NOTE 11—FAIR VALUE MEASUREMENTS

The carrying amounts of cash and cash equivalents, restricted cash, escrow, deposits and other assets and receivables (excluding interest rate swaps), dividends payable, and accrued expenses and other liabilities (excluding interest rate swaps), are not measured at fair value on a recurring basis, but are considered to be recorded at amounts that approximate fair value.

At December 31, 2017, the $397,103,000 estimated fair value of the Company's mortgages payable is more than their $396,946,000 carrying value (before unamortized deferred financing costs) by approximately $157,000, assuming a blended market interest rate of 4.25% based on the 8.7 year weighted average remaining term to maturity of the mortgages. At December 31, 2016, the $413,916,000 estimated fair value of the Company's mortgages payable is greater than their $399,192,000 carrying value (before unamortized deferred financing costs) by approximately $14,724,000, assuming a blended market interest rate of 3.74% based on the 9.3 year weighted average remaining term to maturity of the mortgages.

At December 31, 2017 and 2016, the carrying amount of the Company's line of credit (before unamortized deferred financing costs) of $9,400,000 and $10,000,000, respectively, approximates its fair value.

The fair value of the Company's mortgages payable and line of credit are estimated using unobservable inputs such as available market information and discounted cash flow analysis based on borrowing rates the Company believes it could obtain with similar terms and maturities. These fair value measurements fall within Level 3 of the fair value hierarchy.

Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Fair Value on a Recurring Basis

The fair value of the Company's derivative financial instruments, using Level 2 inputs, was determined to be the following (amounts in thousands):

	As of December 31,		Carrying and Fair Value
Financial assets:
Interest rate swaps		2017	$	1,615
		2016		1,257
Financial liabilities:
Interest rate swaps		2017	$	1,492
		2016		2,695

The Company does not currently own any financial instruments that are measured on a recurring basis and that are classified as Level 1 or 3.

The Company's objective in using interest rate swaps is to add stability to interest expense. The Company does not use derivatives for trading or speculative purposes.

Fair values are approximated using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivatives. 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.

Although the Company has determined the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with it use Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparty. As of December 31, 2017, the Company has assessed and determined the impact of the credit valuation adjustments on the overall valuation of its derivative positions is not significant. As a result, the Company determined its derivative valuation is classified in Level 2 of the fair value hierarchy.

As of December 31, 2017, the Company had entered into 28 interest rate derivatives, all of which were interest rate swaps, related to 28 outstanding mortgage loans with an aggregate $132,965,000 notional amount and mature between 2018 and 2028 (weighted average remaining term to maturity of 7.0 years). Such interest rate swaps, all of which were designated as cash flow hedges, converted LIBOR based variable rate mortgages to fixed annual rate mortgages (with interest rates ranging from 3.02% to 5.38% and a weighted average interest rate of 4.11% at December 31, 2017). The fair value of the Company's derivatives in asset and liability positions are reflected as other assets or other liabilities on the consolidated balance sheets. During the year ended December 31, 2017, the Company discontinued hedge accounting on two of its interest rate swaps (see discussion following the table below).

Three of the Company's unconsolidated joint ventures, in which wholly-owned subsidiaries of the Company are 50% partners, had two interest rate derivatives outstanding at December 31, 2017 with an aggregate $10,491,000 notional amount. These interest rate swaps, which were designated as cash flow hedges, have interest rates of 3.49% and 5.81% and mature in 2022 and 2018, respectively.

The following table presents the effect of the Company's derivative financial instruments on the consolidated statements of income for the periods presented (amounts in thousands):

	Year Ended December 31,
	2017			2016			2015
One Liberty Properties Inc. and Consolidated Subsidiaries
Amount of (loss) gain recognized on derivatives in Other comprehensive income (loss)	$	(221	)	$	255		$	(3,722	)
Amount of (loss) reclassification from Accumulated other comprehensive income (loss) into Interest expense		(1,786	)		(2,624	)		(2,554	)
Unconsolidated Joint Ventures (Company's share)
Amount of gain (loss) recognized on derivatives in Other comprehensive income (loss)	$	15		$	(31	)	$	(109	)
Amount of (loss) reclassification from Accumulated other comprehensive income (loss) into Equity in earnings of unconsolidated joint ventures		(61	)		(95	)		(108	)

During 2017, in connection with the sale of two properties located in Kansas City, Missouri and Ann Arbor, Michigan, the Company paid off the mortgages and terminated the related interest rate swaps. As the Company discontinued hedge accounting on these interest rate swaps as the hedged forecasted transactions became probable not to occur, the Company accelerated the reclassification of $201,000 from Accumulated other comprehensive income to Interest expense for the year ended December 31, 2017. No gain or loss was recognized with respect to hedge ineffectiveness or to amounts excluded from effectiveness testing on the Company's cash flow hedges for the three years ended December 31, 2017.

During the twelve months ending December 31, 2018, the Company estimates an additional $565,000 will be reclassified from Accumulated other comprehensive income as an increase to Interest expense and $7,000 will be reclassified from Accumulated other comprehensive income as a decrease to Equity in earnings of unconsolidated joint ventures.

The derivative agreements in effect at December 31, 2017 provide that if the wholly-owned subsidiary of the Company which is a party to the agreement defaults or is capable of being declared in default on any of its indebtedness, then a default can be declared on such subsidiary's derivative obligation. In addition, the Company is a party to the derivative agreements and if there is a default by the subsidiary on the loan subject to the derivative agreement to which the Company is a party and if there are swap breakage losses on account of the derivative being terminated early, then the Company could be held liable for such swap breakage losses, if any. During the year ended December 31, 2016, the Company terminated three interest rate swaps in connection with the early payoff of the related mortgages, and during the year ended December 31, 2015, the Company terminated one interest rate swap in connection with the sale of its Cherry Hill, New Jersey property. The Company accelerated the reclassification of amounts in accumulated other comprehensive income to earnings as a result of these hedged forecasted transactions being terminated. The accelerated amounts were losses of $178,000 and $472,000 during 2016 and 2015, respectively, which are included in Prepayment costs on debt on the consolidated statements of income.

As of December 31, 2017 and 2016, the fair value of the derivatives in a liability position, including accrued interest of $53,000 and $113,000, respectively, but excluding any adjustments for nonperformance risk, was approximately $1,638,000 and $2,951,000, respectively. In the event the Company breaches any of the contractual provisions of the derivative contracts, it would be required to settle its obligations thereunder at their termination liability value of $1,638,000 and $2,951,000 as of December 31, 2017 and 2016, respectively. This termination liability value, net of adjustments for nonperformance risk of $93,000 and $143,000, is included in Accrued expenses and other liabilities on the consolidated balance sheet at December 31, 2017 and 2016, respectively.

Available-for-sale securities

During 2016, the Company sold its available-for-sale securities for $33,000 which had a cost of $5,300. The Company realized a gain on sale of $27,000, which was reclassified from Accumulated other comprehensive loss on the consolidated balance sheet into Other income on the consolidated statement of income.