7. Mortgage Notes Payable and Line of Credit

Our mortgage notes payable and line of credit as of September 30, 2014 and December 31, 2013 are summarized below (dollars in thousands):

 

						Carrying Value at
		Encumbered properties at September 30, 2014				September 30, 2014				December 31, 2013				Stated Interest Rates at September 30, 2014 (4)		Scheduled Maturity Dates at September 30, 2014
Mortgage and Other Secured Loans:
Fixed rate mortgage loans			72			$	451,375			$	413,678			(1)		(2)
Variable rate mortgage loans			4				8,200				8,200			LIBOR + 2.15% (3)		12/1/2016
Premiums and discounts (net)			N/A				783				724			N/A		N/A
Total Mortgage Notes Payable			76			$	460,358			$	422,602
Variable rate Line of Credit			17				45,600				24,400			LIBOR + 2.75% (3)		8/1/2017
Total Mortgage Notes Payable and Line of Credit			93			$	505,958			$	447,002

 

(1)	Interest rates on our fixed rate mortgage notes payable vary from 4.04% to 6.80%.

(2)	We have 41 mortgage notes payable with maturity dates ranging from 9/1/2015 through 1/6/2039.

(3)	At September 30, 2014, one month LIBOR was approximately 0.15%.

(4)	The weighted average interest rate on all debt outstanding at September 30, 2014, was approximately 5.13%.

N/A - Not Applicable

 

Mortgage Notes Payable

As of September 30, 2014, we had 41 mortgage notes payable, which were collateralized by a total of 76 properties with a net book value of $614.5 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 September 30, 2014 was 5.35%.

During the nine months ended September 30, 2014, we assumed two long-term mortgages, collateralized by three properties, and issued three long-term mortgages, collateralized by three 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
				$	43,781

Scheduled principal payments of mortgage notes payable for the remainder of 2014, 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, 2014		$	18,898
2015			42,683
2016			98,720
2017			67,315
2018			19,909
2019			34,570
Thereafter			177,480
		$	459,575

Interest Rate Cap

In November 2013, we 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 this 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 condensed 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 condensed 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 September 30, 2014, our interest rate cap agreement was valued using Level 3 inputs of the hierarchy established by ASC 820, “Fair Value Measurements and Disclosures.” The following table summarizes the key terms of each interest rate cap agreement (dollars in thousands):

 

														As of September 30,								As of December 31,
		Notional												2014								2013
Interest Rate Cap		Amount				LIBOR Cap				Maturity Date				Cost				Fair Value				Cost				Fair Value
November 26, 2013		$	8,200				3.00	%			December 1, 2016			$	31			$	7			$	31			$	22

Fair Value

The fair value of all mortgage notes payable outstanding as of September 30, 2014, was $467.5 million, as compared to the carrying value stated above of $460.4 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 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 administrative agent) and Citizens Bank of Pennsylvania as an additional lender. On December 16, 2013, Comerica Bank was also added as an additional lender. On March 28, 2014, we amended our Line of Credit to extend the maturity date one additional 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 by 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 $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 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 Line of Credit is equal to the LIBOR plus an applicable margin of up to 3.0%, 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 September 30, 2014, there was $45.6 million outstanding under our Line of Credit at an interest rate of approximately 2.9% and $5.8 million outstanding under letters of credit at a weighted average interest rate of 2.75%. As of September 30, 2014, the maximum additional amount we could draw was $5.3 million. We were in compliance with all covenants under the Line of Credit as of September 30, 2014. The amount outstanding on the Line of Credit as of September 30, 2014 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.