7. Mortgage Notes Payable and Line of Credit

Our mortgage notes payable and line of credit as of December 31, 2014 and December 31, 2013 are summarized below (dollars in thousands):

 

										Principal Balance Outstanding
Date of
Issuance/		Principal		Stated Interest Rate at
Assumption		Maturity Date		December 31, 2014 (1)						December 31, 2014				December 31, 2013
02/21/06		06/30/14		5.20%							—				17,455
08/25/05		09/01/15		5.33%							19,262				19,664
09/12/05		09/01/15		5.21%							11,369				11,593
09/06/07		12/11/15		5.81%							3,964				4,052
12/21/05		01/08/16		5.71%							17,482				17,816
03/27/14		02/01/16		5.58%							6,214				—
03/29/06		04/01/16		5.92%							16,201				16,434
04/27/06		05/05/16		6.58%							12,316				12,696
08/29/08		06/01/16		6.80%							5,510				5,687
05/08/14		06/01/16		6.25%							3,767				—
06/20/11		06/30/16		6.08%							10,977				11,164
11/22/06		12/01/16		5.76%							13,093				13,324
11/26/13		12/01/16		LIBOR +2.15%			(2	)			8,200				8,200
12/22/06		01/01/17		5.79%							20,026				20,376
02/08/07		03/01/17		6.00%							13,775				13,775
06/05/07		06/08/17		6.11%							13,825				13,999
10/15/07		11/08/17		6.63%							14,609				14,848
09/26/12		07/01/18		5.75%							10,252				10,478
11/18/11		11/01/18		4.50%							4,049				4,155
06/09/14		07/01/19		4.23%							22,600				—
12/06/11		12/06/19		6.00%							7,776				8,031
10/28/11		11/01/21		6.00%							6,799				6,938
04/05/12		05/01/22		6.10%							18,116				18,467
06/21/12		07/06/22		5.05%							4,507				4,608
08/03/12		07/31/22		5.00%							2,845				2,911
07/24/12		08/01/22		5.60%							9,066				9,361
10/01/12		10/01/22		4.86%							32,397				33,133
11/21/12		12/06/22		4.04%							18,067				18,525
03/28/13		04/06/23		4.16%							3,551				3,638
07/03/13		08/01/23		5.00%							8,045				8,163
07/10/13		08/01/23		4.20%							8,704				8,852
07/09/13		08/06/23		4.81%							34,567				35,093
12/27/13		01/01/24		5.28%							4,297				4,380
04/22/14		05/01/24		4.90%							4,935				—
09/03/14		10/01/24		4.40%							6,100				—
12/23/14		01/01/25		4.04%							18,426				—
12/15/10		12/10/26		6.63%							9,015				9,496
05/16/12		12/31/26		4.30%							2,757				2,829
11/08/12		02/01/27		5.69%							13,567				13,864
05/30/12		05/10/27		6.50%							4,426				4,653
06/27/12		07/01/29		5.10%							1,823				1,905
12/18/13		01/06/39		4.74%							11,315				11,315
Contractual Mortgage Notes Payable:										$	458,592			$	421,878
Premiums and (Discounts), net:											707				724
Total Mortgage Notes Payable:										$	459,299			$	422,602
Variable-Rate Line of Credit:
08/07/13		08/07/17		LIBOR +3.00%						$	43,300			$	24,400
Total Mortgage Notes Payable and Line of Credit										$	502,599			$	447,002

 

(1)	The weighted average interest rate on all debt outstanding at December 31, 2014, was approximately 5.11%.

(2)	At December 31, 2014, one month LIBOR was approximately 0.17%.

Mortgage Notes Payable

As of December 31, 2014, we had 41 mortgage notes payable, collateralized by a total of 77 properties and the net book value of these collateralized properties was $642.5 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, 2014 was 5.3%.

During the year ended December 31, 2014, we assumed two long-term mortgages, collateralized by three properties, and issued four long-term mortgages, collateralized by five properties, which are summarized below (dollars in thousands):

 

Date of Issuance		Issuing Bank		Debt Issued				Interest Rate				Maturity Date
3/27/2014		Wells Fargo N.A.		$	6,330				5.58	%			2/1/2016
4/22/2014		Keybank N.A.			4,935				4.90	%			5/1/2024
5/8/2014		Wells Fargo N.A.			3,816				6.25	%			6/1/2016
6/9/2014		Prudential Mortgage Capital Company			22,600				4.23	%			7/1/2019
9/3/2014		Everbank			6,100				4.40	%			10/1/2024
12/23/2014		Prudential Mortgage Capital Company			18,450				4.04	%			1/1/2025
				$	62,231

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
2015		$	42,436	(1)
2016			99,042
2017			67,653
2018			20,260
2019			34,936
Thereafter			194,265
		$	458,592

 

(1)	We are planning to refinanance the 3 balloon principal payments that mature in the second half of 2015 with a combination of new mortgage debt or equity.

On November 12, 2014, we completed a deed-in-lieu transaction on our Roseville, Minnesota property, where we returned the property to the lender in exchange for cancellation of obligations under our debt agreement with the lender. At the time of the deed-in-lieu transaction, the carrying value of the property was approximately $9.8 million, the principal balance of the debt outstanding, net of reserves held by the lender, was approximately $14.1 million and the resulting gain on debt extinguishment was approximately $5.3 million. The lender accepted the deed in lieu of the outstanding mortgage, and released us from our obligation.

 

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, 2014 and 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,								As of December 31,
														2014								2013
Interest Rate Cap		Notional Amount				LIBOR Cap				Maturity Date				Cost				Fair Value				Cost				Fair Value
November 26, 2013		$	8,200				3.00	%			December 1, 2016			$	31			$	4			$	31			$	22

Fair Value

The fair value of all mortgage notes payable outstanding as of December 31, 2014, was $476.9 million, as compared to the carrying value stated above of $459.3 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 $60.0 million Line of Credit, expanded to $75.0 million in November 2014, with KeyBank National Association (serving as a revolving lender, a letter of credit issuer and an administrative agent) and added Citizens Bank of Pennsylvania as an additional lender. Comerica Bank was subsequently added as another lender in December 2013. In March 2014, we amended our Line of Credit to extend the maturity date by one year to August 2017. We also modified certain terms under the Line of Credit, including the calculation of the total asset value and unencumbered asset value. The applicable LIBOR margins were also reduced 25 basis points at each pricing level. As a result of these modifications, the availability under our Line of Credit increased by $1.3 million.

The Line of Credit initially matures in August 2017; 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 Line of Credit has a letter of credit sublimit of up to $20.0 million. In addition, we may expand the Line of Credit up to a total of $100.0 million upon satisfaction of certain conditions and payment of the associated up front and arrangement fees at the time of such increase. The interest rate per annum applicable to the Line of Credit is equal to the London Interbank Offered Rate, or 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 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 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 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 Line of Credit. The availability under the Line of Credit is also reduced by letters of credit used in the ordinary course of business. We may use the advances under the Line of Credit for both general corporate purposes and the acquisition of new investments.

As of December 31, 2014, there was $43.3 million outstanding under our Line of Credit at an interest rate of approximately 3.17% and $4.5 million outstanding under letters of credit at a weighted average interest rate of 3.0%. As of February 18, 2015, the maximum additional amount we could draw was $28.3 million. We were in compliance with all covenants under the Line of Credit as of December 31, 2014.