

In August 2013, we procured a senior unsecured revolving credit facility, or the Line of Credit, with KeyBank National Association (serving as a revolving lender, a letter of credit issuer and an administrative agent). On October 5, 2015, we expanded our Line of Credit to $85.0 million and extended the maturity date 1-year through August 2018, with a 1-year extension option through August 2019. We also added a $25.0 million 5-year term loan facility, which matures in October 2020. The interest rate on the revolving line of credit was also reduced by 25 basis points at each of the leverage tiers and the total maximum commitment under the two facilities was increased from $100.0 million to $150.0 million. We also added 3 new lenders to the bank syndicate, which is now comprised of KeyBank, Comerica Banks, Fifth Third Bank, US Bank and Huntington Bank. We were subject to payment of $0.5 million for the modification of the agreement.

As of September 30, 2015, there was $55.5 million outstanding under our Line of Credit at an interest rate of approximately 2.94% and $3.9 million outstanding under letters of credit at a weighted average interest rate of 2.75%. As of October 27, 2015, the maximum additional amount we could draw was $13.8 million. We were in compliance with all covenants under the Line of Credit as of September 30, 2015.