7. Mortgage Notes Payable, Line of Credit and Term Loan Facility

Our mortgage notes payable and line of credit as of March 31, 2016 and December 31, 2015 are summarized below (dollars in thousands):

 

		Encumbered				Carrying Value at								Stated Interest Rates		Scheduled Maturity
		properties at March 31, 2016				March 31, 2016				December 31, 2015				at March 31, 2016(4)		Dates at March 31, 2016
Mortgage and Other Secured Loans:
Fixed rate mortgage loans			62			$	403,987			$	427,334			(1)		(2)
Variable rate mortgage loans			13				51,332				33,044			(3)		(2)
Premiums and discounts (net)			—				332				392			N/A		N/A
Deferred financing costs, mortgage loans (net)			—				(4,987	)			(4,907	)		N/A		N/A
Total Mortgage Notes Payable			75			$	450,664			$	455,863			(5)
Variable rate Line of Credit			22	(6)			43,100				45,300			LIBOR + 2.50%		8/7/2018
Deferred financing costs, line of credit (net)			—				(635	)			(709	)		N/A		N/A
Total Line of Credit			22			$	42,465			$	44,591
Variable rate Term Loan Facility			—				25,000				25,000			LIBOR + 2.45%		10/5/2020
Deferred financing costs, term loan facility (net)			—				(117	)			(122	)		N/A		N/A
Total Term Loan Facility			N/A			$	24,883			$	24,878
Total Mortgage Notes Payable, Line of Credit and Term Loan Facility			97			$	518,012			$	525,332

 

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

(2)	We have 43 mortgage notes payable with maturity dates ranging from 5/5/2016 through 7/1/2045.

(3)	Interest rates on our variable rate mortgage notes payable vary from one month LIBOR + 2.15% to one month LIBOR + 2.35%. At March 31, 2016, one month LIBOR was approximately 0.43%.

(4)	The weighted average interest rate on all debt outstanding at March 31, 2016, was approximately 4.63%.

(5)	The weighted average interest rate on the mortgage notes outstanding at March 31, 2016, was approximately 4.89%.

(6)	The amount we may draw under the Line of Credit and Term Loan Facility is based on a percentage of the fair value of a combined pool of 22 unencumbered properties as of March 31, 2016.

N/A - Not Applicable

Mortgage Notes Payable

As of March 31, 2016, we had 43 mortgage notes payable, collateralized by a total of 75 properties with a net book value of $638.5 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. Gladstone Commercial Corporation has full recourse for $2.9 million of the mortgages notes payable outstanding, or 0.6%. 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 March 31, 2016 was 4.9%.

During the three months ended March 31, 2016, we issued one long-term mortgage, collateralized by four properties, which is summarized below (dollars in thousands):

 

Date of Issuance

Issuing Bank

Debt Issued

Interest Rate

Maturity Date

Principal Balance Repaid

Previous Weighted Average Interest Rate

3/1/2016

First Niagara Bank

$18,475

LIBOR + 2.35%(1)

3/1/2023

$

21,197

6.14%

 

(1)

We refinanced maturing debt on our Chalfont, Pennsylvania, Corning, New York and Franklin and Eatontown, New Jersey properties, which was originally set to mature during second quarter 2016. We entered into an interest rate cap agreement with First Niagara Bank, which caps LIBOR at 3% through March 1, 2019.

We made payments of $0.4 million and $0.2 million for deferred financing costs during the three months ended March 31, 2016 and 2015, respectively.

Scheduled principal payments of mortgage notes payable for the remainder of 2016, and each of the five succeeding fiscal years and thereafter are as follows (dollars in thousands):

 

Year		Scheduled Principal Payments
Nine Months Ending December 31, 2016		$	53,470
2017			69,652
2018			41,536
2019			36,392
2020			11,667
2021			23,864
Thereafter			218,738
		$	455,319

Interest Rate Cap

We have entered into interest rate cap agreements that cap the interest rate on certain of our notes payable when one-month LIBOR is in excess of 3.0%. We have adopted the fair value measurement provisions for our financial instruments recorded at fair value. The fair value guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. 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 March 31, 2016 and December 31, 2015, our interest rate cap agreements were valued using Level 2 inputs.

The fair value of the interest rate cap agreements is recorded in other assets on our accompanying 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 consolidated statements of operations. The following table summarizes the key terms of each interest rate cap agreement (dollars in thousands):

 

										As of March 31,								As of December 31,
										2016								2015
Interest Rate Cap		LIBOR Cap		Maturity Date		Cost				Notional Amount				Fair Value				Notional Amount				Fair Value
Nov-13		3.00%		Dec-16		$	31			$	8,200			$	—			$	8,200			$	—
Jul-15		3.00%		Jul-18			68				21,039				3				21,204				14
Dec-15		3.00%		Dec-20			52				3,618				12				3,640				26
Mar-16		3.00%		Mar-19			33				18,475				10				—				—
						$	184			$	51,332			$	25			$	33,044			$	40

The fair value of all mortgage notes payable outstanding as of March 31, 2016 was $454.5 million, as compared to the carrying value stated above, exclusive of premiums, discounts and deferred financing costs, of $455.3 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.”

 

Line of Credit and Term Loan Facility

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 one-year through August 2018, with a one year extension option through August 2019. The interest rate on the 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, including the Term Loan Facility discussed below, was increased from $100.0 million to $150.0 million. We also added three new lenders to the bank syndicate, which is now comprised of KeyBank, Comerica Bank, Fifth Third Bank, US Bank and Huntington Bank. We were subject to payment of $0.5 million for the modification of the agreement.

In connection with the Line of Credit expansion in October 2015 mentioned above, we added a $25.0 million, five year term loan facility, or the Term Loan Facility, which was fully drawn at closing and matures in October 2020. The Term Loan Facility is subject to the same leverage tiers as the Line of Credit; however the interest rate at each leverage tier is five basis points lower. We have the option to repay the Term Loan Facility in full, or in part, at any time without penalty or premium prior to the maturity date.

As of March 31, 2016, there was $68.1 million outstanding under our Line of Credit and Term Loan Facility at a weighted average interest rate of approximately 2.92% and $3.0 million outstanding under letters of credit at a weighted average interest rate of 2.5%. As of March 31, 2016, the maximum additional amount we could draw under the Line of Credit was $7.2 million. We were in compliance with all covenants under the Line of Credit and Term Loan Facility as of March 31, 2016.

The amount outstanding under the Line of Credit and Term Loan Facility approximates fair value as of March 31, 2016, as the debt is variable rate.