COUSINS PROPERTIES INC (Form: 8-K, Received: 09/23/2019 07:38:20)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): September 23, 2019

Cousins Properties Incorporated

(Exact name of registrant as specified in its charter)

Georgia 001-11312 58-0869052

(State or other jurisdiction of incorporation) (Commission File Number) (IRS Employer Identification Number)

3344 Peachtree Road NE, Suite 1800, Atlanta, Georgia 30326-4802

(Address of principal executive offices)

Registrant’s telephone number, including area code: (404) 407-1000

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):



☐	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $1 par value per share	CUZ	New York Stock Exchange	("NYSE")

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the securities Act of 1933 (§230.405 of this chapter) or Rule 12b-12 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Item 8.01. Other Events.

On June 14, 2019, pursuant to the Agreement and Plan of Merger dated March 25, 2019 (the “Merger Agreement”), by and among Cousins Properties Incorporated (“Cousins” or the “Company”) and TIER REIT, Inc. (“TIER”), TIER merged with and into a subsidiary of the Company (the “Merger”) with this subsidiary continuing as the surviving corporation of the Merger.

This Current Report on Form 8-K updates the unaudited pro forma consolidated statements of operations included in Cousins’ Registration Statement on Form S-4 (File No. 333-230968), which combine the historical consolidated statements of operations of Cousins and TIER, giving effect to the Merger. The unaudited pro forma condensed consolidated statements of operations for the six months ended June 30, 2019 and for the year ended December 31, 2018 and the notes related thereto are filed as Exhibit 99.2 to this Current Report on Form 8-K and incorporated herein by reference.

Filed as Exhibit 99.1 and incorporated herein by reference are the audited consolidated financial statements of TIER as of December 31, 2018 and 2017, and for each of the three years in the period ended December 31, 2018, and the report of the independent registered public accounting firm related thereto, and the unaudited condensed consolidated financial statements of TIER and its subsidiaries as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018.

Item 9.01. Financial Statements and Exhibits.

(a) Exhibits

Exhibit Number Exhibit Description



23.1	Consent of Deloitte & Touche LLP
99.1	Audited consolidated financial statements of TIER and its subsidiaries, as of December 31, 2018 and 2017, and for each of the three years in the period ended December 31, 2018, and the report of the independent registered public accounting firm related thereto; and unaudited condensed consolidated financial statements of TIER and its subsidiaries as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018.
99.2	Unaudited pro forma condensed consolidated statements of operations of Cousins Properties Incorporated for the six months ended June 30, 2019 and for the year ended December 31, 2018 and the related notes.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: September 23, 2019

COUSINS PROPERTIES INCORPORATED



By:	/s/ Gregg D. Adzema

Gregg D. Adzema

Executive Vice President and Chief Financial Officer

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 333-127917, 033-56787, 333-42007, 333-67887, 333-92089, 333-68010, 333-106937, 333-98487, 333-46674, 333-120918, 333-134890, 333-143649, 333-151674, 333-159414, 333-211849 and 333-231512 on Form S-8 and Registration Statement Nos. 333-48841, 333-46676, and 333-215430 on Form S-3 of Cousins Properties Incorporated of our report dated February 11, 2019, relating to the consolidated financial statements of TIER REIT, Inc. and subsidiaries, appearing in this Current Report on Form 8-K of Cousins Properties Incorporated dated September 23, 2019.

/s/ Deloitte & Touche LLP

Dallas, Texas

September 23, 2019

Exhibit 99.1

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Audited Consolidated Financial Statements of TIER REIT, Inc.



Report of Independent Registered Public Accounting Firm	2
Consolidated Balance Sheets	3
Consolidated Statements of Operations and Comprehensive Income (Loss)	4
Consolidated Statements of Changes in Equity	5
Consolidated Statements of Cash Flows	6
Notes to Consolidated Financial Statements	7

Unaudited Condensed Consolidated Financial Statements of TIER REIT, Inc.



Condensed Consolidated Balance Sheets	30
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	31
Condensed Consolidated Statements of Changes in Equity	32
Condensed Consolidated Statements of Cash Flows	33
Notes to Condensed Consolidated Financial Statements	34

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of TIER REIT, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of TIER REIT, Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations and comprehensive income (loss), changes in equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes to the consolidated financial statements (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 11, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP

Dallas, Texas

February 11, 2019

We have served as the Company’s auditor since 2005.

TIER REIT, Inc.

Consolidated Balance Sheets

As of December 31, 2018 and 2017

(in thousands, except share and per share amounts)



	December 31, 2018			December 31, 2017
Assets
Real estate
Land	$	154,422		$	139,951
Land held for development	36,830			45,059
Buildings and improvements, net	1,132,428			1,061,418
Real estate under development	41,404			29,525
Total real estate	1,365,084			1,275,953
Cash and cash equivalents	30,741			13,800
Restricted cash	6,141			8,510
Accounts receivable, net	67,335			81,129
Prepaid expenses and other assets	11,376			28,112
Investments in unconsolidated entities	32,746			31,852
Deferred financing fees, net	2,756			1,387
Lease intangibles, net	101,372			87,047
Assets associated with real estate held for sale	—			53,348
Total assets	$	1,617,551		$	1,581,138

Liabilities and equity

Liabilities
Notes payable, net	$	714,755		$	794,538
Accounts payable and accrued liabilities	91,548			81,166
Acquired below-market leases, net	22,651			17,942
Other liabilities	11,116			7,567
Obligations associated with real estate held for sale	—			2,354
Total liabilities	840,070			903,567

Commitments and contingencies

Equity
Preferred stock, $.0001 par value per share; 17,500,000 shares authorized, none outstanding	—			—
Convertible stock, $.0001 par value per share; 1,000 shares authorized, none outstanding	—			—
Common stock, $.0001 par value per share; 382,499,000 shares authorized, 53,839,766 and 47,623,324 shares issued and outstanding at December 31, 2018 and 2017, respectively	5			5
Additional paid-in capital	2,749,106			2,609,540
Cumulative distributions and net loss attributable to common stockholders	(1,977,969		)	(1,936,960		)
Accumulated other comprehensive income	3,409			4,218
Stockholders’ equity	774,551			676,803
Noncontrolling interests	2,930			768
Total equity	777,481			677,571
Total liabilities and equity	$	1,617,551		$	1,581,138

See Notes to Consolidated Financial Statements.

TIER REIT, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

For the Years Ended December 31, 2018, 2017, and 2016

(in thousands, except share and per share amounts)



	2018			2017			2016
Rental revenue	$	218,517		$	216,461		$	242,818
Expenses
Property operating expenses	51,674			55,921			72,603
Real estate taxes	35,682			34,264			36,297
Property management fees	338			232			917
Interest expense	29,371			33,576			43,257
Asset impairment losses	41,564			5,250			8,977
General and administrative	21,785			21,446			23,649
Depreciation and amortization	101,036			94,754			111,830
Total expenses	281,450			245,443			297,530
Interest and other income	784			1,359			1,169
Loss on early extinguishment of debt	(8,988		)	(545		)	—
Gain on troubled debt restructuring	31,006			—			—
Gain on sale of assets	26,828			92,396			22,176
Hurricane-related loss	(3,000		)	—			—
Income (loss) before income taxes, equity in operations of investments, and gain on remeasurement of investment in unconsolidated entities	(16,303		)	64,228			(31,367		)
Provision for income taxes	(834		)	(468		)	(655		)
Equity in operations of investments	718			6,399			2,569
Gain on remeasurement of investment in unconsolidated entities	11,090			14,168			—
Net income (loss)	(5,329		)	84,327			(29,453		)
Noncontrolling interests	308			(41		)	36
Net income (loss) attributable to common stockholders	$	(5,021	)	$	84,286		$	(29,417	)

Weighted average common shares outstanding - basic	50,233,663			47,537,758			47,405,564
Weighted average common shares outstanding - diluted	50,233,663			47,882,642			47,405,564

Basic net income (loss) per common share	$	(0.10	)	$	1.76		$	(0.62	)
Diluted net income (loss) per common share	$	(0.10	)	$	1.75		$	(0.62	)

Comprehensive income (loss):
Net income (loss)	$	(5,329	)	$	84,327		$	(29,453	)
Other comprehensive income (loss): unrealized gain (loss) on interest rate derivatives	(1,634		)	5,262			2,824
Comprehensive income (loss)	(6,963		)	89,589			(26,629		)
Comprehensive (income) loss attributable to noncontrolling interests	308			(43		)	30
Comprehensive income (loss) attributable to common stockholders	$	(6,655	)	$	89,546		$	(26,599	)

See Notes to Consolidated Financial Statements.

TIER REIT, Inc.

Consolidated Statements of Changes in Equity

For the Years Ended December 31, 2018, 2017, and 2016

(in thousands)



						Cumulative Distributions and Net Loss Attributable to Common Stockholders
	Common Stock			Additional Paid-in Capital					Accumulated Other Comprehensive Income (Loss)
	Number of Shares	Par Value										Noncontrolling Interests			Total Equity
	Number of Shares	Par Value										Noncontrolling Interests			Total Equity
Balance at January 1, 2016	47,362	$	5	$	2,600,193	$	(1,922,721	)	$	(3,860	)	$	1,502		$	675,119
Net loss	—	—		—		(29,417		)	—			(36		)	(29,453		)
Unrealized gain on interest rate derivatives	—	—		—		—			2,818			6			2,824
Share based compensation, net	111	—		3,205		—			—			304			3,509
Contributions by noncontrolling interest	—	—		—		—			—			221			221
Distributions declared:
Common stock ($0.72 per share)	—	—		—		(34,377		)	—			—			(34,377		)
Noncontrolling interests	—	—		—		—			—			(27		)	(27		)
Cancellation of Series A Preferred Stock	—	—		2,700		—			—			—			2,700
Balance at December 31, 2016	47,473	$	5	$	2,606,098	$	(1,986,515	)	$	(1,042	)	$	1,970		$	620,516
Cumulative effect of a change in accounting principle	—	—		290		(290		)	—			—			—
Balance at January 1, 2017	47,473	$	5	$	2,606,388	$	(1,986,805	)	$	(1,042	)	$	1,970		$	620,516
Net income	—	—		—		84,286			—			41			84,327
Unrealized gain on interest rate derivatives	—	—		—		—			5,260			2			5,262
Share based compensation, net	150	—		3,152		—			—			(216		)	2,936
Contributions by noncontrolling interest	—	—		—		—			—			488			488
Distributions declared:
Common stock ($0.72 per share)	—	—		—		(34,441		)	—			—			(34,441		)
Noncontrolling interests	—	—		—		—			—			(17		)	(17		)
Deconsolidation of an investment	—	—		—		—			—			(1,500		)	(1,500		)
Balance at December 31, 2017	47,623	$	5	$	2,609,540	$	(1,936,960	)	$	4,218		$	768		$	677,571
Cumulative effect of changes in accounting principles	—	—		—		635			825			—			1,460
Balance at January 1, 2018	47,623	$	5	$	2,609,540	$	(1,936,325	)	$	5,043		$	768		$	679,031
Net loss	—	—		—		(5,021		)	—			(308		)	(5,329		)
Unrealized loss on interest rate derivatives	—	—		—		—			(1,634		)	—			(1,634		)
Issuance of common stock, net	5,948	—		137,893		—			—			—			137,893
Share based compensation, net	269	—		1,673		—			—			(129		)	1,544
Contributions by noncontrolling interest	—	—		—		—			—			2,607			2,607
Distributions declared:
Common stock ($0.72 per share)	—	—		—		(36,623		)	—			—			(36,623		)
Noncontrolling interests	—	—		—		—			—			(8		)	(8		)
Balance at December 31, 2018	53,840	$	5	$	2,749,106	$	(1,977,969	)	$	3,409		$	2,930		$	777,481

See Notes to Consolidated Financial Statements.

TIER REIT, Inc.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2018, 2017, and 2016

(in thousands)



	2018			2017			2016
Cash flows from operating activities
Net income (loss)	$	(5,329	)	$	84,327		$	(29,453	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Asset impairment losses	41,564			5,250			8,977
Gain on sale of assets	(26,828		)	(92,396		)	(22,176		)
Hurricane-related loss	3,000			—			—
Gain on remeasurement of investment in unconsolidated entities	(11,090		)	(14,168		)	—
Gain on troubled debt restructuring	(31,006		)	—			—
Loss on early extinguishment of debt	8,988			545			—
Hedge ineffectiveness income from derivatives	—			(253		)	(572		)
Amortization of restricted shares and units	4,569			4,079			4,159
Depreciation and amortization	101,036			94,754			111,830
Amortization of lease intangibles	(301		)	(275		)	(2,015		)
Amortization of above- and below-market rent	(6,114		)	(3,895		)	(4,255		)
Amortization of deferred financing and mark-to-market costs	1,481			3,444			3,106
Equity in operations of investments	(718		)	(6,399		)	(2,569		)
Ownership portion of fees from unconsolidated entities	136			409			562
Distributions from investments	10			9,108			739
Change in accounts receivable	(1,074		)	(9,055		)	(8,892		)
Change in prepaid expenses and other assets	843			(697		)	852
Change in lease commissions	(13,592		)	(15,907		)	(10,614		)
Change in other lease intangibles	(73		)	(432		)	(852		)
Change in other intangible assets	—			—			(100		)
Change in accounts payable and accrued liabilities	4,617			(842		)	3,627
Change in other liabilities	1,513			3,255			(1,051		)
Cash provided by operating activities	71,632			60,852			51,303

Cash flows from investing activities
Escrow deposits	(3,000		)	(13,350		)	(19,000		)
Return of investments	1,711			25,784			17,331
Purchases of real estate	(100,480		)	(93,011		)	—
Investments in unconsolidated entities	(1,499		)	(19,667		)	(3,956		)
Capital expenditures for real estate	(34,967		)	(33,688		)	(48,603		)
Capital expenditures for real estate under development	(77,956		)	(30,550		)	(11,088		)
Proceeds from sale of assets	188,772			328,461			295,453
Insurance proceeds for capital expenditures	2,868			—			—
Cash provided by (used in) investing activities	(24,551		)	163,979			230,137

Cash flows from financing activities
Financing costs	(3,329		)	(1,972		)	(885		)
Proceeds from notes payable	778,000			196,000			173,000
Payments on notes payable	(904,241		)	(374,792		)	(419,294		)
Payments for early extinguishment of debt	(3,633		)	(436		)	—
Issuance of common stock	140,348			—			—
Costs associated with issuance of common stock	(2,455		)	—			—
Transfer of common stock	(3,025		)	(1,143		)	(650		)
Distributions paid to common stockholders	(36,623		)	(43,034		)	(34,359		)
Distributions paid to Series A Convertible Preferred stockholders	—			—			(2		)
Distributions paid to noncontrolling interests	(8		)	(25		)	(38		)
Contributions from noncontrolling interests	2,457			488			221
Cash used in financing activities	(32,509		)	(224,914		)	(282,007		)

Net change in cash, cash equivalents, and restricted cash	14,572			(83		)	(567		)
Cash, cash equivalents, and restricted cash at beginning of period	22,310			22,393			22,960
Cash, cash equivalents, and restricted cash at end of period	$	36,882		$	22,310		$	22,393

See Notes to Consolidated Financial Statements.

TIER REIT, Inc.

Notes to Consolidated Financial Statements

1. Business

Organization

TIER REIT, Inc. is a publicly traded (NYSE: TIER), self-managed, Dallas-based real estate investment trust focused on owning quality, well-managed commercial office properties in dynamic markets throughout the U.S. As used herein, “TIER REIT,” the “Company,” “we,” “us,” or “our” refers to TIER REIT, Inc. and its subsidiaries unless the context otherwise requires.

TIER REIT’s vision is to be the premier owner and operator of best-in-class office properties in TIER1 submarkets, which are primarily higher density and amenity-rich locations within select, high-growth metropolitan areas that offer a walkable experience to various amenities. Our mission is to provide unparalleled, TIER ONE Property Services to our tenants and outsized total return through stock price appreciation and dividend growth to our stockholders. TIER REIT was incorporated in June 2002 as a Maryland corporation and has elected to be treated, and currently qualifies, as a real estate investment trust, or REIT, for federal income tax purposes.

As of December 31, 2018, we owned interests in 19 operating office properties, and two development properties located in five markets throughout the United States.

Substantially all of our business is conducted through Tier Operating Partnership LP (“Tier OP”), a Texas limited partnership. Our wholly-owned subsidiary, Tier GP, Inc., a Delaware corporation, is the sole general partner of Tier OP. Our direct and indirect wholly-owned subsidiaries, Tier Business Trust, a Maryland business trust, and Tier Partners, LLC, a Delaware limited liability company, are limited partners that together with Tier GP, Inc. own all of Tier OP.

2. Summary of Significant Accounting Policies

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates include such items as the purchase price allocation for real estate acquisitions; impairment of assets, such as timing of asset dispositions and duration of lease terms; depreciation and amortization; and allowance for doubtful accounts. Actual results could differ materially from those estimates.

Reclassifications

In August 2018, the Securities and Exchange Commission (“SEC”) issued Final Rule Release No.33-10532, Disclosure Update and Simplification, which in part amends certain disclosure requirements of Regulation S-X that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other SEC disclosure requirements, GAAP, or changes in the information environment. The amendments are intended to facilitate the disclosure of information to investors and simplify compliance without significantly altering the total mix of information provided to investors. Certain amounts previously reflected in prior year consolidated statements of operations and comprehensive income (loss) have been reclassified to conform to our 2018 presentation based on our application of these rules. These reclassifications had no effect on previously reported net income (loss).

Principles of Consolidation and Basis of Presentation

Our consolidated financial statements include our accounts, the accounts of variable interest entities (“VIEs”), if any, in which we are the primary beneficiary, and the accounts of other subsidiaries over which we have control. VIEs, as defined by GAAP, are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. Interests in entities acquired are evaluated based on applicable GAAP guidance which requires the consolidation of VIEs in which we are deemed to be the primary beneficiary. The determination of the primary beneficiary requires management to make significant estimates and judgments about our rights, obligations, and economic interests in such entities as well as the same of the other owners. For entities in which we have less than a controlling financial interest or entities with respect to which we are not deemed to be the primary beneficiary, the entities are accounted for using the equity method of accounting. If the interest is in an entity that is determined not to be a VIE, then the entity is evaluated

for consolidation based on legal form, economic substance, and the extent to which we have control and/or substantive participating rights under the respective ownership agreement.

All inter-company transactions, balances, and profits have been eliminated in consolidation.

Real Estate

Upon the acquisition of real estate properties accounted for as an acquisition of an asset, we recognize the assets acquired, the liabilities assumed, and any noncontrolling interest as of the acquisition date, measured at their relative fair values once we have determined the fair value of each of these assets and liabilities. The acquisition date is the date on which we obtain control of the real estate property, and associated transaction costs are capitalized. The assets acquired and liabilities assumed consist of land, inclusive of associated rights, buildings, assumed debt, identified intangible assets and liabilities, and asset retirement obligations. Identified intangible assets generally consist of above-market leases, in-place leases, in-place tenant improvements, in-place leasing commissions, and tenant relationships. Identified intangible liabilities generally consist of below-market leases.

The fair value of the tangible assets acquired, consisting of land and buildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings. Land values are derived from appraisals or other relevant market information available to us, and building values are calculated as replacement cost less depreciation or management’s estimates of the fair value of these assets using discounted cash flow analyses or similar methods believed to be used by market participants. The value of buildings is depreciated over the estimated useful life of generally 25 years using the straight-line method.

We determine the fair value of assumed debt by calculating the net present value of the scheduled mortgage payments using interest rates for debt with similar terms and remaining maturities that management believes we could obtain at the date of the debt assumption. Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan using the effective interest method.

We determine the value of above-market and below-market leases for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) management’s estimate of current market lease rates for the corresponding in-place leases, measured over a period equal to (a) the remaining non-cancelable lease term for above-market leases, or (b) the remaining non-cancelable lease term plus any below-market fixed rate renewal options that, based on a qualitative assessment of several factors, including the financial condition of the lessee, the business conditions in the industry in which the lessee operates, the economic conditions in the area in which the property is located, and the ability of the lessee to sublease the property during the renewal term, are reasonably assured to be exercised by the lessee for below-market leases. We record the fair value of above-market and below-market leases as intangible assets or intangible liabilities, respectively, and amortize them as an adjustment to rental revenue over the determined lease term.

The total value of identified real estate intangible assets acquired is further allocated to in-place leases, in-place tenant improvements, in-place leasing commissions, and tenant relationships based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. The aggregate value for tenant improvements and leasing commissions is based on estimates of these costs incurred at inception of the acquired leases, amortized through the date of acquisition. The aggregate value of in-place leases acquired and tenant relationships is determined by applying a fair value model. The estimates of fair value of in-place leases include an estimate of carrying costs during the expected lease-up periods for the respective spaces considering current market conditions. In estimating the carrying costs that would have otherwise been incurred had the leases not been in place, we include such items as real estate taxes, insurance, and other operating expenses, as well as lost rental revenue during the expected lease-up period based on current market conditions. The estimates of the fair value of tenant relationships also include costs to execute similar leases including leasing commissions, legal fees, and tenant improvements, as well as an estimate of the likelihood of renewal as determined by management on a tenant-by-tenant basis.

We amortize the value of in-place leases, in-place tenant improvements, and in-place leasing commissions to expense over the initial term of the respective leases. The tenant relationship values are amortized to expense over the initial term and any anticipated renewal periods, but in no event does the amortization period for intangible assets or liabilities exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the acquired intangibles related to that tenant would be charged to expense.

In allocating the purchase price of each of our properties, management makes assumptions and uses various estimates, including, but not limited to, the estimated useful lives of the assets, the cost of replacing certain assets, discount rates used to determine present values, market rental rates per square foot, and the period required to lease the property up to its occupancy at acquisition as if it were vacant. Many of these estimates are obtained from independent third party appraisals. However, management is responsible for the source and use of these estimates. A change in these estimates and assumptions could result in the various categories of our real estate assets and/or related intangibles being overstated or understated which could result in an overstatement or understatement of depreciation and/or amortization expense and/or rental revenue. These variances could be material to our financial statements.

The estimated remaining useful lives for our acquired lease intangibles range from an ending date of January 2019 to an ending date of November 2027. Anticipated amortization associated with our acquired lease intangibles for each of the years ending December 31, 2019, through December 31, 2023, is as follows (in thousands):



2019	$	6,982
2020	$	6,141
2021	$	4,899
2022	$	4,197
2023	$	3,634

The following is a summary of our building and improvements and related lease intangibles as of December 31, 2018 and 2017, (in thousands):



				Lease Intangibles
				Assets					Liabilities
	Buildings and Improvements			Other Lease Intangibles			Acquired Above-Market Leases		Acquired Below-Market Leases
as of December 31, 2018	Buildings and Improvements			Other Lease Intangibles			Acquired Above-Market Leases		Acquired Below-Market Leases
Cost	$	1,574,653		$	170,824		$	—	$	(60,509	)
Less: accumulated depreciation and amortization	(442,225		)	(69,452		)	—		37,858
Net	$	1,132,428		$	101,372		$	—	$	(22,651	)



				Lease Intangibles
				Assets						Liabilities
	Buildings and Improvements			Other Lease Intangibles			Acquired Above-Market Leases			Acquired Below-Market Leases
as of December 31, 2017	Buildings and Improvements			Other Lease Intangibles			Acquired Above-Market Leases			Acquired Below-Market Leases
Cost	$	1,514,544		$	146,926		$	4,857		$	(50,399	)
Less: accumulated depreciation and amortization	(453,126		)	(60,298		)	(4,438		)	32,457
Net	$	1,061,418		$	86,628		$	419		$	(17,942	)

Real Estate Development

We capitalize project costs related to the development and construction of real estate (including interest, property taxes, insurance, and other direct costs associated with the development) as a cost of the development. Indirect costs not clearly related to development and construction are expensed as incurred. Capitalization begins when we determine that the development is probable and significant development activities are underway. We cease capitalization when the development is completed and ready for its intended use or if the intended use changes such that capitalization is no longer appropriate.

Sales of Real Estate

Upon the disposition of a property, we recognize a gain or loss at a point in time when we determine control of the underlying asset has been transferred to the buyer. Our performance obligation is generally satisfied at closing of the transaction. Any continuing involvement is analyzed as a separate performance obligation in the contract, and a portion of the sales price is allocated to each performance obligation. When the performance obligation related to the continuing involvement is satisfied, the sales price allocated to it is recognized. There is significant judgment applied to estimate the amount of any variable consideration identified within the sales price and assess its probability of occurrence based on current market information, historical transactions, and forecasted information that is reasonably available.

Impairment of Real Estate Related Assets

For our consolidated real estate assets, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable. When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted cash flows expected to be generated over the life of the asset, including its eventual disposition, to the carrying amount of the asset. In the event that the carrying amount exceeds the estimated future undiscounted cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to its estimated fair value. Our process to estimate the fair value of an asset involves using bona fide purchase offers or the expected sales price of an executed sales agreement, which would be considered Level 1 or Level 2 assumptions within the fair value hierarchy. To the extent that this type of third-party information is unavailable, we estimate projected cash flows and a risk-adjusted rate of return that we believe would be used by a third party market participant in estimating the fair value of an asset. This is considered a Level 3 assumption within the fair value hierarchy. These projected cash flows are prepared internally by the Company’s asset management professionals and are updated quarterly to reflect in-place and projected leasing activity, market revenue and expense growth rates, market capitalization rates, discount rates, and changes in economic and other relevant conditions. The Company’s Chief Financial Officer, Chief Accounting Officer, and Managing Director - Asset Management review these projected cash flows to assure that the valuation is prepared using reasonable inputs and assumptions, which are consistent with market data or with assumptions that would be used by a third party market participant and assume the highest and best use of the real estate investment. For the years ended December 31, 2018, 2017 and 2016, we recorded non-cash impairment charges of approximately $41.6 million, $5.3 million and $9.0 million, respectively. The impairment losses recorded were related to assets assessed for impairment due to the disposition of a property or changes in management’s estimates of the intended hold periods for certain of our properties.

For our unconsolidated real estate assets, at each reporting date we compare the estimated fair value of our investment to the carrying amount. An impairment charge is recorded to the extent the fair value of our investment is less than the carrying amount and the decline in value is determined to be an other-than-temporary decline. We had no impairment charges related to our investments in unconsolidated entities for the years ended December 31, 2018, 2017, or 2016.

In evaluating our investments for impairment, management makes several estimates and assumptions, including, but not limited to, the projected date of disposition and sales price for each property, the estimated future cash flows of each property during our estimated ownership period, and for unconsolidated investments, the estimated future distributions from the investment. A change in these estimates and assumptions could result in understating or overstating the carrying amount of our investments which could be material to our financial statements.

We undergo continuous evaluations of property level performance, credit market conditions, and financing options. If our assumptions regarding the cash flows expected to result from the use and eventual disposition of our properties decrease or our expected hold periods decrease, we may incur future impairment charges on our real estate related assets. In addition, we may incur impairment charges on assets classified as held for sale in the future if the carrying amount of the asset upon classification as held for sale exceeds the estimated fair value less costs to sell.

Hurricane Harvey

In August 2017, One & Two Eldridge Place and Three Eldridge Place (collectively known as the “Eldridge Properties”), located in Houston, Texas, experienced flood-related loss, damage, and destruction as a result of Hurricane Harvey and its aftermath. By early January 2018, all of the properties were fully operational. We carry comprehensive, all-risk property, casualty, flood, and business interruption insurance that we anticipate will cover our losses at the properties, subject to a deductible. For the year ended December 31, 2017, we recognized approximately $15.0 million for the write-off of the net book value of damaged assets, and incurred approximately $8.6 million of restoration expenses. For the year ended December 31, 2018, we incurred approximately $3.5 million of restoration expenses.

As of December 31, 2017, we recorded an insurance recovery in “accounts receivable, net” on our consolidated balance sheet for the estimated net book value of damaged assets and the restoration expenses incurred because we determined the insurance proceeds were probable of receipt. Through December 31, 2018, we have received approximately $14.7 million of this insurance recovery. At December 31, 2018, we wrote off a portion of this receivable and recognized an approximately $3.0 million charge in “hurricane-related loss” on our consolidated statement of operations for the year ended December 31, 2018.

To the extent that insurance proceeds ultimately exceed the net book value of damaged assets plus the restoration expenses incurred, the excess (net of the deductible) will be reflected as income in the period insurance proceeds are received or when receipt is deemed probable to occur.

We provided rent abatements and concessions to tenants through the second quarter of 2018 as a result of Hurricane Harvey. For the years ended December 31, 2018 and 2017, we provided rent abatements of approximately $4.7 million and $7.0 million, respectively. These abatements were a reduction to “rental revenue” on our consolidated statements of operations and comprehensive income (loss). The rent abatements and concessions provided were offset by business interruption and other insurance proceeds recognized (net of a deductible and estimated saved expenses) of approximately $7.9 million and $6.2 million, for the years ended December 31, 2018 and 2017, respectively. In the year ended December 31, 2018, these proceeds consisted of approximately $4.8 million of net business interruption insurance proceeds and approximately $3.1 million of other insurance proceeds. In the year ended December 31, 2017, all proceeds consisted of net business interruption insurance proceeds.

The Eldridge Properties were sold in January 2019, for a contract sales price of approximately $78.4 million.

Cash and Cash Equivalents

We consider investments in highly-liquid money market funds or investments with original maturities of three months or less to be cash equivalents.

Restricted Cash

Restricted cash includes restricted money market accounts, as required by our lenders or by leases, for anticipated tenant improvements, property taxes and insurance, certain tenant security deposits, and additional loan security reserves.

The following is a summary of our cash, cash equivalents, and restricted cash total as presented in our statements of cash flows for the years ended December 31, 2018, 2017 and 2016 (in thousands):



	December 31, 2018		December 31, 2017		December 31, 2016
Cash and cash equivalents	$	30,741	$	13,800	$	14,884
Restricted cash	6,141		8,510		7,509
Total cash, cash equivalents, and restricted cash	$	36,882	$	22,310	$	22,393

Accounts Receivable, net

The following is a summary of our accounts receivable, net, as of December 31, 2018 and 2017 (in thousands):



	December 31, 2018			December 31, 2017
Straight-line rental revenue receivable	$	51,912		$	57,372
Insurance receivable	9,680			18,826
Tenant receivables	5,572			4,221
Non-tenant receivables	821			893
Allowance for doubtful accounts	(650		)	(183		)
Total	$	67,335		$	81,129

Our allowance for doubtful accounts is an estimate based on management’s evaluation of accounts where it has determined that a tenant may not meet its financial obligations. In these situations, management uses its judgment, based on the facts and circumstances, and records a reserve for that tenant against amounts due to reduce the receivable to an amount it believes is collectible. These reserves are reevaluated and adjusted as additional information becomes available.

Prepaid Expenses and Other Assets

Prepaid expenses and other assets include escrow deposits for the purchase of properties that we have contracted to acquire, prepaid insurance, prepaid real estate taxes, and utility and other deposits of the properties we consolidate, as well as our deferred tax assets, derivative financial assets, and prepaid directors’ and officers’ insurance.

Investments in Unconsolidated Entities

Investments in unconsolidated entities consist of our noncontrolling interests in properties. We account for these investments using the equity method of accounting in accordance with GAAP. We use the equity method of accounting when we have significant influence, but not control, of the decision-making involved in the operating and financial decisions of these investments and thereby have some responsibility to create a return on our investment. The equity method of accounting requires these investments to be initially recorded at cost and subsequently increased (decreased) for our share of net income (loss), including eliminations for our share of inter-company transactions, and increased (decreased) for contributions (distributions). To the extent that we contribute assets to an unconsolidated entity, our investment in the unconsolidated entity is recorded at our cost basis in the assets that were contributed to the entity. To the extent that our cost basis is different than the basis reflected at the entity level, the basis difference is generally amortized over the life of the related asset and included in our share of equity in operations of investments.

For unconsolidated investments that have properties under development, we capitalize interest expense to our investment basis using our weighted average interest rate of consolidated debt. Capitalization begins when we are engaged in the activities necessary to get the property ready for its intended use. We cease capitalization when the development is completed and ready for its intended use or if the intended use changes such that capitalization is no longer appropriate. For the years ended December 31, 2018 and 2017, we capitalized interest expense of approximately $1.1 million and $1.3 million, respectively, for unconsolidated entities with properties under development, which are included in our investments in unconsolidated entities on our consolidated balance sheets.

Real Estate Held for Sale

We classify properties as held for sale when certain criteria are met, in accordance with GAAP. At that time, we present the assets and obligations associated with the real estate held for sale separately in our consolidated balance sheet, and we cease recording depreciation and amortization expense related to that property. Real estate held for sale is reported at the lower of its carrying amount or its estimated fair value less estimated costs to sell. In the event that a property classified as held for sale no longer meets the criteria for held for sale classification, the property is reclassified as held for use at the lower of the fair value or the depreciated basis as if the property had continued to be used. We have no properties classified as real estate held for sale as of December 31, 2018. We had one property classified as real estate held for sale as of December 31, 2017, which was sold during 2018.

Derivative Financial Instruments

We record all derivatives on our consolidated balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. For derivatives designated as fair value hedges, the changes in the fair value of both the derivative instrument and the hedged items are recorded in earnings. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For derivatives designated as cash flow hedges, the changes in the fair value of the derivative are reported in accumulated other comprehensive income (loss) and are subsequently reclassified into earnings when the hedged item affects earnings. Changes in the fair value of derivative instruments not designated as hedges are recognized in earnings in the affected period. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain of our risk even though hedge accounting does not apply or we elect not to apply hedge accounting.

As of December 31, 2018 and 2017, we do not have any derivatives designated as fair value hedges or hedges of net investments in foreign operations, nor are derivatives being used for trading or speculative purposes.

Series A Convertible Preferred Stock

As of December 31, 2015, we had 10,000 shares of Series A participating, voting, convertible preferred stock (the “Series A Convertible Preferred Stock”) outstanding. The shares of Series A Convertible Preferred Stock were initially recorded at fair value and classified as temporary equity, outside the stockholders’ equity section, on our consolidated balance sheets. On March

2, 2016, based on the Conversion Company Value, as defined in the Articles Supplementary, no shares of common stock were issued, and the shares of Series A Convertible Preferred Stock were canceled.

Revenue Recognition

For contracts with customers (as defined by GAAP), we recognize revenue when we transfer promised goods or services to a customer in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Our revenue from contracts with customers primarily consists of parking income and development fee income.

Parking income - Parking income is primarily generated (1) through contractual arrangements with management companies that operate our parking garages and remit the monthly revenue collected to us or (2) directly through tenant leases. Revenue is recognized at a point in time upon the performance of services. Accounts receivable are recorded for services provided in advance of receiving payment. Management applies judgment in determining whether we are the principal or agent in those arrangements with management companies. We report revenue and expenses from these arrangements on a gross basis since we control the fulfillment of the promise to provide the service.

Development fee income - We serve as a development manager for development projects owned by unconsolidated entities in which we have an ownership interest. Development fees are paid monthly and structured based on costs that approximate the percentage of construction completed. Our performance obligation is therefore satisfied over time, and we recognize development fee income based on progress of the developments.

Income Taxes

We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), and have qualified as a REIT since the year ended December 31, 2004. Except where otherwise noted, TIER REIT, Inc. is generally not subject to federal income taxes to the extent we distribute our REIT taxable income to our stockholders currently each year and we meet certain other organizational and operational requirements. In addition to TIER REIT, Inc., our business is conducted through our operating partnership, Tier OP, and various subsidiaries, including one or more taxable REIT subsidiaries. We are subject to state and local income taxes on operations located in states, cities, and other jurisdictions that impose an income tax. In addition, our taxable REIT subsidiaries are subject to federal, state, and local income taxes at regular corporate tax rates. During the years ended December 31, 2018, 2017, and 2016 the total state and federal income tax provision was approximately $0.8 million, $0.5 million, and $0.7 million respectively. We have certain deferred tax assets and liabilities consisting primarily of net operating losses and the timing of recognition of depreciation and amortization for tax purposes as opposed to GAAP purposes.

During the years ended December 31, 2018 and 2017, we believe we had no liability for unrecognized tax benefits. Our policy is to include any interest and penalties related to income taxes within the “provision for income taxes” line item on our consolidated statements of operations and comprehensive income (loss). We generally remain subject to examination by tax authorities for the past three tax years.

At December 31, 2018, TIER REIT, Inc. had net operating loss carryforwards of approximately $638.9 million for income tax purposes that expire in years 2028 to 2036.

The tax basis of our net assets and liabilities exceeds the book value by approximately $181.7 million at December 31, 2018, and approximately $148.3 million at December 31, 2017.

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law and included wide-scale changes to individual, pass-through and corporation tax laws, including those that impact the real estate industry, the ownership of real estate and real estate investments, and REITs. We have reviewed the provisions of the law that pertain to the Company and have determined them to have no material income tax effect for financial statement purposes for the year ended December 31, 2018.

Stock Based Compensation

We have a stock-based incentive award plan for our employees, independent directors, and consultants. Compensation cost for restricted stock and restricted stock units is measured at the grant date based on the estimated fair value of the award and

is recognized as expense over the service period based on the tiered lapse schedule and any forfeitures. Stock options are granted at the fair market value on the date of grant with fair value estimated using the Black-Scholes-Merton option valuation model that incorporates assumptions surrounding volatility, distribution yield, the risk-free interest rate, expected life, and the exercise price as compared to the underlying stock price on the grant date. Any tax benefits associated with these share-based payments are classified as financing activities in the consolidated statements of cash flows.

401(k) Plan

We have a 401(k) defined contribution plan (“401(k) Plan”) for the benefit of our eligible employees. Each employee may contribute up to 100% of their annual compensation, subject to specific limitations under the Code. Our 401(k) Plan allows us to make discretionary contributions during each plan year. For each of the years ended December 31, 2018, 2017 and 2016, we expensed approximately $0.3 million in employer contributions.

Concentration of Credit Risk

We have cash and cash equivalents and restricted cash deposited in certain financial institutions in excess of federally insured levels. We have diversified our accounts with several banking institutions in an attempt to minimize exposure to any one of these institutions. We regularly monitor the financial stability of these financial institutions and believe that we are not exposed to significant credit risk in cash and cash equivalents or restricted cash.

We have a concentration of properties located in each of Austin, Dallas, and Houston, Texas, which subject us to the business risk associated with our geographic concentration in these markets. The percentage of our total rental revenue from these markets for the years ended December 31, 2018, 2017 and 2016, are 79.0%, 69.8%, and 55.5%, respectively.

Noncontrolling Interests

Noncontrolling interests consist of our third-party owners’ proportionate share of equity in certain consolidated real estate properties and restricted stock units issued to our independent directors.

Net Income (Loss) per Common Share

Net income (loss) per common share is calculated using the two-class method, which requires the allocation of undistributed net income between common and participating stockholders. All outstanding restricted stock awards containing rights to non-forfeitable distributions are considered participating securities for this calculation. In periods of net loss, no loss is allocated to participating securities because our participating securities do not have a contractual obligation to share in our losses. Gain on sale of assets and gain on remeasurement of investment in unconsolidated entities are included in the calculation of net income (loss) per common share in accordance with SEC guidelines.

Reportable Segments

Our current business consists of owning, acquiring, developing, operating, investing in, and selling real estate assets. All of our consolidated revenues are from our consolidated real estate properties. Our chief operating decision maker evaluates operating performance on an individual property level and views each of our real estate assets as an individual operating segment. However, all of our properties are aggregated into one reportable segment as they have similar economic characteristics.

Subsequent Events

We have evaluated subsequent events for recognition or disclosure in our consolidated financial statements.

3. New Accounting Pronouncements

New Accounting Pronouncements to be Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued updated guidance that sets out revised principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The guidance requires lessees to recognize assets and liabilities for operating leases with lease terms greater than twelve months on the balance sheet. The guidance modifies lessors’ classification criteria for leases and the accounting for sales-type and direct financing leases. The guidance also makes changes to lessor accounting and reporting, specifically the classification of lease components and non-

lease components, such as services provided to tenants. New disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases are also required. In July 2018, the FASB issued updated guidance that provides lessors a practical expedient to not separate non-lease components from associated lease components when certain criteria are met. The combined component is accounted for under the revenue standard if the non-lease component is the predominant component of the combined component; otherwise, the combined component is accounted for as an operating lease in accordance with the new leasing standard. The guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted and was initially required to be adopted using the modified retrospective approach. However, the updated guidance also provides a transition option that allows entities to apply the standard at the adoption date and recognize a cumulative-effect adjustment to opening retained earnings in the period of adoption. We expect to adopt this guidance effective January 1, 2019, and elect to apply the transition option and the practical expedients provided by this standard. We have completed our analysis of the impact of adoption, the most significant being the recognition of right-of-use assets and lease liabilities for material operating leases in which we are the lessee. We expect to recognize right-of-use assets and lease liabilities on our consolidated balance sheet upon adoption related to our ground lease and surface parking lot leases in an amount not to exceed $2.1 million. Our accounting for leases in which we are the lessor will remain substantially the same. Additionally, we believe that the amount of certain leasing costs required to be expensed upon adoption is immaterial. The adoption will, however, require more extensive disclosures related to our leases.

In June 2016, the FASB issued amended guidance that requires measurement and recognition of expected credit losses for financial assets, including trade and other receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This is different from the current guidance as this will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets. Generally, the pronouncement requires a modified retrospective method of adoption. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact this guidance will have on our financial statements when adopted.

In June 2018, the FASB issued updated guidance that is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share-based compensation. This guidance is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. The adoption of this guidance will not have a material impact on our financial statements.

In August 2018, the FASB issued amended guidance that removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty, and adds new disclosure requirements, such as disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact this guidance will have on our financial statements when adopted.

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued guidance to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Lease contracts are excluded from this revenue recognition criteria; however, the sale of real estate is required to follow the new model. Expanded quantitative and qualitative disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers are required under the guidance. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years, or full retrospective, and one requiring prospective application of the new standard with disclosure of results under old standards, or modified retrospective. We adopted this guidance on January 1, 2018, using the modified retrospective approach applied to those contracts that were not completed as of January 1, 2018. The most material potential impact from adoption relates to how revenue is recognized for sales of real estate with continuing involvement. Prior to the adoption, profit for such sales transactions was recognized and then reduced by the maximum exposure to loss related to the nature of the continuing involvement at the time of sale. Under the new guidance, any continuing involvement must be analyzed as a separate performance obligation in the contract and a portion of the sales price allocated to each performance obligation. When the performance obligation related to the continuing involvement is satisfied, the sales price allocated to it is recognized. Upon adoption, we recorded a cumulative-effect adjustment to decrease opening cumulative distributions and net loss attributable to common stockholders by approximately $1.5 million. The adjustment represents a gain on sale that was deferred under the previous guidance. We determined since control of the underlying asset was transferred to the buyer at closing of the transaction, the gain was recognizable at the time of sale. Our internal controls with respect to accounting for real estate sales have been

updated accordingly. The adoption of this guidance resulted in no other changes with respect to the timing of revenue recognition or internal controls related to our other revenue from contracts with customers, which include primarily parking income and development fee income. The additional disclosures required under the guidance related to our revenue from contracts with customers are provided in Footnote 12.

In August 2016, the FASB issued amended guidance on the classification of certain cash receipts and payments in the statement of cash flows. Of the eight types of cash flows discussed in the new standard, the classification of debt prepayment and debt extinguishment costs as financing outflows impact our financial statements as these items were previously reflected as operating outflows. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017. We adopted this guidance on January 1, 2018, and the consolidated statement of cash flows for the year ended December 31, 2017, reflects the reclassification of approximately $0.4 million of payments for debt extinguishment costs from cash provided by operating activities to cash used in financing activities.

In February 2017, the FASB issued updated guidance that clarifies the scope of asset derecognition guidance, adds guidance for partial sales of nonfinancial assets, and clarifies recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The adoption of this guidance on January 1, 2018, did not have a material impact on our financial statements or disclosures.

In May 2017, the FASB issued updated guidance on applying modification accounting to changes in the terms or conditions of a share-based payment award. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The adoption of this guidance on January 1, 2018, did not have a material impact on our financial statements or disclosures.

In August 2017, the FASB issued updated guidance to simplify the application of hedge accounting, increase transparency as to the scope and results of hedging programs, and result in a more accurate portrayal of the economics of an entity’s risk management activities in its financial statements. The transition guidance provides the option of early adoption using a modified retrospective transition method in any interim period after issuance of the update, or alternatively requires adoption for fiscal years beginning after December 15, 2018. We early adopted this guidance using the modified retrospective approach on January 1, 2018, and recorded a cumulative-effect adjustment to increase accumulated other comprehensive income with a corresponding increase to cumulative distributions and net loss attributable to common stockholders of approximately $0.8 million to eliminate hedge ineffectiveness income previously recognized.

In October 2018, the FASB issued amended guidance related to derivatives and hedge accounting. The guidance expands the list of eligible U.S. benchmark interest rates permitted in the application of hedge accounting to include the Overnight Index Swap rate based on the Secured Overnight Financing Rate. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. We early adopted this guidance on December 31, 2018, and it did not have a material impact on our financial statements.

4. Real Estate Activities

Sales of Real Estate

The following table presents our sales of real estate for the years ended December 31, 2018, 2017 and 2016, (in thousands):



	Date of Sale		Rentable Square Footage (unaudited)	Contract Sales Price		Proceeds from Sale
Property Name	Date of Sale	Location	Rentable Square Footage (unaudited)	Contract Sales Price		Proceeds from Sale
2018
500 East Pratt	02/13/18	Baltimore, MD	280	$	60,000	$	56,529
Centreport Office Center	02/22/18	Fort Worth, TX	133	12,696		12,421
Loop Central	03/27/18	Houston, TX	575	72,982		71,948
Fifth Third Center (1)	08/27/18	Columbus, OH	331	—		—
Plaza at MetroCenter	10/31/18	Nashville, TN	361	51,250		47,702
			1,680	$	196,928	$	188,600
2017
Buena Vista Plaza	01/18/17	Burbank, CA	115	$	52,500	$	47,498
Three Parkway	03/01/17	Philadelphia, PA	561	95,000		91,876
Eisenhower I (2)	03/13/17	Tampa, FL	130	31,400		30,742
Third + Shoal (3)	03/31/17	Austin, TX	N/A	14,955		14,525
Louisville Portfolio (4)	06/26/17	Louisville, KY	678	71,500		67,042
			1,484	$	265,355	$	251,683
2016
Lawson Commons	03/01/16	St. Paul, MN	436	$	68,430	$	60,931
FOUR40 (5)	06/17/16	Chicago, IL	1,041	191,000		189,072
Hurstbourne Business Center (6)	09/30/16	Louisville, KY	418	41,000		39,777
801 Thompson	10/27/16	Rockville, MD	51	4,900		4,614
Other			—	—		1,059
			1,946	$	305,330	$	295,453

__________________________


(1)	Ownership of this property was conveyed to the associated lender pursuant to a foreclosure.


(2)	We may be entitled to receive up to an additional $3.0 million subject to certain future events.


(3)	We sold a 50% interest in the entity that owns a 95% interest in Third + Shoal.


(4)	The Louisville Portfolio consists of five properties located in Louisville, Kentucky.


(5)	We may be entitled to receive up to an additional $12.5 million subject to certain future events.


(6)	Hurstbourne Business Center is comprised of Hurstbourne Park and Hurstbourne Place, both office buildings, and Hurstbourne Plaza, a retail center.

Properties that have been sold contributed net loss of approximately $5.7 million, $5.3 million and $12.8 million to our net income (loss) for the years ended December 31, 2018, 2017, and 2016, respectively. These amounts include charges for impairment and exclude any gains on the sales of these properties.

Asset Acquisitions

On January 4, 2018, we acquired a 96.5% initial economic interest in Domain Point for a contract purchase price of approximately $73.8 million (at 100%). We own a 90% interest in the entity that owns Domain Point. Domain Point is located in Austin, Texas, adjacent to our other Domain office properties and includes two buildings with 240,000 rentable square feet (combined). Assets acquired and liabilities assumed were recorded at their relative fair values and include lease intangible assets of approximately$9.3 million and acquired below-market leases of approximately $2.8 million. The estimated remaining average useful lives for these acquired lease intangibles ranged from an ending date of September 2018 to an ending date of April 2022.

On March 30, 2018, we acquired the remaining 50% interest in Domain Junction 8 Venture LLC, the entity that owns Domain 8, increasing our ownership interest in this property to 100%, for a contract purchase price of approximately $92.8 million, which included the assumption of approximately $44.9 million in mortgage debt. As a result of obtaining a controlling interest in the entity, we recognized a gain of approximately $11.1 million from the remeasurement of our previously held equity interest at fair value. Assets acquired and liabilities assumed were recorded at their relative fair values upon consolidation of the property, and include lease intangible assets of approximately $21.3 million and acquired below-market leases of approximately $8.3 million. The estimated remaining average useful lives for these acquired lease intangibles range from an ending date of May 2025 to an ending date of November 2027.

On January 4, 2017, we acquired the remaining 50.16% interest in Domain Junction LLC, the entity that owns Domain 2 and Domain 7, increasing our ownership interest in these properties to 100%, for a purchase price of approximately $91.3 million, which included the assumption of approximately $40.1 million in mortgage debt. As a result of obtaining a controlling interest in the entity, we recognized a gain of approximately $14.2 million from the remeasurement of our previously held equity interest at fair value. Assets acquired and liabilities assumed were recorded at their relative fair values upon consolidation of the properties, and include lease intangible assets of approximately $16.6 million and acquired below-market leases of approximately $9.4 million. The estimated remaining average useful lives for these acquired lease intangibles range from an ending date of December 2022 to an ending date of February 2026.

On June 23, 2017, we acquired Legacy Union One for a purchase price of approximately $123.3 million, which included the assumption of approximately $66.0 million in mortgage debt. Legacy Union One is located in Plano, Texas, and contains approximately 319,000 rentable square feet. The debt matures in January 2023 and has a fixed stated annual interest rate of 4.24%. Assets acquired and liabilities assumed were recorded at their relative fair values and include lease intangible assets of approximately $20.0 million and acquired below-market leases of approximately $6.4 million. The estimated remaining average useful lives for these acquired lease intangibles all have an ending date of June 2027.

Real Estate Held for Sale

We had no properties classified as real estate held for sale as of December 31, 2018. In January 2019, we sold the Eldridge Properties for a contract sales price of approximately $78.4 million. These properties were not classified as held for sale as of December 31, 2018, as they did not meet the accounting criteria established for such classification. As of December 31, 2017, we had one property classified as real estate held for sale, which was sold in 2018.

The major classes of assets and obligations associated with real estate held for sale as of December 31, 2017, are as follows (in thousands):



	December 31, 2017
Buildings and improvements, net of approximately $29.0 million in accumulated depreciation	$	45,396
Accounts receivable and other assets	3,335
Lease intangibles, net of approximately $5.6 million in accumulated amortization	2,830
Other intangible assets, net of approximately $1.2 million in accumulated amortization	1,787
Assets associated with real estate held for sale	$	53,348

Acquired below-market leases, net of approximately $1.3 million in accumulated amortization	$	364
Other liabilities	1,990
Obligations associated with real estate held for sale	$	2,354

5. Real Estate Under Development

When we are engaged in activities to get a potential development ready for its intended use, we capitalize interest, property taxes, insurance, ground lease payments, and direct construction costs. For the year ended December 31, 2018, we capitalized a total of approximately $95.4 million, including approximately $4.6 million in interest. For the year ended December 31, 2017, we capitalized a total of approximately $30.3 million, including approximately $1.4 million in interest. These costs are classified as real estate under development on our consolidated balance sheets until such time that the development is complete.

6. Investments in Unconsolidated Entities

We participate in real estate ventures for the purpose of acquiring and developing office properties in which we may or may not have a controlling financial interest. Our investments in unconsolidated entities consist of our noncontrolling interests in certain properties that are accounted for using the equity method of accounting.

The following is a summary of our investments in unconsolidated entities as of December 31, 2018 and 2017 (in thousands):



		Ownership Interest		Investment Balance
	Property Name	December 31, 2018	December 31, 2017	December 31, 2018		December 31, 2017
Domain Junction 8 Venture LLC (1)(2)	Domain 8	100.00%	50.00%	$	—	$	882
208 Nueces Street, LLC (2)	Third + Shoal	47.50%	47.50%	32,746		30,970
Total (3)				$	32,746	$	31,852

____________________


(1)	On March 30, 2018, we acquired the unrelated third party’s 50% interest in Domain Junction 8 Venture LLC increasing our ownership interest to 100%, and this property was consolidated.

(2)

We have evaluated our investments in unconsolidated entities in order to determine if they are VIEs. Based on our assessment, we have identified each of these entities as a VIE, but we are not the primary beneficiary, as we do not have the power to direct the activities that most significantly impact the economic performance of these entities. For these VIEs in which we are not deemed to be the primary beneficiary, we continue to account for them using the equity method. The maximum amount of exposure to loss with respect to these VIEs is the carrying amount of our investment and to the extent that we guarantee debt. As of December 31, 2018, and 2017, Tier OP had guaranteed 25% and 50%, respectively, of the construction loan of 208 Nueces Street, LLC, as discussed below in “Guarantees.” At December 31, 2018, 208 Nueces Street, LLC was a VIE with assets of approximately $140.6 million and liabilities of approximately $85.2 million. At December 31, 2017, Domain Junction 8 Venture LLC and 208 Nueces Street, LLC were VIEs with combined assets of approximately $172.3 million and combined liabilities of approximately $125.1 million.

(3)

Our investments in unconsolidated entities at December 31, 2018 and 2017, include basis adjustments that total approximately $6.4 million and $9.4 million, respectively. These amounts represent the aggregate difference between our historical cost basis and our equity basis reflected at the joint venture level, which is typically amortized over the life of the related assets and liabilities. Basis differences occur from impairment of investments and upon the transfer of assets that were previously owned by us into a joint venture. In addition, certain acquisition, transaction, and other costs may not be reflected in the net assets at the joint venture level.

Our equity in operations of investments represents our proportionate share of the combined earnings and losses of our investments for the period of our ownership and in 2017, include combined gains on the sales of 1325 G Street and the Colorado Building of approximately $6.7 million. For the years ended December 31, 2018, 2017 and 2016, we recorded income of approximately $0.7 million, $6.4 million and $2.6 million, respectively, for our share of equity in operations from our investments in unconsolidated entities.

Guarantees

The unconsolidated entities in which we have investments generally finance their activities with a combination of partner equity and debt financing. In 2017, 208 Nueces Street, LLC entered into a construction loan for the development of Third + Shoal, in which Tier OP guaranteed up to 50% of the outstanding principal balance. This percentage is reduced when certain conditions in the guarantee agreement are met, and as of December 31, 2018, this percentage was 25%. The guarantee, which extends to October 2021 when the loan matures, includes a project completion guarantee and a payment guarantee covering a percentage of the outstanding loan.

Additionally, there is a recourse carve-out agreement in which Tier OP guarantees the entire outstanding balance of the loan in addition to any related losses that may arise from certain violations of the joint venture’s contractual agreements, including “bad boy acts.” In these situations, we have an indemnity and contribution agreement with our partners where each partner has indemnified the other for any recourse liability resulting from claims triggered by that partner.

As of December 31, 2018, 208 Nueces Street, LLC has a loan commitment of approximately $103.8 million, of which, if the full amount of the debt obligation was borrowed, we estimate approximately $26.0 million to be our maximum exposure related to the payment guarantee. As of December 31, 2018, the outstanding balance of the construction loan for 208 Nueces Street, LLC was approximately $66.3 million, of which we estimate approximately $16.6 million to be our maximum exposure related to the payment guarantee. These maximum exposure estimates do not take into account any recoveries from the underlying collateral or any reimbursement from our partners. We believe that, as of December 31, 2018, in the event we become legally obligated to perform under a guarantee of an obligation of 208 Nueces Street, LLC due to a triggering event, the collateral in such entity should be sufficient to repay the obligation. If it is not, we and our partners would need to contribute additional capital to the venture.

7. Notes Payable, net

Our notes payable, net were approximately $714.8 million and $794.5 million as of December 31, 2018 and 2017, respectively. As of December 31, 2018, all of our outstanding debt was fixed rate debt (or effectively fixed rate debt, through the use of interest rate swaps), with the exception of approximately $50.0 million. As of December 31, 2018, the stated annual interest

rates on our outstanding notes payable ranged from approximately 3.06% to 5.65%. As of December 31, 2018, the effective weighted average interest rate for our debt is approximately 3.69%.

Our loan agreements generally require us to comply with certain reporting and financial covenants. As of December 31, 2018, we believe we were in compliance with the covenants under each of our loan agreements, including our credit facility. Our outstanding debt has maturity dates that range from August 2021 to January 2025.

The following table provides information regarding the timing of principal payments of our notes payable, net as of December 31, 2018, (in thousands):



Principal payments due in:
2019	$	1,582
2020	1,670
2021	72,402
2022	275,000
2023	66,000
Thereafter	300,000
Less: unamortized debt issuance costs (1)	(1,899		)
Total	$	714,755

________________


(1)	Excludes approximately $2.8 million of unamortized debt issuance costs associated with the revolving line of credit because these costs are presented as an asset on our consolidated balance sheets.

Credit Facility

We have a credit agreement through our operating partnership, Tier OP, that provides for total unsecured borrowings of up to $900.0 million, subject to our compliance with certain financial covenants. The facility consists of a $300.0 million term loan, a $275.0 million term loan, and a $325.0 million revolving line of credit. The $300.0 million term loan matures on January 17, 2025. The $275.0 million term loan matures on June 30, 2022. The revolving line of credit matures on January 18, 2022, and can be extended one additional year subject to certain conditions and payment of an extension fee. The annual interest rate on the credit facility is equal to either, at our election, (1) the “base rate” (calculated as the greatest of (i) the agent’s “prime rate”; (ii) 0.5% above the Federal Funds Effective Rate; or (iii) the LIBOR Market Index Rate plus 1.0%) plus the applicable margin or (2) LIBOR for an interest period of one, three, or six months plus the applicable margin. The applicable margin will be determined based on the ratio of total indebtedness to total asset value and ranges from 10 to 235 basis points. We have entered into interest rate swap agreements to hedge interest rates on $525.0 million of these borrowings to manage our exposure to future interest rate movements. All amounts owed are guaranteed by us and certain subsidiaries of Tier OP. As of December 31, 2018, we had approximately $575.0 million in borrowings outstanding under the term loans, and no borrowings outstanding under the revolving line of credit with the ability, subject to our most restrictive financial covenants, to borrow an additional approximately $320.6 million under the facility as a whole. As of December 31, 2018, the weighted average effective interest rate for borrowings under the credit facility as a whole, inclusive of our interest rate swaps, was approximately 3.35%.

Troubled Debt Restructuring

In August 2018, ownership of Fifth Third Center, located in Columbus, Ohio, was conveyed to the associated lender pursuant to a foreclosure. This transaction was accounted for as a full settlement of the outstanding debt and related interest. As a result, we recognized a gain on troubled debt restructuring of approximately $31.0 million, or approximately $0.62 per common share on a basic and diluted net income per share basis for the year ended December 31, 2018.

8. Fair Value Measurements

Fair value, as defined by GAAP, is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy) has been established.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Derivative financial instruments

We use derivative financial instruments, such as interest rate swaps, to manage our interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis of the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

We incorporate credit valuation adjustments (“CVAs”) to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the CVAs associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, we have assessed the significance of the impact of the CVAs on the overall valuation of our derivative positions and have determined that they are not significant. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. Unrealized gains or losses on derivatives are recorded in accumulated other comprehensive income (loss) (“OCI”) within equity at each measurement date. Our derivative financial instruments are included in “prepaid expenses and other assets” and “other liabilities” on our consolidated balance sheets.

The following table sets forth our financial assets measured at fair value on a recurring basis, which equals book value, by level within the fair value hierarchy as of December 31, 2018 and 2017 (in thousands):



				Basis of Fair Value Measurements
				Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	Total Fair Value
	Total Fair Value
Derivative financial instruments:
2018
Assets	$	7,751		$	—	$	7,751		$	—
Liabilities	$	(4,340	)	$	—	$	(4,340	)	$	—

2017
Assets	$	5,045		$	—	$	5,045		$	—

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Impairment of Real Estate Related Assets

We have recorded non-cash impairment charges related to a reduction in the fair value of certain of our assets. The inputs used to calculate the fair value of these assets included projected cash flows and a risk-adjusted rate of return that management estimated would be used by a market participant in valuing these assets, bona fide purchase offers, or the expected sales price of an executed sales agreement.

During 2018 and 2017, we recorded impairment losses of approximately $41.6 million and $5.3 million, respectively. The impairment losses recorded were related to assets assessed for impairment due to the disposition of a property and changes in management’s estimates of the intended hold periods for certain of our properties.

The following table summarizes those assets which were measured at fair value and impaired during 2018 and 2017 (in thousands):



			Basis of Fair Value Measurements
	Fair Value of Assets at Impairment		Quoted Prices In Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Losses
for the year ended December 31, 2018
Real estate	$	97,544	$	—	$	97,544	$	—	$	(41,564	)

for the year ended December 31, 2017
Real estate	$	69,353	$	—	$	69,353	$	—	$	(5,250	)

Financial Instruments not Reported at Fair Value

Financial instruments held at December 31, 2018 and 2017, but not measured at fair value on a recurring basis include cash and cash equivalents, restricted cash, accounts receivable, notes payable, accounts payable and accrued liabilities, and other liabilities. With the exception of notes payable, the financial statement carrying amounts of these items approximate their fair values due to their short-term nature. Estimated fair values for notes payable have been determined using recent trading activity and/or bid-ask spreads and are classified as Level 2 in the fair value hierarchy.

Carrying amounts of our notes payable and the related estimated fair values as of December 31, 2018 and 2017, are as follows (in thousands):



	December 31, 2018					December 31, 2017
	Carrying Amount			Fair Value		Carrying Amount			Fair Value
Notes payable	$	716,654		$	718,505	$	801,339		$	805,786
Less: unamortized debt issuance costs	(1,899		)			(6,801		)
Notes payable, net	$	714,755				$	794,538

9. Derivative Instruments and Hedging Activities

We may be exposed to the risk associated with variability of interest rates that might impact our cash flows and the results of our operations. Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we have used interest rate swaps as part of our interest rate risk management strategy. Our interest rate swaps involve the receipt of variable-rate amounts from counterparties in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Our hedging strategy of entering into interest rate swaps, therefore, is to eliminate or reduce, to the extent possible, the volatility of cash flows.

The following table summarizes the notional values of our derivative financial instruments (in thousands) as of December 31, 2018. The notional values provide an indication of the extent of our involvement in these instruments, but do not represent exposure to credit, interest rate, or market risks:

Type/Description

Notional Value

Index

Strike Rate

Effective Date

Maturity Date