UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  
FORM 10-Q
 
  ý       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934  

For the quarterly period ended March 31, 2017
OR  
o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  
For the transition period from  _________ to _________                     
Commission File Number: 001-37512
TIER REIT, Inc.
(Exact name of registrant as specified in its charter)
Maryland
 
68-0509956
(State or other jurisdiction of incorporation or
organization)
 
(I.R.S. Employer
Identification No.)
 
5950 Sherry Lane, Suite 700, Dallas, Texas 75225
(Address of principal executive offices)
(Zip code) 
(972) 483-2400
(Registrant’s telephone number, including area code)  
None
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý   No  o
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.45 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ý   No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.:
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
Emerging growth company o
 
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No ý

As of April 30, 2017 , TIER REIT, Inc. had 47,801,968 shares of common stock, $.0001 par value, outstanding.



TIER REIT, Inc.
FORM 10-Q
Quarter Ended March 31, 2017
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I
FINANCIAL INFORMATION
Item 1.                                  Financial Statements


TIER REIT, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(unaudited)
 
March 31, 2017
 
December 31, 2016
Assets
 

 
 

Real estate
 

 
 

Land
$
142,776

 
$
143,537

Land held for development
45,059

 
45,059

Buildings and improvements, net
1,076,701

 
1,043,641

Real estate under development
5,974

 
17,961

Total real estate
1,270,510

 
1,250,198

Cash and cash equivalents
55,215

 
14,884

Restricted cash
7,685

 
7,509

Accounts receivable, net
60,996

 
71,459

Prepaid expenses and other assets
18,163

 
25,305

Investments in unconsolidated entities
40,421

 
76,813

Deferred financing fees, net
2,442

 
2,395

Lease intangibles, net
71,740

 
61,844

Other intangible assets, net
1,876

 
9,787

Assets associated with real estate held for sale
32,375

 
32,346

Total assets
$
1,561,423

 
$
1,552,540

Liabilities and equity
 

 
 

Liabilities
 

 
 

Notes payable, net
$
773,905

 
$
826,783

Accounts payable and accrued liabilities
51,813

 
74,458

Acquired below-market leases, net
15,252

 
6,886

Distributions payable
—

 
8,601

Other liabilities
7,762

 
14,353

Obligations associated with real estate held for sale
970

 
943

Total liabilities
849,702

 
932,024

Commitments and contingencies


 


Equity
 

 
 

Preferred stock, $.0001 par value per share; 17,500,000 shares authorized at March 31, 2017, and December 31, 2016, respectively, 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, 47,525,725 and 47,473,218 shares issued and outstanding at March 31, 2017, and December 31, 2016, respectively
5

 
5

Additional paid-in capital
2,607,071

 
2,606,098

Cumulative distributions and net loss attributable to common stockholders
(1,897,240
)
 
(1,986,515
)
Accumulated other comprehensive income (loss)
1,026

 
(1,042
)
Stockholders’ equity
710,862

 
618,546

Noncontrolling interests
859

 
1,970

Total equity
711,721

 
620,516

Total liabilities and equity
$
1,561,423

 
$
1,552,540


See Notes to Condensed Consolidated Financial Statements.

3


TIER REIT, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands, except share and per share amounts)
(unaudited)


 
Three Months Ended
 
March 31, 2017
 
March 31, 2016
Rental revenue
$
56,363

 
$
68,478

Expenses
 

 
 

Property operating expenses
14,690

 
20,485

Interest expense
8,780

 
12,240

Real estate taxes
8,560

 
11,064

Property management fees
60

 
284

Asset impairment losses
—

 
4,826

General and administrative
5,707

 
6,504

Depreciation and amortization
24,529

 
32,044

Total expenses
62,326

 
87,447

Interest and other income
318

 
274

Loss on early extinguishment of debt
(545
)
 
—

Loss before income taxes, equity in operations of investments, and gains
(6,190
)
 
(18,695
)
Provision for income taxes
(244
)
 
(182
)
Equity in operations of investments
(256
)
 
415

Loss before gains
(6,690
)
 
(18,462
)
Gain on sale of assets
90,750

 
5,739

Gain on remeasurement of investment in unconsolidated entities
14,168

 
—

Net income (loss)
98,228

 
(12,723
)
Noncontrolling interests
(57
)
 
16

Net income (loss) attributable to common stockholders
$
98,171

 
$
(12,707
)
Basic weighted average common shares outstanding
47,510,915

 
47,389,591

Diluted weighted average common shares outstanding
47,806,069

 
47,389,591

 
 
 
 
Basic income (loss) per common share
$
2.05

 
$
(0.27
)
Diluted income (loss) per common share
$
2.04

 
$
(0.27
)
 
 
 
 
Distributions declared per common share
$
0.18

 
$
0.18

 
 
 
 
Comprehensive income (loss):
 

 
 

Net income (loss)
$
98,228

 
$
(12,723
)
Other comprehensive income (loss): unrealized income (loss) on interest rate derivatives
2,069

 
(12,880
)
Comprehensive income (loss)
100,297

 
(25,603
)
Comprehensive (income) loss attributable to noncontrolling interests
(58
)
 
24

Comprehensive income (loss) attributable to common stockholders
$
100,239

 
$
(25,579
)

See Notes to Condensed Consolidated Financial Statements.

4


TIER REIT, Inc.
Condensed Consolidated Statements of Changes in Equity
(in thousands, except per share amounts)
(unaudited)
 
 
 
 
 
 
 
Cumulative
Distributions
and
Net Loss Attributable to Common Stockholders
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
Common Stock
 
Additional Paid-in Capital
 
 
 
 
 
 
 
Number of Shares
 
Par value
 
 
 
 
Noncontrolling Interests
 
Total
 Equity
 
 
 
 
 
 
 
Three months ended March 31, 2017
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at January 1, 2017
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 (as restated)
47,473

 
$
5

 
$
2,606,388

 
$
(1,986,805
)
 
$
(1,042
)
 
$
1,970

 
$
620,516

Net income
—

 
—

 
—

 
98,171

 
—

 
57

 
98,228

Unrealized gain on interest rate derivatives
—

 
—

 
—

 
—

 
2,068

 
1

 
2,069

Share based compensation, net
53

 
—

 
683

 
—

 
—

 
(102
)
 
581

Contributions by noncontrolling interest
—

 
—

 
—

 
—

 
—

 
438

 
438

Distributions declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
   Common stock ($0.18 per share)
—

 
—

 
—

 
(8,606
)
 
—

 
—

 
(8,606
)
   Noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(5
)
 
(5
)
Deconsolidation of investment
—

 
—

 
—

 
—

 
—

 
(1,500
)
 
(1,500
)
Balance at March 31, 2017
47,526

 
$
5

 
$
2,607,071

 
$
(1,897,240
)
 
$
1,026

 
$
859

 
$
711,721

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2016
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at January 1, 2016
47,362

 
$
5

 
$
2,600,193

 
$
(1,922,721
)
 
$
(3,860
)
 
$
1,502

 
$
675,119

Net loss
—

 
—

 
—

 
(12,707
)
 
—

 
(16
)
 
(12,723
)
Unrealized loss on interest rate derivatives
—

 
—

 
—

 
—

 
(12,872
)
 
(8
)
 
(12,880
)
Share based compensation, net
43

 
—

 
671

 
—

 
—

 
69

 
740

Distributions declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
   Common stock ($0.18 per share)
—

 
—

 
—

 
(8,594
)
 
—

 
—

 
(8,594
)
   Noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(6
)
 
(6
)
Cancellation of Series A Convertible Preferred Stock
—

 
—

 
2,700

 
—

 
—

 
—

 
2,700

Balance at March 31, 2016
47,405

 
$
5

 
$
2,603,564

 
$
(1,944,022
)
 
$
(16,732
)
 
$
1,541

 
$
644,356














See Notes to Condensed Consolidated Financial Statements.


5


TIER REIT, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Three Months Ended
 
March 31, 2017
 
March 31, 2016
Cash flows from operating activities
 

 
 

Net income (loss)
$
98,228

 
$
(12,723
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 

 
 

Asset impairment losses
—

 
4,826

Gain on sale of assets
(90,750
)
 
(5,739
)
Gain on remeasurement of investment in unconsolidated entities
(14,168
)
 
—

Loss on early extinguishment of debt
109

 
—

Hedge ineffectiveness expense from derivatives
30

 
—

Amortization of restricted shares and units
910

 
994

Depreciation and amortization
24,529

 
32,044

Amortization of lease intangibles
(246
)
 
(755
)
Amortization of above- and below-market rent
(908
)
 
(1,348
)
Amortization of deferred financing costs
812

 
739

Equity in operations of investments
256

 
(415
)
Ownership portion of management and construction management fees from unconsolidated companies
18

 
126

Distributions from investments
3,325

 
300

Change in accounts receivable
(1,135
)
 
(3,697
)
Change in prepaid expenses and other assets
336

 
510

Change in lease commissions
(2,752
)
 
(2,881
)
Change in other lease intangibles
(335
)
 
(582
)
Change in accounts payable and accrued liabilities
(20,560
)
 
(16,519
)
Change in other liabilities
(194
)
 
(815
)
Change in payables to related parties
—

 
(4
)
Cash used in operating activities
(2,495
)
 
(5,939
)
 
 
 
 
Cash flows from investing activities
 

 
 

Escrow deposits
(3,000
)
 
—

Return of investments
1,451

 
745

Purchases of real estate
(39,363
)
 
—

Investments in unconsolidated entities
(4,384
)
 
(1,759
)
Capital expenditures for real estate
(10,146
)
 
(9,166
)
Capital expenditures for real estate under development
(12,079
)
 
(1,470
)
Proceeds from sales of assets
261,578

 
61,214

Change in payables to related parties
—

 
6

Cash provided by investing activities
194,057

 
49,570

 
 
 
 
Cash flows from financing activities
 

 
 

Financing costs
(1,221
)
 
(746
)
Proceeds from notes payable
125,000

 
73,000

Payments on notes payable
(257,731
)
 
(111,708
)
Transfer of common stock
(329
)
 
(253
)
Distributions paid to common stockholders
(17,200
)
 
(8,578
)
Distributions paid to noncontrolling interests
(12
)
 
(18
)
Contributions from noncontrolling interests
438

 
—

Cash used in financing activities
(151,055
)
 
(48,303
)
 
 
 
 
Net change in cash, cash equivalents, and restricted cash
40,507

 
(4,672
)
Cash, cash equivalents, and restricted cash at beginning of period
22,393

 
22,960

Cash, cash equivalents, and restricted cash at end of period
$
62,900

 
$
18,288


See Notes to Condensed Consolidated Financial Statements.

6


TIER REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
 
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 TIER 1 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 March 31, 2017 , we owned interests in 25 operating office properties, one non-operating property, and two development properties, located in 10 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.             Basis of Presentation and Significant Accounting Policies
 
Interim Unaudited Financial Information
 
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the Securities and Exchange Commission (“SEC”) on February 13, 2017.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted from this report on Form 10-Q pursuant to the rules and regulations of the SEC.
 
The results for the interim periods shown in this report are not necessarily indicative of future financial results.  The accompanying condensed consolidated balance sheets as of March 31, 2017 , and December 31, 2016 , and condensed consolidated statements of operations and comprehensive income (loss), changes in equity, and cash flows for the periods ended March 31, 2017 and 2016 , have not been audited by our independent registered public accounting firm.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to present fairly our financial position as of March 31, 2017 , and December 31, 2016 , and our results of operations and our cash flows for the periods ended March 31, 2017 and 2016 .  These adjustments are of a normal recurring nature.

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

Reclassification

Certain amounts previously reflected in the prior year condensed consolidated statement of cash flows have been reclassified to conform to our 2017 presentation.  The March 31, 2016 , condensed consolidated statement of cash flows reflects within the operating section the single line “change in accounts payable and accrued liabilities” that was previously presented on two lines “change in accounts payable” (approximately $3,000 ) and “change in accrued liabilities” (approximately $16.5 million ).  These reclassifications had no effect on the previously reported total liabilities or cash used in operating activities.

Summary of Significant Accounting Policies
 
Described below are certain of our significant accounting policies. The disclosures regarding several of the policies have been condensed or omitted in accordance with interim reporting regulations specified by Form 10-Q pursuant to the rules and

7

regulations of the SEC. Please see our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for a complete listing of our significant accounting policies.

Real Estate
 
As of March 31, 2017 , and December 31, 2016 , the cost basis and accumulated depreciation and amortization related to our consolidated depreciable real estate properties and related lease intangibles were as follows (in thousands): 
 
 
 
 
Lease Intangibles
 
 
 
 
Assets
 
Liabilities
 
 
 
 
 
 
Acquired Above-Market Leases
 
Acquired Below-Market Leases
 
 
Buildings and Improvements
 
Other Lease Intangibles
 
 
as of March 31, 2017
 
 
 
 
Cost
 
$
1,570,495

 
$
137,283

 
$
5,004

 
$
(47,595
)
Less: accumulated depreciation and amortization
 
(493,794
)
 
(66,321
)
 
(4,226
)
 
32,343

Net
 
$
1,076,701

 
$
70,962

 
$
778

 
$
(15,252
)
 
 
 
 
 
Lease Intangibles
 
 
 
 
Assets
 
Liabilities
 
 
 
 
 
 
Acquired Above-Market Leases
 
Acquired Below-Market Leases
 
 
Buildings and Improvements
 
Other Lease Intangibles
 
 
as of December 31, 2016
 
 
 
 
Cost
 
$
1,579,157

 
$
131,618

 
$
5,005

 
$
(42,537
)
Less: accumulated depreciation and amortization
 
(535,516
)
 
(70,672
)
 
(4,107
)
 
35,651

Net
 
$
1,043,641

 
$
60,946

 
$
898

 
$
(6,886
)
 
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 tenants’ respective initial lease terms 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 lease intangibles related to that tenant would be charged to expense.  The estimated remaining average useful lives for acquired lease intangibles range from an ending date of April 2017 to an ending date of February 2026. 

Anticipated amortization associated with acquired lease intangibles for each of the following five years is as follows (in thousands):
April 2017 - December 2017
$
2,118

2018
$
2,196

2019
$
2,213

2020
$
2,320

2021
$
1,984

 
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 and also exceeds the fair value of the asset, 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

8

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. We had no impairment charges for the three months ended March 31, 2017 . For the three months ended March 31, 2016 , we recorded non-cash impairment charges totaling approximately $4.8 million related to the impairment of consolidated real estate assets, primarily related to assets assessed for impairment due to a change in management’s estimate of the intended hold periods.
 
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 other than a temporary decline.  We had no impairment charges related to our investments in unconsolidated entities for the three months ended March 31, 2017 and 2016 .

In evaluating our investments for impairment, management makes several estimates and assumptions, including, but not limited to, the projected date of disposition (the intended hold period) 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.

Cash, Cash Equivalents and Restricted Cash
 
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 includes restricted money market accounts, as required by our lenders or by leases, for anticipated tenant improvements, property taxes and insurance, and certain tenant security deposits for our consolidated properties.
    
We early adopted new Financial Accounting Standards Board (“FASB”) guidance on December 31, 2016, which changes the presentation of our statements of cash flows and related disclosures for all periods presented and accordingly, the following is a summary of our cash, cash equivalents, and restricted cash total as presented in our statements of cash flows for the three months ended March 31, 2017 and 2016 (in thousands):
 
March 31,
2017
 
March 31, 2016
Cash and cash equivalents
$
55,215

 
$
5,532

Restricted cash
7,685

 
12,756

Total cash, cash equivalents, and restricted cash
$
62,900

 
$
18,288


Accounts Receivable, net
 
The following is a summary of our accounts receivable as of March 31, 2017 , and December 31, 2016 (in thousands):
 
March 31,
2017
 
December 31,
2016
Straight-line rental revenue receivable
$
57,871

 
$
68,287

Tenant receivables
3,681

 
5,047

Non-tenant receivables
935

 
691

Allowance for doubtful accounts
(1,491
)
 
(2,566
)
Total
$
60,996

 
$
71,459

 
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

9

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.

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 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 three months ended March 31, 2017 and 2016, we capitalized interest expense of approximately $0.4 million and $0.1 million , respectively, for unconsolidated entities with properties under development, which are included in our investments from unconsolidated entities on our condensed consolidated balance sheets.

  Other Intangible Assets, net
 
Other intangible assets consist of below-market ground leases on properties where a third party owns and has leased the underlying land to us. As of March 31, 2017 , and December 31, 2016 , the cost basis and accumulated amortization related to our consolidated other intangible assets were as follows (in thousands):
 
March 31,
2017
 
December 31,
2016
Cost
$
2,978

 
$
11,277

Less: accumulated amortization
(1,102
)
 
(1,490
)
Net
$
1,876

 
$
9,787

 
Revenue Recognition
 
We recognize rental income generated from all leases of consolidated real estate assets on a straight-line basis over the terms of the respective leases, including the effect of rent holidays, if any.  The total net increase to rental revenue due to straight-line rent adjustments for the three months ended March 31, 2017 and 2016 , was approximately $1.8 million and $2.5 million , respectively.  When a tenant exceeds its tenant improvement allowance, this amount is reimbursed to us and recorded as a deferred rent liability, which is recognized as rental revenue over the life of the lease. The total net increase to rental revenue due to this deferred rent for the three months ended March 31, 2017 and 2016 , was approximately $0.6 million and $1.0 million , respectively. Our rental revenue also includes amortization of acquired above- and below-market leases.  The total net increase to rental revenue due to the amortization of acquired above- and below-market leases for the three months ended March 31, 2017 and 2016 , was approximately $0.9 million and $1.3 million , respectively. Revenues relating to lease termination fees are recognized on a straight-line basis amortized from the time that a tenant’s right to occupy the leased space is modified through the end of the revised lease term.  For the three months ended March 31, 2017 and 2016 , we recognized lease termination fees of approximately $0.1 million and $0.6 million , respectively.

3.            New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In March 2016, the FASB issued guidance which affects accounting for certain aspects of share-based payments for employees. The guidance requires income statement recognition of income tax effects of the awards when the awards vest or are settled. The guidance also changes the employer’s accounting for forfeitures as well as for an employee’s use of shares to satisfy their income tax withholding obligations. We have elected to recognize forfeitures as they occur. This guidance is effective for

10

fiscal years and interim periods within those years beginning after December 15, 2016, with early adoption permitted. We adopted this guidance using the modified retrospective approach on January 1, 2017, and recorded a cumulative-effect adjustment of approximately $0.3 million to retained earnings to recognize forfeitures as they occur.    
In March 2016, the FASB issued amended guidance which simplifies the accounting for equity method investments by removing the requirement that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendment requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016, with early adoption permitted. The adoption of this guidance on January 1, 2017, did not have a material impact on our financial statements or disclosures.    
New Accounting Pronouncements to be Adopted
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 will be excluded from this revenue recognition criteria; however, the sale of real estate will be required to follow the new model. Expanded quantitative and qualitative disclosures regarding revenue recognition will be required for contracts that are subject to this guidance. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. We are currently evaluating the impact the guidance will have on our financial statements when adopted, but we believe the impact could primarily relate to sales of properties, timing of revenue recognition, and the ability to capitalize certain internal costs.
In February 2016, the FASB issued updated guidance which 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 further modifies lessors’ classification criteria for leases and the accounting for sales-type and direct financing leases. New disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases are also required. The guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted and is required to be adopted using the modified retrospective approach.  Upon adoption, the Company will recognize a lease liability and a right-of-use asset for operating leases where it is the lessee, such as ground leases and office and equipment leases. We are currently evaluating the impact this guidance will have on our financial statements when adopted.
In June 2016, the FASB issued amended guidance which requires measurement and recognition of expected credit losses for financial assets 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. Financial assets that are measured at amortized cost will be required to be presented at the net amount expected to be collected with an allowance for credit losses deducted from the amortized cost basis. 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 August 2016, the FASB issued amended guidance on 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, we believe the classification of debt prepayment and debt extinguishment costs as financing outflows will impact the Company as these items are currently reflected as operating outflows. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted and is required to be applied retrospectively to all periods presented. We will continue to evaluate the impact this guidance will have on our financial statements when adopted.
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, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact this guidance will have on our financial statements when adopted.


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4.           Real Estate Activities

Sales of Real Estate
On January 18, 2017, we sold our Buena Vista Plaza property for a contract sales price of $52.5 million , resulting in proceeds from sale of approximately $47.5 million . Buena Vista Plaza is located in Burbank, California, and contains 115,000 rentable square feet.
On March 1, 2017, we sold our Three Parkway property for a contract sales price of $95.0 million , resulting in proceeds from sale of approximately $91.9 million . Three Parkway is located in Philadelphia, Pennsylvania, and contains 561,000 rentable square feet.
On March 13, 2017, we sold our Eisenhower I property for a contract sales price of $31.4 million , resulting in proceeds from sale of approximately $30.8 million . Eisenhower I is located in Tampa, Florida, and contains 130,000 rentable square feet. We may be entitled to receive an additional $3.0 million subject to certain future events.
On March 31, 2017, we sold a 50% interest in our 95% interest in the Third + Shoal development property for a contract sales price of approximately $15.0 million , resulting in proceeds from sale of approximately $14.6 million . Third + Shoal is located in Austin, Texas, and is expected to contain approximately 345,000 rentable square feet when completed.
    
Properties that have been sold contributed income of approximately $0.4 million and loss of approximately $5.2 million to our net income (loss) for the three months ended March 31, 2017 and 2016 , respectively. These amounts exclude any gains on the sales of these properties.

Acquisitions of Real Estate
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 combined contract purchase price of $51.2 million plus assumed debt of approximately $40.1 million . 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. 

Real Estate Held for Sale

As of March 31, 2017 , and December 31, 2016, four of our properties (One Oxmoor Place, Steeplechase Place, Lakeview, and Hunnington) were held for sale. The major classes of assets and obligations associated with real estate held for sale as of March 31, 2017 , and December 31, 2016, are as follows (in thousands):
 
March 31,
 2017
 
December 31, 2016
Land
$
5,481

 
$
5,481

Buildings and improvements, net of approximately $11.8 million in accumulated depreciation
24,848

 
24,837

Accounts receivable and other assets
657

 
665

Lease intangibles, net of approximately $2.1 million in accumulated amortization
1,389

 
1,363

Assets associated with real estate held for sale
$
32,375

 
$
32,346

 
 
 
 
Acquired below-market leases, net of approximately $0.2 million in accumulated amortization
$
39

 
$
44

Other liabilities
931

 
899

   Obligations associated with real estate held for sale
$
970

 
$
943


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 three months ended March 31, 2017 , we capitalized a total of approximately $2.2 million , including approximately $0.3 million in interest. For the three months ended March 31,

12

2016 , we capitalized a total of approximately $1.4 million , which included no capitalized interest. These costs are classified as real estate under development on our condensed 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 March 31, 2017 , and December 31, 2016 (dollar amounts in thousands):
 
 
 
 
Ownership Interest
 
Unconsolidated
Investment Balance
Entity Name
 
Property
 
March 31,
2017
 
December 31, 2016
 
March 31,
2017
 
December 31,
2016
Domain Junction LLC (1)
 
Domain 2 & Domain 7
 
100.00
%
 
49.84
%
 
$
—

 
$
9,770

Domain Junction 8 Venture LLC (2)(3)
 
Domain 8
 
50.00
%
 
50.00
%
 
18,211

 
18,093

TR 208 Nueces Member, LLC (4)
 
Third + Shoal
 
47.50
%
 
95.00
%
 
18,004


—

COLDC 54 Holdings, LLC (3)(5)
 
Colorado Building
 
10.00
%
 
10.00
%
 
531

 
711

GSTDC 72 Holdings, LLC (3)(5)
 
1325 G Street
 
10.00
%
 
10.00
%
 
3,675

 
3,719

1301 Chestnut Associates, L.P. (6)
 
Wanamaker Building
 
1.10
%
 
60.00
%
 
—

 
44,520

Total (7)
 
 
 
`

 
 

 
$
40,421

 
$
76,813

_________________
(1)
On January 4, 2017, we acquired our unrelated third party’s 50.16% interest in Domain Junction LLC increasing our ownership interest to 100% , and these properties were consolidated.
(2)
All major decisions for this entity are made by the other owner.
(3)
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. At March 31, 2017 , these VIEs have total assets of approximately $274.4 million and total liabilities of approximately $184.4 million .
(4)
On March 31, 2017, we sold a 50% interest in the entity that owns a 95% interest in Third + Shoal, resulting in this property being deconsolidated as control of this property is now shared.
(5)
On April 27, 2017, the Colorado Building and 1325 G Street were sold (at 100%) for a combined contract sales price of $259.0 million .
(6)
On January 17, 2017, we sold substantially all of our noncontrolling investment in 1301 Chestnut Associates, L.P. At March 31, 2017 , our remaining 1.1% interest is accounted for using the cost method and is included in “prepaid expenses and other assets” on our condensed consolidated balance sheet.
(7)
Our investment in unconsolidated entities includes basis adjustments that total approximately $6.0 million . This amount represents 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. For the three months ended March 31, 2017 and 2016, we recorded a loss of approximately $0.3 million and income of approximately $0.4 million , respectively, for our share of equity in operations from our investments in unconsolidated entities.

7.           Notes Payable
 
Our notes payable, net were approximately $773.9 million as of March 31, 2017 . Approximately $206.4 million of these notes payable, net were secured by real estate assets with a carrying value of approximately $288.4 million as of March 31, 2017 . As of March 31, 2017 , 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 $130.0 million . As of March 31, 2017 , the stated annual interest rates on our outstanding debt, ranged from approximately 2.48% to 6.09% . As of March 31, 2017 , the effective weighted average interest rate for our consolidated debt is approximately 3.71% . For our loan that is in default and detailed below, we incur a default interest rate that is 500 basis points higher than the stated interest rate, which resulted in an overall effective weighted average interest rate of approximately 4.02% as of March 31, 2017 , for our consolidated debt and an increase in interest expense for the three months ended March 31, 2017 , of approximately $0.6 million . We anticipate, although we can provide no assurance, that when the property to which such loan relates is sold, or if ownership of this property is conveyed to the lender, the default interest will be forgiven.
 

13

Our loan agreements generally require us to comply with certain reporting and financial covenants.  As of March 31, 2017 , we were in default on a non-recourse property loan with an outstanding balance of approximately $48.2 million secured by our Fifth Third Center property located in Columbus, Ohio, which has a carrying value of approximately $32.7 million as of March 31, 2017 . A receiver was appointed for this property in March 2016. The loan had an original maturity date of July 2016, and we are currently working with the lender to dispose of this property on its behalf. As of March 31, 2017 , other than the default discussed above, we believe we were in compliance with the covenants under each of our loan agreements, including our credit facility.
 
Excluding debt already matured as detailed above, our outstanding consolidated debt has maturity dates that range from April 2019 to June 2022. The following table provides information regarding the timing of principal payments of our notes payable, net as of March 31, 2017 (in thousands):
Principal payments due in:
 
April 2017 - December 2017
$
49,224

2018
1,501

2019
381,589

2020
1,670

2021
72,416

Thereafter
275,000

Less: unamortized debt issuance costs (1)
(7,495
)
Notes payable, net
$
773,905

________________
(1)
Excludes approximately $2.4 million of unamortized debt issuance costs associated with the revolving line of credit because these costs are presented as an asset on our condensed 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 $860.0 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 $285.0 million revolving line of credit. The first term loan matures on December 18, 2019. The second term loan matures on June 30, 2022. The revolving line of credit matures on December 18, 2018, 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 35 basis points to 250 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 March 31, 2017 , 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 $177.1 million under the facility as a whole. As of March 31, 2017 , the weighted average effective interest rate for borrowings under the credit facility as a whole, inclusive of our interest rate swaps, was approximately 3.38% .
 
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 the 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 fair value hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the fair value hierarchy) has been established.


14

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 condensed consolidated balance sheets.

The following table sets forth our financial assets and liabilities measured at fair value on a recurring basis, which equals book value, by level within the fair value hierarchy as of March 31, 2017 , and December 31, 2016 (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
 
 
 
Description
 
 
 
 
March 31, 2017
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Assets
 
$
2,193

 
$
—

 
$
2,193

 
$
—

Liabilities
 
$
(624
)
 
$
—

 
$
(624
)
 
$
—

 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Assets
 
$
1,182

 
$
—

 
$
1,182

 
$
—

Liabilities
 
$
(1,652
)
 
$
—

 
$
(1,652
)
 
$
—


Financial Instruments not Reported at Fair Value
 
Financial instruments held at March 31, 2017 , and December 31, 2016 , 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, distributions payable, 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.


15

Carrying amounts of our notes payable and the related estimated fair value as of March 31, 2017 , and December 31, 2016 , are as follows (in thousands):
 
March 31, 2017
 
December 31, 2016
 
Carrying Amount
 
Fair
Value
 
Carrying Amount
 
Fair
Value
Notes payable
$
781,400

 
$
786,182

 
$
834,131

 
$
837,878

Less: unamortized debt issuance costs
(7,495
)
 
 
 
(7,348
)
 
 
Notes payable, net
$
773,905

 
 
 
$
826,783

 
 
 
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 March 31, 2017 . The notional values provide an indication of the extent of our involvement in these instruments at March 31, 2017 , but do not represent exposure to credit, interest rate, or market risks.
Type/Description
 
Notional Value
 
Index
 
Strike Rate
 
Effective Date
 
Maturity Date
Interest rate swap - cash flow hedge
 
$
125,000

 
one-month LIBOR
 
1.6775
%
 
12/31/14
 
10/31/19
Interest rate swap - cash flow hedge
 
$
125,000

 
one-month LIBOR
 
1.6935
%
 
04/30/15
 
10/31/19
Interest rate swap - cash flow hedge
 
$
125,000

 
one-month LIBOR
 
1.7615
%
 
06/30/15
 
05/31/22
Interest rate swap - cash flow hedge
 
$
150,000

 
one-month LIBOR
 
1.7695
%
 
06/30/15
 
05/31/22

The table below presents the fair value of our derivative financial instruments, included in “prepaid expenses and other assets” and “other liabilities” on our condensed consolidated balance sheets, as of March 31, 2017 , and December 31, 2016 (in thousands):
 
Derivatives designated as hedging instruments:
Derivative Assets
 
Derivative Liabilities
 
 
March 31,
2017
 
December 31,
2016
 
March 31,
2017
 
December 31,
2016
 
 
Interest rate swaps
$
2,193

 
$
1,182

 
$
(624
)
 
$
(1,652
)
 
The tables below present the effect of the change in fair value of derivative financial instruments in our condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2017 and 2016 (in thousands):
 
Derivatives in Cash Flow Hedging Relationship
 
Gain (loss) recognized in OCI on derivatives
(effective portion)
 
Three Months Ended
 
March 31, 2017
 
March 31, 2016
Interest rate swaps
$
2,069

 
$
(12,880
)
 
Amount reclassified from OCI into income
(effective portion)
 
Three Months Ended
Location
March 31, 2017
 
March 31, 2016
Interest expense (1)
$
1,246

 
$
1,722

______________
(1)
Increases in fair value as a result of accrued interest associated with our swap transactions are recorded in accumulated OCI and subsequently reclassified into income. Such amounts are shown net in the statements of changes in equity and offset dollar for dollar.    

16

 
 
Amount recognized in income on derivatives
 (ineffective portion and amount excluded from effectiveness testing)
 
 
 
Three Months Ended
 
Location
March 31, 2017
 
March 31, 2016
 
Interest expense (1)
$
30

 
$
—

_____________
(1)
Represents the portion of the change in fair value of our interest rate swaps attributable to the mismatch between an interest rate floor on our hedged debt and no floor on the index rate in our interest rate swaps which causes hedge ineffectiveness.     
Amounts reported in accumulated OCI related to derivatives will be reclassified to interest expense as interest payments and accruals are made on our variable-rate debt. During the next twelve months, we estimate that approximately $2.6 million will be reclassified as an increase to interest expense.

We have agreements with our derivative counterparties that contain provisions where if we default on any of our indebtedness for at least 30 days, during which time such default has not been remedied, and in all cases provided that the aggregate amount of all such defaults is not less than $10.0 million for recourse debt or $75.0 million for non-recourse debt, then we could also be declared in default on our derivative obligations.

As of March 31, 2017 , we had not been declared in default on any of our derivative obligations. As of March 31, 2017 , the fair value of our derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was approximately $0.6 million .  As of March 31, 2017 , we have not posted any collateral related to these agreements.  If we had breached any of these provisions at March 31, 2017 , we could have been required to settle our obligations under the agreements at the termination value of approximately $0.6 million .

10.          Commitments and Contingencies
 
As of March 31, 2017 , we had commitments of approximately $22.9 million for future tenant improvements and leasing commissions.
 
We have employment agreements with five of our executive officers.  The term of each employment agreement ends on February 10, 2020, provided that the term will automatically continue for an additional one -year period unless either party provides 60 days written notice of non-renewal prior to the expiration of the initial term.  The agreements provide for lump sum payments and an immediate lapse of restrictions on compensation received under the long-term incentive plan upon termination of employment without cause.  As a result, in the event we terminated all of these agreements without cause as of March 31, 2017 , we would have recognized approximately $13.7 million in related compensation expense.

11.           Equity

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. In connection with the listing of our common stock on the NYSE on July 23, 2015, an automatic conversion of the Series A Convertible Preferred Stock was triggered with the number of shares to be issued not determinable until March 2, 2016, based on the Conversion Company Value, as defined in the Articles Supplementary. On March 2, 2016, based on the Conversion Company Value, no shares of common stock were issued, and the shares of Series A Convertible Preferred Stock were canceled.

Stock Plans
 
Our 2015 Equity Incentive Plan allows for, and our 2005 Incentive Award Plan allowed for, equity-based incentive awards to be granted to our employees, non-employee directors, and key persons as detailed below:

Stock options. As of March 31, 2017 and 2016, we had outstanding options held by our independent directors to purchase 8,330 and 12,495 shares of our common stock, respectively, at a weighted average exercise price of approximately $40.13 per share. These options are all fully vested and have expiration dates that range from July 2018 to June 2022.
 
Restricted stock units. We have outstanding restricted stock units (“RSUs”) held by our independent directors. These units vest 13 months after the grant date. Subsequent to vesting, the restricted stock units will be converted to an equivalent number

17

of shares of common stock upon the earlier to occur of the following events or dates: (i) separation from service for any reason other than cause; (ii) a change in control of the Company; (iii) death; or (iv) specific dates chosen by the independent directors that range from June 2017 to December 2020. Expense is measured at the grant date based on the estimated fair value of the award and is recognized over the vesting period. Any forfeitures of awards are recognized as they occur.

The following is a summary of the number of outstanding RSUs held by our independent directors as of March 31, 2017 and 2016 :
 
March 31, 2017
 
March 31, 2016
 
Units
 
Weighted Average Price per unit
 
Units
 
Weighted Average Price per unit
Outstanding at the beginning of the year
39,255

 
$
16.45

 
28,705

 
$
18.29

Issued
1,917

 
$
18.27

 
1,695

 
$
14.75

Converted
(12,966
)
 
$
14.78

 
—

 
$
—

Outstanding at the end of the period (1)
28,206

 
$
17.34

 
30,400

 
$
18.09

_____________
(1) As of March 31, 2017 , 9,709 RSUs held by our independent directors are vested.


On January 26, 2016, 111,063 RSUs were issued to employees with a grant price of $15.26 per unit. On January 23, 2017, 93,455 RSUs were issued to employees with a grant price of $18.17 per unit. These units vest on December 31, 2018, and December 31, 2019, respectively, at which time they will be converted into a number of shares of common stock, which could range from zero shares to 222,126 shares at December 31, 2018, and zero shares to 186,910 shares at December 31, 2019. The actual number of shares of common stock issued will be based on our annualized total stockholder return (“TSR”) percentage as compared to three metrics: our TSR on a predetermined absolute basis, the TSR of the constituent companies of the NAREIT Office Index (unweighted), and the TSR of a select group of peer companies. Expense is measured at the grant date, based on the estimated fair value of the award ( $19.18 per unit for the 2016 grants and $20.95 per unit for the 2017 grants) as determined by a Monte Carlo simulation-based model using the assumptions outlined in the table below. Any forfeitures of awards are recognized as they occur.
Assumption
 
Value
Expected volatility
 
24%-26%
Risk-free interest rate
 
1.15%-1.53%
Expected term
 
35 months
Expected dividend yield
 
3.7%-4.5%
Restricted stock. We have outstanding restricted stock held by employees. Restrictions on outstanding shares lapse based on various lapse schedules and range from December 2017 to December 2019. Compensation cost 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 a tiered lapse schedule. Any forfeitures of awards are recognized as they occur.

The following is a summary of the number of shares of restricted stock outstanding as of March 31, 2017 and 2016 :

 
March 31, 2017
 
March 31, 2016
 
Shares
 
Weighted Average Price per share
 
Shares
 
Weighted Average Price per share
Outstanding at the beginning of the year
246,805

 
$
20.74

 
281,905

 
$
22.46

Issued
100,170

 
$
18.17

 
119,523

 
$
15.19

Forfeiture
(13,179
)
 
$
16.92

 
(8,406
)
 
$
19.98

Restrictions lapsed
(57,553
)
 
$
25.64

 
(59,673
)
 
$
25.64

Outstanding at the end of the period
276,243

 
$
18.97

 
333,349

 
$
19.34


For the three months ended March 31, 2017 and 2016 , we recognized a total of approximately $0.9 million  and  $1.0 million , respectively, for compensation expense related to the amortization of all of the equity-based incentive awards outlined

18

above. As of March 31, 2017 , the total remaining compensation cost on unvested awards was approximately $6.1 million , with a weighted average remaining contractual life of approximately 1.7 years.

12.    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 from continuing operations, no loss is allocated to participating securities because our participating securities do not have a contractual obligation to share in our losses. The following table reflects the calculation of basic and diluted net income (loss) per common share for the three months ended March 31, 2017 and 2016 (in thousands, except per share data).
 
 
Three Months Ended
 
 
March 31, 2017
 
March 31, 2016
Numerator:
 
 
 
 
Net income (loss) attributable to common stockholders
 
$
98,171

 
$
(12,707
)
Less: net income allocated to participating securities
 
(582
)
 
—

Numerator for basic net income (loss) per share
 
$
97,589

 
$
(12,707
)
Add: undistributed net income allocated to participating securities
 
530

 
—

Less: undistributed net income re-allocated to participating securities
 
(527
)
 
—

Numerator for diluted net income (loss) per share
 
$
97,592

 
$
(12,707
)
 
 
 
 
 
Denominator:
 
 
 
 
Weighted average common shares outstanding - basic
 
47,511

 
47,390

Effect of dilutive securities
 
295

 
—

Weighted average common shares outstanding - diluted
 
47,806

 
47,390

 
 
 
 
 
Basic net income (loss) per common share
 
$
2.05

 
$
(0.27
)
Diluted net income (loss) per common share
 
$
2.04

 
$
(0.27
)
 
 
 
 
 
Securities excluded from weighted average common shares outstanding-diluted because their effect would be anti-dilutive
 
37

 
369

    


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13.          Supplemental Cash Flow Information
 
Supplemental cash flow information is summarized below for the three months ended March 31, 2017 and 2016 (in thousands):
 
Three Months Ended
 
March 31, 2017
 
March 31, 2016
Interest paid, net of amounts capitalized
$
6,782

 
$
9,665

Income taxes paid
$
3

 
$
85

 
 
 
 
Non-cash investing activities:
 

 
 

Property and equipment additions in accounts payable and accrued liabilities
$
6,176

 
$
7,368

  Development reimbursements in accounts receivable
$
—

 
$
958

Liabilities assumed through the purchase of real estate
$
3,267

 
$
—

Escrow deposit applied to purchase of real estate
$
10,000

 
$
—

Sale of real estate and lease intangibles to unconsolidated joint venture
$
13,804

 
$
—

  Acquisition of controlling interest in unconsolidated entity
$
9,770

 
$
—

 
 
 
 
Non-cash financing activities:
 

 
 

Cancellation of Series A Convertible Preferred Stock
$
—

 
$
2,700

Mortgage note assumed (1)
$
80,000

 
$
—

  Financing costs in accounts payable and accrued liabilities
$
10

 
$
81

  Unrealized gain on interest rate derivatives
$
2,069

 
$
—

Unrealized loss on interest rate derivatives
$
—

 
$
12,880

Accrual for distributions declared
$
—

 
$
8,600

 _________________
(1) The approximately $80.0 million mortgage note assumed includes approximately $40.1 million of debt assumed when we acquired the remaining 50.16% interest in our Domain 2 and Domain 7 properties during the three months ended March 31, 2017, and approximately $39.9 million of debt associated with our previously held 49.84% unconsolidated interest in these properties. The properties were consolidated during the three months ended March 31, 2017.

20


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the accompanying condensed consolidated financial statements and the notes thereto.
Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements include discussion and analysis of the financial condition of TIER REIT, Inc. and our subsidiaries (which may be referred to herein as the “Company,” “we,” “us,” or “our”), including our ability to rent space on favorable terms, our ability to address debt maturities and fund our capital requirements, our intentions to acquire or sell certain properties, the value of our assets, our anticipated capital expenditures, the amount and timing of any anticipated future cash distributions to our stockholders, and other matters.  Words such as “may,” “will,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “objectives,” “strategies,” “opportunities,” “goals,” “vision,” “mission,” and variations of these words and similar expressions are intended to identify forward-looking statements.
These forward-looking statements are not historical facts but reflect the intent, belief, or current expectations of our management based on their knowledge and understanding of the business and industry, the economy, and other future conditions. These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements.  Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described under “Risk Factors” in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2016 , as filed with the SEC on February 13, 2017, and the factors described below:
•
market disruptions and economic conditions experienced by the U.S. economy or real estate industry as a whole and the local economic conditions in the markets in which our properties are located;
•
our ability to renew expiring leases and lease vacant spaces at favorable rates or at all;
•
the inability of tenants to continue paying their rent obligations due to bankruptcy, insolvency, or a general downturn in their businesses; 
•
the availability of cash flow from operating activities to fund distributions and capital expenditures;
•
our ability to raise capital in the future by issuing additional equity or debt securities, selling our assets, or otherwise to fund our future capital needs;
•
the availability and terms of financing, including the impact of higher interest rates on the cost and/or availability of financing;
•
our ability to strategically acquire, develop, or dispose of assets on favorable terms, or at all;
•
our level of debt and the terms and limitations imposed on us by our debt agreements;
•
our ability to retain our executive officers and other key personnel;
•
unfavorable changes in laws or regulations impacting our business or our assets; and
•
factors that could affect our ability to qualify as a real estate investment trust for federal income tax purposes.
Forward-looking statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this report, and may ultimately prove to be incorrect or false.  We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.  We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and Section 21E of the Exchange Act.



21


Critical Accounting Policies and Estimates     
For a discussion of our critical accounting policies and estimates, please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 . There have been no significant changes to our critical accounting policies since December 31, 2016 .
Overview
As of March 31, 2017 , we owned interests in 25 operating office properties with approximately 7.9 million rentable square feet, one non-operating property with approximately 331,000 rentable square feet, and two development properties that will consist of approximately 636,000 rentable square feet. Our properties are located in 10 markets throughout the United States, and substantially all of our business is conducted through our operating partnership, Tier Operating Partnership LP (“Tier OP”).  The operations of properties sold in 2017 and 2016 are included in our continuing operations for our period of ownership.
As an owner of real estate, the majority of our income and cash flow is derived from rental revenue received pursuant to tenant leases for office space at our properties. While many real estate markets have generally stabilized since the pervasive and fundamental disruptions associated with the last recession that created extensive job losses and limited availability of credit to businesses, the financial markets have been highly variable, and oil prices declined dramatically in 2015 and have been volatile in recent years. Further, performance in commercial office real estate is generally predicated on a sustained pattern of office-using job growth, and as a result of only modest annual growth and tenants focused on using less space per employee, it has trailed the general economy. The uncertainty about continued economic recovery has also impacted, and may continue to impact, our tenants’ businesses. For example, tenants may be reluctant to make long-term lease commitments. In the current economic climate, we continue to follow a disciplined approach to managing our operations.

2017 Key Objectives
We have substantially completed the strengthening phase of our strategic plan, which has been our focus for the past two years, and have begun the recycling phase, which will reallocate our capital and efforts from properties outside our target growth markets to new opportunities inside them. Through prudent development and strategic acquisitions, we will seek to increase our influence and concentration within TIER 1 submarkets, enhance the overall quality and reduce the average age of our portfolio, and position the Company for growth, which we are beginning to see with the pre-leasing of our Domain 8 development property.

Our business strategy for 2017 is comprised of the following four objectives: (1) substantially complete portfolio repositioning while balancing relative market concentration; (2) manage capital expenditures to sustain dividend coverage; (3) maintain portfolio occupancy despite known challenges in the Houston market; and (4) continue our robust investor relations program.

Substantially Complete Portfolio Repositioning While Balancing Market Concentration
Provided capital market conditions remain advantageous, during 2017, we will work to exit four or more non-target markets yielding between $400 million and $500 million of proceeds that will be allocated to highly-selective strategic investment opportunities. Exiting these properties will allow us to substantially complete our portfolio repositioning and provide capital to reinvest into our target markets. In the first quarter of 2017, we exited three non-target markets and generated gross proceeds of approximately $293.2 million from the sales of four properties: Buena Vista Plaza in Burbank, California; the Wanamaker Building and Three Parkway in Philadelphia, Pennsylvania; and Eisenhower I in Tampa, Florida. Subsequent to quarter end, we exited a fourth non-target market when 1325 G Street and the Colorado Building (two properties located in Washington, D.C. in which we owned a 10% interest) were sold, generating approximately $25.9 million gross proceeds to us.

We will seek to invest between $100 million and $225 million in target growth markets through a combination of prudent development and our strategic acquisition efforts in 2017. In the first quarter of 2017, we acquired an unrelated third party’s 50.16% interest in Domain 2 and Domain 7 in Austin, Texas, for a contract purchase price of approximately $51.2 million plus assumed debt of approximately $40.1 million. We have also continued the execution of our build-to-core development program, with the start of development of Third + Shoal, located in the CBD of Austin, Texas, which is strategically located within our TIER 1 submarkets. Finally, we will remain disciplined as we seek to acquire additional properties that specifically align with our strategy, provide a competitive edge within TIER 1 submarkets, and demonstrate a clear path to long-term value creation for our stockholders.

Manage Capital Expenditures to Sustain Dividend Coverage
We intend to actively manage our capital expenditures with the objective of balancing leasing capital and competitive building improvements that we believe are important to maintain and/or create value with the goal of full and sustainable dividend

22


coverage. We expect our recycling efforts will allow us to manage our capital expenditures by: (1) enhancing the overall quality of the portfolio; (2) reducing the average age of our real estate assets; and (3) leveraging the existing property management team, thereby resulting in operating efficiencies within each market.

Maintain Portfolio Occupancy Despite Known Challenges in the Houston Market
We are focused on maintaining occupancy across our portfolio despite upcoming known tenant vacancies in our Houston portfolio. The leasing environment remains strong in the majority of our markets, though risks exist in the following areas: (1) the pending known tenant move-out of approximately 83,000 square feet in our properties located in the energy corridor of Houston, Texas; and (2) general exposure to the Houston market that continues to be hampered by low oil prices, recent office deliveries, and sublease space. Despite the downside exposure from the known upcoming tenant vacancies in Houston, and the Houston market generally, we estimate the total portfolio should be between 88% and 90% occupied as of December 31, 2017. As of March 31, 2017, the total portfolio was 90.2% occupied.
The following table sets forth information regarding our leasing activity for the three months ended March 31, 2017 :
Three months ended March 31, 2017
Renewal
 
Expansion
 
New
 
Total
Square feet leased
219,000

 
3,000

 
59,000

 
281,000

Weighted average lease term (in years)
11.2

 
9.9

 
11.0

 
11.1

Increase in weighted average net rental rates per square foot per year (1)
$
2.24

 
$
0.15

 
$
6.28

 
$
2.82

% increase in weighted average net rental rates per square foot per year
19
%
 
1
%
 
37
%
 
22
%
Leasing cost per square foot per year (2)
$
3.22

 
$
3.73

 
$
7.40

 
$
4.09

_________________
(1) Weighted average net rental rates are calculated as the fixed base rental amount paid by a tenant under the terms of their related lease agreements, less any portion of that base rent used to offset real estate taxes, utility charges, and other operating expenses incurred in connection with the leased space, weighted for the relative square feet under the lease. Increase reflects change in net rental rates related to the lease previously occupying the specific space.
(2)
Includes tenant improvements and leasing commissions.

Continue Our Robust Investor Relations Program
We believe our best-in-class, Class A office portfolio, focused investment strategy, in-house expertise, and opportunity to generate significant value through our reinvestment efforts in build-to-core developments and strategic acquisitions are attractive to institutional investors and differentiate us from other office REITs. To this end, we will continue a robust investor relations program that will communicate our strategy to a broad audience of institutional investors.
Results of Operations
The results of operations of our consolidated operating and non-operating properties are included in the discussion below, and include properties sold and acquired in 2017 and 2016 for our period of ownership. The term “same store” in the discussion below includes our consolidated operating office properties that are owned and operated for the entirety of the two periods being compared and excludes properties held for sale.
Three months ended March 31, 2017 , as compared to the three months ended March 31, 2016
Rental Revenue.   Rental revenue for the three months ended March 31, 2017 , was approximately $56.4 million as compared to approximately $68.5 million for the three months ended March 31, 2016 , a $12.1 million decrease . Our non-same store properties had a decrease of approximately $10.6 million in rental revenue primarily due to a decrease of approximately $14.1 million from the sale (or held for sale classification) of properties, partially offset by an increase of approximately $3.8 million from acquired properties. Our same store properties had a decrease of approximately $1.5 million, primarily as a result of a decrease in contribution to revenue from the amortization of above- and below-market rents, net, of approximately $0.7 million and a decrease in lease termination fee income of approximately $0.5 million.
Property Operating Expenses. Property operating expenses for the three months ended March 31, 2017 , were approximately $14.7 million as compared to approximately $20.5 million for the three months ended March 31, 2016 , a $5.8 million decrease . Our non-same store properties had a decrease of approximately $5.4 million primarily due to a decrease of approximately $5.6 million from the sale (or held for sale classification) of properties, partially offset by an increase of approximately $0.6 million from acquired properties. Our same store properties had a decrease of approximately $0.4 million, primarily due to lower utilities expense and lower repairs and maintenance expense.
Interest Expense.  Interest expense for the three months ended March 31, 2017 , was approximately $8.8 million as compared to approximately $12.2 million for the three months ended March 31, 2016 , and was comprised of interest expense,

23


and amortization of deferred financing fees. The $3.4 million decrease was primarily due to lower overall borrowings which reduced our interest expense by approximately $3.2 million and increased capitalized interest which reduced our interest expense by approximately $0.5 million.

Real Estate Taxes.  Real estate taxes from our consolidated real estate properties for the three months ended March 31, 2017 , were approximately $8.6 million as compared to approximately $11.1 million for the three months ended March 31, 2016 , a $2.5 million decrease . Our non-same store properties had a decrease of approximately $2.0 million primarily due to a decrease of $2.6 million from the sale (or held for sale classification) of properties, partially offset by increases of approximately $0.6 million from acquired properties. Our same store properties had a decrease of approximately $0.5 million primarily due to higher estimates of assessed values in certain markets in 2016 and increased tax refunds received in 2017.
Asset Impairment Losses. We had no asset impairment losses for the three months ended March 31, 2017 . We had $4.8 million in asset impairment losses for the three months ended March 31, 2016 , related to an asset assessed for impairment primarily due to a change in management’s estimate of the intended hold period.

General and Administrative.   General and administrative expenses for the three months ended March 31, 2017 , were approximately $5.7 million as compared to approximately $6.5 million for the three months ended March 31, 2016 , and were comprised of corporate general and administrative expenses including payroll costs, directors’ and officers’ insurance premiums, audit and tax fees, legal fees, and other administrative expenses. The $0.8 million decrease is primarily due to reduced payroll costs.
Depreciation and Amortization. Depreciation and amortization expense for the three months ended March 31, 2017 , was approximately $24.5 million as compared to approximately $32.0 million for the three months ended March 31, 2016 , a $7.5 million decrease . Our non-same store properties had a decrease of approximately $4.3 million primarily due to a decrease of approximately $6.1 million from the sale (or held for sale classification) of properties, partially offset by an increase of approximately $2.0 million from acquired properties. Our same store properties had a decrease of approximately $3.2 million primarily due to accelerated depreciation and amortization expense in 2016 as a result of early lease terminations.
Loss on Early Extinguishment of Debt. We had approximately $0.5 million in loss on early extinguishment of debt for the three months ended March 31, 2017 , primarily comprised of prepayment penalty costs and write-off of deferred financing fees related to early payoffs of debt. We had no loss on extinguishment of debt for the three months ended March 31, 2016 .
Equity in Operations of Investments. Equity in operations of investments for the three months ended March 31, 2017 , was a loss of approximately $0.3 million as compared to income of approximately $0.4 million for the three months ended March 31, 2016 , and was comprised of our share of the earnings and losses of our unconsolidated investments. The $0.7 million decrease was primarily due to the sale of our investment in the Wanamaker Building.
Gain on Sale of Assets. We had approximately $90.8 million in gain on sale of assets for the three months ended March 31, 2017 , primarily related to our sales of Buena Vista Plaza, Eisenhower I, and Three Parkway and the sale of our investment in the Wanamaker Building. We had approximately $5.7 million in gain on sale of assets for the three months ended March 31, 2016 , primarily related to our sale of Lawson Commons.
Gain on Remeasurement of Investment in Unconsolidated Entities. We had approximately $14.2 million in gain on remeasurement of investment in unconsolidated entities for the three months ended March 31, 2017 , as a result of obtaining a controlling interest in Domain 2 and Domain 7 and remeasuring our previously held equity interest at fair value. We had no gain on remeasurement of investment in unconsolidated entities for the three months ended March 31, 2016 .
Cash Flow Analysis
Three months ended March 31, 2017 , as compared to the three months ended March 31, 2016
Cash used in operating activities was approximately $2.5 million for the three months ended March 31, 2017 . Cash used in operating activities for the three months ended March 31, 2016 , was approximately $5.9 million . The approximately $3.4 million decrease is primarily attributable to (1) approximately $4.1 million more cash received primarily due to the results of our real estate property operations, net of interest expense, and general and administrative expenses; and (2) a decrease in cash paid for lease commissions and other lease intangibles of approximately $0.4 million; partially offset by (3) the timing of receipt of revenues and payment of expenses which resulted in approximately $1.0 million more net cash outflows from working capital assets and liabilities in the three months ended March 31, 2017 , compared to the three months ended March 31, 2016 .
Cash provided by investing activities for the three months ended March 31, 2017 , was approximately $194.1 million and was primarily comprised of proceeds from the sale of assets of approximately $261.6 million and return of investments of approximately $1.5 million, partially offset by purchases of real estate of approximately $39.4 million, monies used to fund

24


capital expenditures for existing real estate and real estate under development of approximately $22.2 million, investments in unconsolidated entities of approximately $4.4 million, and escrow deposits for anticipated real estate purchases of approximately $3.0 million. Cash provided by investing activities for the three months ended March 31, 2016 , was approximately $49.6 million and was primarily comprised of proceeds from the sale of assets of approximately $61.2 million, partially offset by monies used to fund capital expenditures for existing real estate and real estate under development of approximately $10.6 million, and investments in unconsolidated entities of approximately $1.8 million related to development activities at an unconsolidated property.
Cash used in financing activities for the three months ended March 31, 2017 , was approximately $151.1 million and was primarily comprised of payments on notes payable and financing costs, net of proceeds from notes payable of approximately $134.0 million and distributions of approximately $17.2 million. Cash used in financing activities for the three months ended March 31, 2016 , was approximately $48.3 million and was primarily comprised of payments on notes payable and financing costs, net of proceeds from notes payable of approximately $39.5 million and distributions of approximately $8.6 million.
Funds from Operations (“FFO”)

Historical cost accounting for real estate assets in accordance with accounting principles generally accepted in the United States of America (“GAAP”) implicitly assumes that the value of real estate diminishes predictably over time.  Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient for evaluating operating performance.  FFO is a non-GAAP financial measure that is widely recognized as a measure of a REIT’s operating performance.  We use FFO as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) in the April 2002 “White Paper on Funds From Operations” which is net income (loss), computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, gains (or losses) from sales of property and impairments of depreciable real estate (including impairments of investments in unconsolidated entities which resulted from measurable decreases in the fair value of the depreciable real estate held by the unconsolidated entity), plus depreciation and amortization of real estate assets, and after related adjustments for unconsolidated entities and noncontrolling interests.  The determination of whether impairment charges have been incurred is based partly on anticipated operating performance and hold periods.  Estimated undiscounted cash flows from a property, derived from estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred.  While impairment charges for depreciable real estate are excluded from net income (loss) in the calculation of FFO as described above, impairments reflect a decline in the value of the applicable property which we may not recover.

We believe that the use of FFO, together with the required GAAP presentations, is helpful in understanding our operating performance because it excludes real estate-related depreciation and amortization, gains and losses from property dispositions, impairments of depreciable real estate assets, and extraordinary items, and as a result, when compared period to period, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income.  Factors that impact FFO include fixed costs, yields on cash held in accounts, income from portfolio properties and other portfolio assets, interest rates on debt financing, and operating expenses.

We also evaluate FFO, excluding certain items. The items excluded relate to certain non-operating activities or certain non-recurring activities that may create significant FFO volatility and affect the comparability of FFO across periods. We believe it is useful to evaluate FFO excluding these items because it provides useful information in analyzing comparability between reporting periods and in assessing the sustainability of our operating performance.

FFO and FFO, excluding certain items, should not be considered as alternatives to net income (loss), or as indicators of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to make distributions.  Additionally, the exclusion of impairments limits the usefulness of FFO and FFO, excluding certain items, as historical operating performance measures since an impairment charge indicates that operating performance has been permanently affected.  FFO and FFO, excluding certain items, are non-GAAP measurements and should be reviewed in connection with other GAAP measurements.  Our FFO and FFO, excluding certain items, as presented may not be comparable to amounts calculated by other REITs that do not define FFO in accordance with the current NAREIT definition, or interpret it differently, or that identify and exclude different items related to non-operating activities or certain non-recurring activities.         
    
The following section presents our calculations of FFO (as defined by NAREIT) attributable to common stockholders and FFO attributable to common stockholders, excluding certain items, for the three months ended March 31, 2017 and 2016 , and provides additional information related to our FFO attributable to common stockholders and FFO attributable to common stockholders, excluding certain items.

25


    
The table below is presented in thousands, except per share amounts: 
 
Three Months Ended
 
March 31, 2017
 
March 31, 2016
Net income (loss)
$
98,228

 
$
(12,723
)
Noncontrolling interests
(57
)
 
16

Net income (loss) attributable to common stockholders
98,171

 
(12,707
)
Adjustments:
 

 
 

Real estate depreciation and amortization from consolidated properties
24,431

 
31,770

Real estate depreciation and amortization from unconsolidated properties
566

 
2,045

Real estate depreciation and amortization - noncontrolling interests
—

 
(6
)
Impairment of depreciable real estate
—

 
4,826

Gain on sale of depreciable real estate
(90,750
)
 
(5,739
)
Gain on remeasurement of investment in unconsolidated entities
(14,168
)
 
—

Taxes associated with sale of depreciable real estate
—

 
64

Noncontrolling interests
48

 
(21
)
FFO attributable to common stockholders
18,298

 
20,232

 
 
 
 
Severance charges
—

 
493

Interest rate hedge ineffectiveness expense (1)
30

 
—

Loss on early extinguishment of debt
545

 
—

Default interest (2)
602

 
617

Noncontrolling interests
(1
)
 
(1
)
FFO attributable to common stockholders, excluding certain items
$
19,474

 
$
21,341

Weighted average common shares outstanding - basic
47,511

 
47,390

Weighted average common shares outstanding - diluted (3)
47,806

 
47,715

Net income (loss) per common share - diluted (3)
$
2.04

 
$
(0.27
)
FFO per common share - diluted
$
0.38

 
$
0.42

FFO, excluding certain items, per common share - diluted
$
0.41

 
$
0.45

_____________
(1)    Interest rate swaps are adjusted to fair value through other comprehensive income (loss). However, because our interest rate swaps do not have a LIBOR
floor while the hedged debt is subject to a LIBOR floor, the portion of the change in fair value of our interest rate swaps attributable to this mismatch is reclassified to interest rate hedge ineffectiveness expense.
(2)
We have a non-recourse loan in default which subjects us to incur default interest at a rate that is 500 basis points higher than the stated interest rate. Although there can be no assurance, we anticipate that when this property is sold or when ownership of this property is conveyed to the lender, this default interest will be forgiven.
(3)
There are no dilutive securities for purposes of calculating net loss per common share.

For a more detailed discussion of certain changes in the factors listed above, refer to “Results of Operations” beginning on page 23.





26


Same Store Net Operating Income and Same Store Cash Net Operating Income (“Same Store NOI” and “Same Store Cash NOI”)

Same Store NOI is equal to rental revenue, less lease termination fee income, property operating expenses (excluding tenant improvement demolition costs), real estate taxes, and property management expenses for our same store properties and is considered a non-GAAP financial measure. Same Store Cash NOI is equal to Same Store NOI less non-cash revenue items including straight-line rent adjustments and the amortization of above- and below-market rent. The same store properties include our operating office properties not held for sale and owned and operated for the entirety of both periods being compared and include our comparable ownership percentage in each period for properties in which we own an unconsolidated interest that is accounted for using the equity method.  We view Same Store NOI and Same Store Cash NOI as important measures of the operating performance of our properties because they allow us to compare operating results of properties owned and operated for the entirety of both periods being compared and therefore eliminate variations caused by acquisitions or dispositions during such periods.

Same Store NOI and Same Store Cash NOI presented by us may not be comparable to Same Store NOI or Same Store Cash NOI reported by other REITs that do not define Same Store NOI or Same Store Cash NOI exactly as we do. We believe that in order to facilitate a clear understanding of our operating results, Same Store NOI and Same Store Cash NOI should be examined in conjunction with net income (loss) as presented in our consolidated financial statements and notes thereto. Same Store NOI and Same Store Cash NOI should not be considered as an indicator of our ability to make distributions, as alternatives to net income (loss) as an indication of our performance, or as measures of cash flows or liquidity.


27


The table below presents our Same Store NOI and Same Store Cash NOI with a reconciliation to net loss for the three months ended March 31, 2017 and 2016 (in thousands). The same store properties for these comparisons consist of 21 operating properties and 7.0 million square feet. Our four held for sale properties have been excluded from our same store results below. Our Domain 2 and Domain 7 properties (two properties in which we acquired full ownership in January 2017) are reflected below as unconsolidated and at their prior year ownership percentage of 49.84% in both periods.
 
 
 
Three Months Ended
 
 
 
March 31, 2017
 
March 31, 2016
Same Store Revenue:
 
Rental revenue
$
46,546

 
$
48,039

 
 
Less:
 
 
 
 
 
  Lease termination fees
(128
)
 
(589
)
 
 
 
46,418

 
47,450

 
 
 
 
 
 
Same Store Expenses:
 
 
Property operating expenses (less tenant improvement demolition costs)
12,008

 
12,447

 
 
Real estate taxes
7,453

 
7,956

 
 
Property management fees
9

 
56

 
Property Expenses
19,470

 
20,459

Same Store NOI - consolidated properties
26,948

 
26,991

Same Store NOI - unconsolidated properties (at ownership %)
1,557

 
820

Same Store NOI
$
28,505

 
$
27,811

 
 
 
 
Increase in Same Store NOI
2.5
%
 

 
 
 
 
 
 
Same Store NOI - consolidated properties
$
26,948

 
$
26,991

 
 
Less:
 
 
 
 
 
  Straight-line rent revenue adjustment
(1,722
)
 
(1,768
)
 
 
  Amortization of above- and below-market rents, net
(703
)
 
(1,401
)
Same Store Cash NOI - consolidated properties
24,523

 
23,822

Same Store Cash NOI - unconsolidated properties (at ownership %)
1,311

 
590

Same Store Cash NOI
$
25,834

 
$
24,412

 
 
 
 
Increase in Same Store Cash NOI
5.8
%
 
 
 
 
 
 
 
 
Reconciliation of net income (loss) to Same Store NOI and Same Store Cash NOI
 
Net income (loss)
$
98,228

 
$
(12,723
)
 
 
Adjustments:
 
 
 
 
 
  Interest expense
8,780

 
12,240

 
 
  Asset impairment losses
—

 
4,826

 
 
  Tenant improvement demolition costs
81

 
64

 
 
  General and administrative
5,707

 
6,504

 
 
  Depreciation and amortization
24,529

 
32,044

 
 
  Interest and other income
(318
)
 
(274
)
 
 
  Loss on early extinguishment of debt
545

 
—

 
 
  Provision for income taxes
244

 
182

 
 
  Equity in operations of investments
256

 
(415
)
 
 
  Gain on sale of assets
(90,750
)
 
(5,739
)
 
 
  Gain on remeasurement of investment in unconsolidated entities
(14,168
)
 
—

 
 
  Net operating income of non-same store properties
(6,058
)
 
(9,129
)
 
 
  Lease termination fees
(128
)
 
(589
)
 
 
Same Store NOI of unconsolidated properties (at ownership %)
1,557

 
820

Same Store NOI
28,505

 
27,811

 
 
  Straight-line rent revenue adjustment
(1,722
)
 
(1,768
)
 
 
  Amortization of above- and below-market rents, net
(703
)
 
(1,401
)
 
 
Cash NOI adjustments for unconsolidated properties (at ownership %)
(246
)
 
(230
)
Same Store Cash NOI
$
25,834

 
$
24,412


28


For a more detailed discussion of certain of the changes in the factors listed above, refer to “Results of Operations” beginning on page 23.
Liquidity and Capital Resources  
    
As of March 31, 2017 , we had cash and cash equivalents of approximately $55.2 million and restricted cash of approximately $7.7 million .  We also have a credit facility with a borrowing capacity of $860.0 million (as described in more detail below). As of March 31, 2017 , we had approximately $575.0 million of outstanding borrowings and had the ability, subject to our most restrictive financial covenants, to borrow an additional approximately $177.1 million under the credit facility as a whole.

Our expected actual and potential short- and long-term liquidity sources are, among others, cash and cash equivalents, restricted cash, revenue from our properties, proceeds from available borrowings under our credit facility and additional secured or unsecured debt financings and refinancings, and proceeds from the sales of properties. We believe our listing on the NYSE in 2015 will facilitate supplementing these sources by selling equity or debt securities of the Company in the future if and when we believe appropriate to do so.
 
We may also seek to generate capital by contributing one or more of our existing assets to a joint venture with a third party. Investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved. Our ability to successfully identify, negotiate, and complete joint venture transactions on acceptable terms or at all is highly uncertain.

Generally, our principal liquidity needs are operating and administrative expenses, payment of principal and interest on our outstanding indebtedness, including repaying or refinancing our outstanding indebtedness as it matures, capital improvements to our properties, including commitments for future tenant improvements, property developments, property acquisitions, and distributions to our stockholders. During the three months ended March 31, 2017 , we paid off approximately $73.4 million of mortgage debt before maturity. As of March 31, 2017 , approximately $64.3 million of debt, including our share of debt at our unconsolidated properties, has matured or matures before the end of 2018. We expect to pay off this debt with cash provided by operating activities, proceeds from the dispositions of properties, borrowings under our credit facility, or other refinancings, although there can be no assurance regarding such repayment.
  
At projected operating levels, we anticipate we have adequate capital resources and liquidity to meet our short-term and long-term liquidity requirements.

Notes Payable

Our notes payable, net were approximately $773.9 million as of March 31, 2017 . Approximately $206.4 million of these notes payable, net were secured by real estate assets with a carrying value of approximately $288.4 million as of March 31, 2017 . As of March 31, 2017 , 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 $130.0 million . As of March 31, 2017 , the stated annual interest rates on our outstanding debt ranged from approximately 2.48% to 6.09% . As of March 31, 2017 , the effective weighted average interest rate for our consolidated debt is approximately 3.71% . For our loan that is in default and detailed below, we incur a default interest rate that is 500 basis points higher than the stated interest rate, which resulted in an overall effective weighted average interest rate of approximately 4.02% as of March 31, 2017 , for our consolidated debt and an increase in interest expense for the three months ended March 31, 2017 , of approximately $0.6 million . We anticipate, although we can provide no assurance, that when the property to which such loan relates is sold, or if ownership of this property is conveyed to the lender, the default interest will be forgiven.

Our loan agreements generally require us to comply with certain reporting and financial covenants.  As of March 31, 2017 , we were in default on a non-recourse property loan with an outstanding balance of approximately $48.2 million secured by our Fifth Third Center property located in Columbus, Ohio, which has a carrying value of approximately $32.7 million as of March 31, 2017 . A receiver was appointed for this property in March 2016. The loan had an original maturity date of July 2016, and we are currently working with the lender to dispose of this property on its behalf. As of March 31, 2017 , other than the default discussed above, we believe we were in compliance with the covenants under each of our loan agreements, including our credit facility, and our outstanding consolidated debt (excluding the default debt) had maturity dates that range from April 2019 to June 2022.




29


Credit Facility
 
We have a credit agreement through our operating partnership, Tier OP, that provides for total unsecured borrowings of up to $860.0 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 $285.0 million revolving line of credit. The first term loan matures on December 18, 2019. The second term loan matures on June 30, 2022. The revolving line of credit matures on December 18, 2018, 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 35 basis points to 250 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 March 31, 2017 , 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 $177.1 million under the facility as a whole. As of March 31, 2017 , the weighted average effective interest rate for borrowings under the credit facility as a whole, inclusive of our interest rate swaps, was approximately 3.38% .
 
Distributions

Distributions are authorized at the discretion of our board of directors based on its analysis of numerous factors, including but not limited to our performance over the previous period, expectations of performance over future periods, forthcoming cash needs, earnings, cash flow, anticipated cash flow, capital expenditure requirements, cash on hand and general financial condition. The board’s decisions are also influenced, in substantial part, by the requirements necessary to maintain our REIT status.

Our board of directors reinstated quarterly cash distributions beginning in the second quarter of 2015, at $0.18 per share per quarter, and has authorized cash distributions in the same amount for each quarter since that time. Distributions declared for each quarter were paid in the subsequent quarter through January 2017. Beginning in the first quarter of 2017, distributions declared for each quarter are paid in the same quarter. We have paid distributions of approximately $17.2 million to our common stockholders thus far in 2017, which includes amounts declared in the fourth quarter of 2016. We anticipate that the board of directors will continue to consider authorizing a quarterly distribution payable from cash anticipated to be provided by operations. There is no assurance that distributions will continue or at any particular rate or timing. All or a portion of the distribution may constitute a return of capital.
 
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to interest rate changes primarily as a result of our debt used to acquire properties. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we borrow primarily at fixed rates or variable rates with what we believe are the lowest margins available at the time and in some cases, the ability to convert variable rates to fixed rates. With regard to variable rate financing, we will assess interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. We have entered into derivative financial instruments to mitigate our interest rate risk on certain financial instruments and as a result have effectively fixed the interest rate on certain of our variable rate debt. As of March 31, 2017 , we had approximately $655.0 million of debt that bears interest at a variable rate with $525.0 million of this variable rate debt effectively fixed through the use of interest rate swaps.

30

A 100 basis point increase in interest rates on our variable rate debt outstanding as of March 31, 2017 , would result in a net increase in total annual interest incurred of approximately $1.3 million. A 100 basis point decrease in interest rates on our variable rate debt outstanding as of March 31, 2017 , would result in a net decrease in total annual interest incurred of approximately $1.3 million. In the event LIBOR was less than zero we would incur additional interest expense of approximately $1.3 million per year per 25 basis point decrease. A 100 basis point increase in interest rates on our variable rate debt outstanding as of March 31, 2017 , would result in a net increase in the fair value of our interest rate swaps of approximately $18.9 million. A 100 basis point decrease in interest rates on our variable rate debt outstanding as of March 31, 2017 , would result in a net decrease in the fair value of our interest rate swaps of approximately $19.8 million.
We do not have any foreign operations and thus we are not directly exposed to foreign currency fluctuations.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures
 
As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated as of March 31, 2017 , the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of March 31, 2017 , were effective for the purpose of ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
 
We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2017 , that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




31


PART II
OTHER INFORMATION
Item 1. Legal Proceedings.

We are not party to, and none of our properties are subject to, any material pending legal proceedings.
Item 1A. Risk Factors.

Except to the extent previously updated or to the extent additional factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors (including, without limitation, the matters discussed in Part I, “Item 2-Management’s Discussion and Analysis of Financial Condition and Results of Operations”), there were no material changes to the risk factors disclosed in Part I, “Item 1A - Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016 .

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table includes information regarding purchases of our common stock made by us during the quarter ended March 31, 2017 . These purchases represent shares of common stock surrendered by employees to us to satisfy such employees’ minimum tax withholding obligations in connection with the lapse of restrictions on shares of restricted common stock.
 
 
Total number of shares purchased
 
Average price paid per share
 
Total number of shares purchased as part of publicly announced plans or programs
 
Maximum number of shares that may yet be purchased under the plans or programs
January 2017
 
12,679

 
$18.30
 
not applicable
 
not applicable
February 2017
 
5,333

 
$18.18
 
not applicable
 
not applicable
March 2017
 
—

 
—
 
not applicable
 
not applicable
Total
 
18,012

 
$18.26
 
 
 
 

Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
    
On May 10, 2017, the Board of Directors appointed James E. Sharp, the Company’s Chief Accounting Officer & Executive Vice President, as Executive Vice President - Capital Markets. In connection with Mr. Sharp’s appointment, the Board of Directors determined that, in addition to his current role as Chief Financial Officer and Treasurer, Dallas E. Lucas will also succeed Mr. Sharp as the Company’s principal accounting officer.
Prior to joining the Company in May 2014, Mr. Lucas, 54, served as chief financial officer of Intrawest ULC (“Intrawest”) from July 2012 to October 2013. Intrawest is a developer and operator of destination resorts. Prior to joining Intrawest, Mr. Lucas was a founding partner of Pacshore Partners, a Los Angeles-based real estate investment company. He also served as chief executive officer and president and as a director of Pacific Office Properties Trust, Inc., a publicly traded REIT, from September 2007 to August 2009. He served as executive vice president and chief financial officer of Maguire Properties, Inc., a publicly traded REIT, from July 2002 to March 2007, and he served as chief financial officer and vice president and as a director of NorthStar Capital Investment Corp. from August 1998 to July 2002. From December 1993 to August 1998, he served as senior vice president and chief financial officer of Crescent Real Estate Equities Inc., a publicly traded REIT. He began his career as an auditor with Arthur Andersen & Company in 1984 until joining Crescent in 1993. He received a bachelor of business administration degree in accounting from the University of Oklahoma.

32


Effective May 10, 2017, the Company and Tier OP entered into a Sixth Amendment to Employment Agreement with Mr. Sharp (the “Amendment”).  The Amendment adjusts Mr. Sharp’s base salary and the percentages for his target annual cash incentive compensation and target annual long-term incentive compensation.

The information set forth herein with respect to the Amendment does not purport to be complete in scope and is qualified in its entirety by the full text of the Amendment, which is filed as Exhibit 10.9 hereto and is incorporated into this Quarterly Report on Form 10-Q by reference.
Item 6. Exhibits.
The exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto.

33


SIGNATURE  
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
 
TIER REIT, INC.
Dated: May 10, 2017
By:
/s/ Dallas E. Lucas
 
 
Dallas E. Lucas
 
 
Chief Financial Officer
 
 
(Principal Financial Officer and Principal Accounting Officer)

34


Index to Exhibits
Exhibit Number
 
Description
10.1
 
Form of Restricted Stock Unit Award Agreement with respect to performance-based vesting under the TIER REIT, Inc. 2015 Equity Incentive Plan (previously filed and incorporated by reference to Annual Report on Form 10-K filed February 13, 2017)
10.2
 
Form of Restricted Stock Award Agreement under the TIER REIT, Inc. 2015 Equity Incentive Plan (previously filed and incorporated by reference to Annual Report on Form 10-K filed February 13, 2017)
10.3
 
First Amendment to TIER REIT, Inc. 2015 Equity Incentive Plan (previously filed and incorporated by reference to Annual Report on Form 10-K filed February 13, 2017)
10.4
 
Fourth Amendment to Employment Agreement, effective as of February 10, 2017, by and between TIER REIT, Inc. and Tier Operating Partnership LP and Scott W. Fordham (previously filed and incorporated by reference to Annual Report on Form 10-K filed February 13, 2017)
10.5
 
Third Amendment to Employment Agreement, effective as of February 10, 2017, by and between TIER REIT, Inc. and Tier Operating Partnership LP and Dallas E. Lucas (previously filed and incorporated by reference to Annual Report on Form 10-K filed February 13, 2017)
10.6
 
Fourth Amendment to Employment Agreement, effective as of February 10, 2017, by and between TIER REIT, Inc. and Tier Operating Partnership LP and William J. Reister (previously filed and incorporated by reference to Annual Report on Form 10-K filed February 13, 2017)
10.7
 
Fourth Amendment to Employment Agreement, effective as of February 10, 2017, by and between TIER REIT, Inc. and Tier Operating Partnership LP and Telisa Webb Schelin (previously filed and incorporated by reference to Annual Report on Form 10-K filed February 13, 2017)
10.8
 
Fifth Amendment to Employment Agreement, effective as of February 10, 2017, by and between TIER REIT, Inc. and Tier Operating Partnership LP and James E. Sharp (previously filed and incorporated by reference to Annual Report on Form 10-K filed February 13, 2017)
10.9
 
Sixth Amendment to Employment Agreement, effective as of May 10, 2017, by and between TIER REIT, Inc. and Tier Operating Partnership LP and James E. Sharp (filed herewith)
10.10
 
Third Amendment to Amended and Restated Credit Agreement, dated as of March 17, 2017, by and among Tier Operating Partnership LP as Borrower; TIER REIT, Inc. as Parent; and Wells Fargo Bank, National Association as Administrative Agent (filed herewith)
31.1
 
Rule 13a-14(a) or Rule 15d-14(a) Certification (filed herewith)
31.2
 
Rule 13a-14(a) or Rule 15d-14(a) Certification (filed herewith)
32.1*
 
Section 1350 Certifications (furnished herewith)
101
 
The following financial information from TIER REIT, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Condensed Consolidated Statements of Changes in Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements (filed herewith)
 _______________________________________________________________

*                  In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certification will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

35
Exhibit 10.9

SIXTH AMENDMENT TO EMPLOYMENT AGREEMENT

This SIXTH AMENDMENT TO EMPLOYMENT AGREEMENT (the “Amendment”) is made as of May 10, 2017, between James E. Sharp (the “Executive”) and TIER REIT, Inc. (formerly known as Behringer Harvard REIT I, Inc.), a Maryland corporation (the “Company”), and Tier Operating Partnership LP (formerly known as Behringer Harvard Operating Partnership I LP), a Texas limited partnership (the “Operating Partnership” and together with the Company, the “Employers”).

WHEREAS, the Executive and the Employers entered into that certain Employment Agreement, dated September 1, 2012, as amended (the “Agreement”), pursuant to which the Executive is currently employed by the Employers; and

WHEREAS, the Executive and the Employers mutually desire to amend the Term of the Agreement.

NOW THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:

1. Recitals . The recitals contained in this Amendment are hereby incorporated into, and made an integral part of, this Amendment. All defined terms used herein that are not otherwise defined shall have the same meaning ascribed to them in the Agreement.    

2. Base Salary . The first sentence of Section 2(a) is hereby amended and restated as follows:

“(a) During the Term, the Executive’s annual base salary shall be no less than $300,000.”

3. Cash Incentive Compensation . The second sentence of Section 2(b) is hereby amended and restated as follows:

“(b) The Executive’s target annual cash incentive compensation shall be 70% of his Base Salary.”

4. Long-Term Incentive Awards . The second sentence of Section 2(c) is hereby amended and restated as follows:
“(c) The Executive’s target annual long-term incentive award shall be equal to at least 60% of his combined Base Salary and target annual cash incentive compensation attributable to such calendar year during the Term.”



a.      Binding Effect of Amendment . This Amendment shall be binding on all successors and permitted assigns of the parties hereof.

b.      Severability . The enforceability or invalidity of any provision of this Amendment shall not affect the enforceability or validity of any other provision.

c.      Headings . The headings have been inserted solely as a matter of convenience to the parties and shall not affect the construction or meaning thereof.

d.      Ratification . The Executive and the Employers hereby ratify and confirm their respective obligations under the Agreement, as modified by this Amendment. If any inconsistency exists or arises between the terms of the Agreement and the terms of this Amendment, the terms of this Amendment shall prevail.

    IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first set forth above.

TIER REIT, INC.
/s/ Scott W. Fordham    
By:    Scott W. Fordham
Its:
Chief Executive Officer and President

TIER OPERATING PARTNERSHIP LP

/s/ Scott W. Fordham    
By:    Scott W. Fordham
Its:
Chief Executive Officer and President
EXECUTIVE:
/s/ James E. Sharp    
James E. Sharp


2

EXHIBIT 10.10


THIRD AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT

This THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this “ Third Amendment ”) is made and entered into as of March 17, 2017 (the “ Third Amendment Effective Date ”) by and among TIER OPERATING PARTNERSHIP LP, a limited partnership formed under the laws of the State of Texas (together with its successors and assigns, the “ Borrower ”), TIER REIT, INC., a corporation formed under the laws of the State of Maryland (the “ Parent ”), each of the undersigned Lenders (as defined below) and WELLS FARGO BANK, NATIONAL ASSOCIATION, as Administrative Agent (the “ Administrative Agent ”).

WITNESSETH:

WHEREAS, the Borrower, the Parent, the Administrative Agent and the financial institutions initially a signatory to the Credit Agreement (as defined below) together with their successors and assigns under Section 13.5 of the Credit Agreement (the “ Lenders ”) are parties to that certain Amended and Restated Credit Agreement dated as of June 30, 2015 (as amended by that certain First Amendment to Amended and Restated Credit Agreement dated as of July 20, 2015 and by that certain Increase and Second Amendment to Amended and Restated Credit Agreement dated as of March 15, 2016, the “ Credit Agreement ”);

WHEREAS, the Borrower has requested that the Administrative Agent and the Lenders amend certain terms and conditions of the Credit Agreement as described herein; and

WHEREAS, the Administrative Agent and the Lenders party to this Third Amendment have agreed to so amend certain terms and conditions of the Credit Agreement to make certain agreed upon modifications on the terms and conditions set forth below in this Third Amendment.

NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto hereby agree as follows:

1.
Definitions . All capitalized undefined terms used in this Third Amendment shall have the meanings ascribed thereto in the Credit Agreement, as amended hereby.
2.
Amendments to Credit Agreement . Effective as set forth in Section 3 below, the Credit Agreement is hereby amended as follows:
a.
Section 1.1 of the Credit Agreement is hereby amended to add the following new definition in the appropriate alphabetical order:
“ Third Amendment Effective Date ” means March 17, 2017.
b.
The following definitions appearing in Section 1.1 of the Credit Agreement are hereby amended and restated in their entirety as follows:
“ Development Property ” means a Property on which the improvements (other than tenant improvements on unoccupied space) related to the development have not been completed.

        


“ Fee Letters ” means, collectively, each of those certain fee letters dated as of September 26, 2014, April 20, 2015 and February 17, 2017, by and among the Borrower, the Arrangers, the Administrative Agent and the Syndication Agent.
“ Interest Expense ” means, for any period, without duplication, (a) total interest expense of the Parent, including capitalized interest not funded under a construction loan interest reserve account but excluding any non-cash interest charges to the extent accruing as the result of hedge ineffectiveness under GAAP, determined on a consolidated basis in accordance with GAAP for such period, plus (b) the Parent’s Ownership Share of Interest Expense of Unconsolidated Affiliates for such period.
“ Total Asset Value ” means, at a given time, the sum (without duplication) of all of the following of the Parent and its Subsidiaries determined on a consolidated basis in accordance with GAAP applied on a consistent basis: (a) cash and Cash Equivalents (other than tenant deposits and other cash and Cash Equivalents that are subject to a Lien or a Negative Pledge or the disposition of which is restricted in any way); plus (b) with respect to all Properties owned (or leased pursuant to a Ground Lease) by the Borrower or any Subsidiary for the 12-month period ending on such date of determination, the quotient of (i) Net Operating Income of the Parent and its Subsidiaries for such 12-month period, divided by (ii) the Capitalization Rate; plus (c) with respect to any Property acquired during the 12-month period ending on such date of determination, the acquisition price paid for all such Properties; plus (d) the GAAP book value of all Development Properties; plus (e) the acquisition price of Unimproved Land, less any GAAP impairment charges specific to any such asset; plus (f) the acquisition price of all mortgage notes receivable and mezzanine loans, less any GAAP impairment charges specific to any such asset. The Borrower’s Ownership Share of assets held by Unconsolidated Affiliates (excluding assets of the type described in the immediately preceding clause (a)) will be included in the calculation of Total Asset Value consistent with the above described treatment for wholly owned assets. For purposes of determining Total Asset Value, Properties which are not valued under subsections (c), (d), or (e), of this definition above, and which either have an Occupancy Rate of less than 85% as of the applicable date of determination or shall have had an Occupancy Rate of 85% or more for less than two (2) consecutive fiscal quarters during the six (6) consecutive fiscal quarter period ending on such date of determination, shall be valued at the greater of (i) gross book value (undepreciated) reported for GAAP purposes and (ii) the capitalized value obtained under subsection (b) of this definition above, provided, however, that any such Property (x) may only be included in the calculation of Total Asset Value with a valuation calculated pursuant to this clause for a maximum of six (6) consecutive fiscal quarters (and thereafter any such Property shall be valued in accordance with subsection (b) above), and (y) may not be included in the calculation of Total Asset Value with a valuation calculated pursuant to this clause if such Property has already been valued pursuant to this clause and subsequently valued in any other manner. Notwithstanding the foregoing, for purposes of determining Total Asset Value, to the extent the amount of Total Asset Value attributable to (A) Properties leased under Ground Leases would exceed 20% of Total Asset Value, such excess shall be excluded, (B) Properties subject to adjustment above for having an Occupancy Rate of less than 85% would exceed

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25% of Total Asset Value, such excess shall be excluded, (C) assets of the type described in the foregoing clauses (d), (e), (f) and the Borrower’s Ownership Share of assets held by Unconsolidated Affiliates would exceed, in the aggregate, 30% of Total Asset Value, such excess shall be excluded and (D) Development Properties would exceed 10% of Total Asset Value, such excess shall be excluded.
“ Unencumbered Asset Value ” means, at a given time, the sum (without duplication) of all of the following of the Parent and its Subsidiaries determined on a consolidated basis in accordance with GAAP applied on a consistent basis: (a) with respect to all Unencumbered Pool Properties owned (or leased pursuant to a Ground Lease) by the Borrower or any Subsidiary for the 12-month period ending on such date of determination, the quotient of (i) Unencumbered NOI (excluding NOI attributable to Development Properties) for the 12-month period ending on such date of determination divided by (ii) the Capitalization Rate, plus (b) with respect to any Unencumbered Pool Property acquired during the 12-month period ending on such date of determination, the acquisition price paid for all such Unencumbered Pool Properties plus (c) the GAAP book value of all Unencumbered Development Properties. Notwithstanding the foregoing, for purposes of determining Unencumbered Asset Value, to the extent the amount of Unencumbered Asset Value attributable to (A) Unencumbered Pool Properties leased under Ground Leases would exceed 10% of Unencumbered Asset Value, such excess shall be excluded and (B) Unencumbered Development Properties would exceed 15% of Unencumbered Asset Value, such excess shall be excluded.
“ Unsecured Interest Expense ” means, with respect to a Person and for any period, all Interest Expense of such Person for such period attributable to Unsecured Indebtedness of such Person.
c.
Section 1.1 of the Credit Agreement is hereby amended to add the following new definition in the appropriate alphabetical order:
“ Unencumbered Development Property ” means any Development Property (or any Property that shall have (a) previously been a Development Property, (b) had (i) an Occupancy Rate of less than 85% as of the applicable date of determination or (ii) an Occupancy Rate of 85% or more for less than two (2) consecutive fiscal quarters during the six (6) consecutive fiscal quarter period ending on such date of determination and (c) been valued on a gross book value basis for purposes of calculating Total Asset Value as of the applicable date of determination) that satisfies all of the following requirements as confirmed by the Administrative Agent: (w) such Development Property is owned in fee simple, or leased under a Ground Lease, by the Borrower or a Guarantor; (x) such Development Property is located in a State of the United States of America or in the District of Columbia; (y) regardless of whether such Development Property is owned by the Borrower or a Subsidiary, the Borrower has the right directly, or indirectly through a Subsidiary, to take the following actions without the need to obtain the consent of any Person: (i) to create Liens on such Development Property as security for Indebtedness of the Borrower or such Subsidiary, as applicable, and (ii) to sell, transfer or otherwise dispose of such Development Property; and (z) neither such Development Property, nor if such Development Property is owned by a Subsidiary, any of the Borrower’s

-3-


direct or indirect ownership interest in such Subsidiary, is subject to (i) any Lien other than Permitted Liens or (ii) any Negative Pledge.
d.
Section 10.1(a) of the Credit Agreement is hereby amended (i) to replace “$1,053,000,000” appearing therein with “$909,185,575” and (ii) to replace “Second Amendment Effective Date” appearing therein with “Third Amendment Effective Date”.
e.
Section 10.1(e) of the Credit Agreement is hereby amended and restated in its entirety as follows: “[Reserved.]”.
3.
Conditions to Effectiveness .    This Third Amendment shall become effective upon (a) the Administrative Agent’s receipt of (i) counterparts of (A) this Third Amendment duly executed and delivered by the Borrower, the Parent, the Administrative Agent and the Requisite Lenders and (B) the Consent and Reaffirmation attached as Annex I hereto duly executed by the Guarantors (the “ Consent and Reaffirmation ”) and (ii) a Compliance Certificate dated as of the Third Amendment Effective Date and calculated on a pro forma basis for the Parent’s fiscal quarter ending December 31, 2016 signed by a Responsible Officer of the Parent and (b) the payment of all fees and expenses required to be paid on or before the effectiveness of this Third Amendment.
4.
Representations and Warranties . Each of the Parent and the Borrower hereby represent and warrant to the Administrative Agent, each Issuing Bank and each Lender as follows:
a.
Except for changes in factual circumstances specifically and expressly permitted under the Loan Documents, the representations and warranties of the Borrower and each other Loan Party contained in Article VII of the Credit Agreement or any other Loan Document to which any of them is a party, are true and correct in all material respects (except in the case of a representation or warranty qualified by materiality, in which case such representation or warranty shall be true and correct in all respects) on and as of the date hereof with the same force and effect as if made on and as of such date except to the extent that such representations and warranties expressly relate solely to an earlier date (in which case such representations and warranties shall have been true and correct in all material respects (except in the case of a representation or warranty qualified by materiality, in which case such representation or warranty shall be true and correct in all respects) on and as of such earlier date).
b.
No Default or Event of Default exists on the date hereof or would exist immediately after giving effect to this Amendment.
5.
Limited Amendment; Ratification of Loan Documents . Except as specifically amended or modified hereby, the terms and conditions of the Credit Agreement and the other Loan Documents shall remain in full force and effect, and are hereby ratified and affirmed in all respects. This Third Amendment shall not be deemed a waiver of, or consent to, or a modification or amendment of, any other term or condition of the Credit Agreement or any other Loan Document, except as expressly set forth herein.
6.
Governing Law . This Third Amendment shall be governed by and construed in accordance with the laws of the State of New York.
7.
Miscellaneous . This Third Amendment may be executed in any number of counterparts, which shall together constitute an entire original agreement, and shall be binding upon and inure to the benefit

-4-


of the parties hereto and their respective successors and assigns. This Third Amendment expresses the entire understanding of the parties with respect to the transactions contemplated hereby. No prior negotiations or discussions shall limit, modify, or otherwise affect the provisions hereof. Any determination that any provision of this Third Amendment or the Consent and Reaffirmation or any application hereof or thereof is invalid, illegal, or unenforceable in any respect and in any instance shall not affect the validity, legality, or enforceability of such provision in any other instance, or the validity, legality, or enforceability of any other provisions of this Third Amendment or the Consent and Reaffirmation. Each of the Borrower and the Parent represents and warrants that it has consulted with independent legal counsel of its selection in connection herewith and is not relying on any representations or warranties of the Administrative Agent or its counsel in entering into this Third Amendment. Each of this Third Amendment and the Consent and Reaffirmation shall constitute a Loan Document.
*******


-5-


IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be duly executed as of the date first above written.


TIER OPERATING PARTNERSHIP LP,
as the Borrower
 
 
By: Tier GP, Inc., a Delaware corporation, its general partner
 
 
By:
/s/ Dallas E. Lucas
Name:
Dallas E. Lucas
Title:
Chief Financial Officer
 
 
TIER REIT, INC.,
as the Parent
 
 
By:
/s/ Dallas E. Lucas
Name:
Dallas E. Lucas
Title:
Chief Financial Officer



Signature Page to
Third Amendment to
Amended and Restated Credit Agreement


WELLS FARGO BANK, NATIONAL ASSOCIATION,
as Administrative Agent, an Issuing Bank, the Swingline Lender, and a Lender



By: /s/ Dale Northup    
Name:    Dale Northup
Title:    Senior Vice President

Signature Page to
Third Amendment to
Amended and Restated Credit Agreement


JPMORGAN CHASE BANK, N.A., as an Issuing Bank and as a Lender

By:
/s/ Ryan M. Dempsey            
Name: Ryan M. Dempsey
Title:     Authorized Officer




Signature Page to
Third Amendment to
Amended and Restated Credit Agreement



U.S. BANK NATIONAL ASSOCIATION, as a Lender


By: /s/ Sergio Reyes         
Name: Sergio Reyes    
Title: SVP    


Signature Page to
Third Amendment to
Amended and Restated Credit Agreement



CAPITAL ONE, NATIONAL ASSOCIATION, as a Lender


By: /s/ Ashish Tandon             
Name: Ashish Tandon    
Title: Vice President    


Signature Page to
Third Amendment to
Amended and Restated Credit Agreement



ASSOCIATED BANK, NATIONAL ASSOCIATION, as a Lender


By: /s/ Michael J. Sedivy             
Name: Michael J. Sedivy    
Title: Senior Vice President    


Signature Page to
Third Amendment to
Amended and Restated Credit Agreement



FIFTH THIRD BANK, an Ohio banking corporation, as a Lender


By: /s/ Michael Glandt             
Name: Michael Glandt    
Title: Vice President    


Signature Page to
Third Amendment to
Amended and Restated Credit Agreement



PNC BANK, NATIONAL ASSOCIATION, as a Lender


By: /s/ Joseph J. Seroke             
Name: Joseph J. Seroke    
Title: Vice President    


Signature Page to
Third Amendment to
Amended and Restated Credit Agreement



DEUTSCHE BANK AG, NEW YORK BRANCH, as a Lender


By: /s/ James Rolison                 
Name: James Rolison    
Title: Managing Director    


By: /s/ Joanna Soliman                 
Name: Joanna Soliman    
Title: Vice President    



Signature Page to
Third Amendment to
Amended and Restated Credit Agreement



ANNEX I
CONSENT AND REAFFIRMATION
March 17, 2017
Each of the undersigned hereby acknowledges receipt of a copy of the foregoing Third Amendment to Amended and Restated Credit Agreement dated as of June 30, 2015 (as amended by that certain First Amendment to Amended and Restated Credit Agreement dated as of July 20, 2015, by that certain Increase and Second Amendment to Amended and Restated Credit Agreement dated as of March 15, 2016, and as may be further amended, restated, supplemented or otherwise modified from time to time, the “ Credit Agreement ”) by and among TIER OPERATING PARTNERSHIP LP, a limited partnership formed under the laws of the State of Texas (together with its successor and assigns, the “ Borrower ”), TIER REIT, INC., a corporation formed under the laws of the State of Maryland (the “ Parent ”), the Lenders party thereto from time to time and WELLS FARGO BANK, NATIONAL ASSOCIATION, as Administrative Agent (the “ Administrative Agent ”), which Third Amendment is dated as of March 17, 2017 (the “ Amendment ”). Capitalized terms used in this Consent and Reaffirmation and not defined herein shall have the meanings given to them in the Credit Agreement as amended by the Amendment.
Without in any way establishing a course of dealing by the Administrative Agent or any Lender, each of the undersigned consents to the Amendment and reaffirms the terms and conditions of the Guaranty and any other Loan Document executed by it and acknowledges and agrees that the Guaranty and each and every such Loan Document executed by the undersigned in connection with the Credit Agreement remains in full force and effect and is hereby reaffirmed, ratified and confirmed. All references to the Credit Agreement contained in the above‑referenced documents shall be a reference to the Credit Agreement as so modified by the Amendment and as the same may from time to time hereafter be amended, restated, supplemented or otherwise modified.

[ Signature Pages Follow ]






GUARANTORS:

TIER REIT, INC., a Maryland corporation

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer

IPC FLORIDA III HOLDINGS, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


IPC FLORIDA III, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


IPC (US), LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


101 SOUTH TRYON GP, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


101 SOUTH TRYON LP, a Delaware limited partnership

By: 101 SOUTH TRYON GP, LLC, a Delaware
limited liability company, its general partner

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer




Signature Page to
Consent and Reaffirmation


BUENA VISTA PLAZA GP, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


BUENA VISTA PLAZA LP, a Delaware limited partnership

By: BUENA VISTA PLAZA GP, LLC, a Delaware
limited liability company, its general partner

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer



BURNETT PLAZA GP, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


BURNETT PLAZA LP, a Texas limited partnership

By: BURNETT PLAZA GP, LLC, a Delaware
limited liability company, its general partner

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


CENTREPORT OFFICE CENTRE GP, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer







Signature Page to
Consent and Reaffirmation





CENTREPORT OFFICE CENTRE LP, a Texas limited partnership

By: CentrePort Office Centre GP, LLC,
a Delaware limited liability company, its
general partner

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


TR ELDRIDGE GP, LLC, a Texas limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


TR ELDRIDGE LP, a Texas limited partnership

By: TR Eldridge GP, LLC,
a Texas limited liability company, its
general partner

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


IPC REALTY II, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


IPC LOOP CENTRAL HOLDINGS, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer




Signature Page to
Consent and Reaffirmation


IPC LOOP CENTRAL, LP, a Delaware limited partnership

By: IPC REALTY II, LLC, a Delaware limited liability company, its general partner

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer

IPC LP/WP HOLDINGS, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer

IPC LOUISVILLE PROPERTIES, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer

TR TERRACE GP, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer

TR TERRACE LP, a Delaware limited partnership

By: TR TERRACE GP, LLC, a Delaware limited liability company, its general partner

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


WOODCREST IV, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer





Signature Page to
Consent and Reaffirmation


5950 SHERRY PROPERTY, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


WOODCREST HOLDING, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


WOODCREST I, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


WOODCREST II, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


WOODCREST III, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


WOODCREST ROAD ASSOCIATES, L.P., a Pennsylvania limited partnership

By: WOODCREST I, LLC, a Delaware limited liability company, its general partner

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer



Signature Page to
Consent and Reaffirmation


WOODCREST ROAD URBAN RENEWAL, LLC, a New Jersey limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer

TR DOMAIN, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer

BURNETT PARKING LP, a Delaware limited partnership

By: Burnett Parking GP, LLC, a Delaware limited liability company, its general partner

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer

BURNETT PARKING GP, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer

TIER PARTNERS, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


TIER BUSINESS TRUST, a Maryland statutory trust

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


TIER BT, INC., a Delaware corporation

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer

Signature Page to
Consent and Reaffirmation


IPC METROCENTER, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer

IPC METROCENTER HOLDINGS, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer

IPC RETAIL PROPERTIES, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer

THREE PARKWAY HOLDING, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer

THREE PARKWAY, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer

TR ELDRIDGE PLACE GP, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer

TR ELDRIDGE PLACE LP, a Delaware limited partnership

By: TR Eldridge Place GP, LLC, a Delaware limited liability company, its general partner

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer

Signature Page to
Consent and Reaffirmation


TWO BRIARLAKE PLAZA GP, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


TWO BRIARLAKE PLAZA LP, a Delaware limited partnership

By: TWO BRIARLAKE PLAZA GP, LLC, a Delaware limited liability company, its general partner

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


IPC 500 PRATT STREET, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


IPC 500 PRATT STREET HOLDINGS, LLC, a Delaware limited liability company

By:     /s/ Dallas E. Lucas    
Name:    Dallas E. Lucas
Title:    Chief Financial Officer


Signature Page to
Consent and Reaffirmation


Exhibit 31.1
 
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
 
I, Scott W. Fordham, certify that:
 
1.               I have reviewed this quarterly report on Form 10-Q of TIER REIT, Inc.;
 
2.               Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.               Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.               The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)          Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)          Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)          Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.               The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)          All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)          Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
Dated this 10th day of May, 2017
/s/ Scott W. Fordham
 
Scott W. Fordham
 
Chief Executive Officer




Exhibit 31.2
 
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
 
I, Dallas E. Lucas, certify that:
 
1.               I have reviewed this quarterly report on Form 10-Q of TIER REIT, Inc.;
 
2.               Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.               Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.               The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)          Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)          Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)          Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.               The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)          All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)          Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
Dated this 10th day of May, 2017
/s/ Dallas E. Lucas
 
Dallas E. Lucas
 
Chief Financial Officer





Exhibit 32.1
 
SECTION 1350 CERTIFICATIONS
 
This Certificate is being delivered pursuant to the requirements of Section 1350 of Chapter 63 (Mail Fraud) of Title 18 (Crimes and Criminal Procedures) of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
 
The undersigned, who are the Chief Executive Officer and Chief Financial Officer of TIER REIT, Inc. (the “Company”), hereby certifies as follows:
 
The Quarterly Report on Form 10-Q of the Company (the “Report”), which accompanies this Certificate, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and all information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Dated this 10th day of May, 2017
/s/ Scott W. Fordham
 
Scott W. Fordham
 
Chief Executive Officer
 
 
 
 
Dated this 10th day of May, 2017
/s/ Dallas E. Lucas
 
Dallas E. Lucas
 
Chief Financial Officer