Fair Value of Financial Instruments:

Assets and Liabilities Measured at Fair-Value – The Company follows authoritative guidance on fair value measurements, which defines fair-value, establishes a framework for measuring fair-value, and expands disclosures about fair-value measurements. The guidance applies to reported balances that are required or permitted to be measured at fair-value under existing accounting pronouncements.

The Company follows authoritative guidance on the fair value option for financial assets, which permits companies to choose to measure certain financial instruments and other items at fair-value in order to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently. Effective with the Merger, the Company adopted the liquidation basis of accounting and reports all assets and liabilities at fair value, accordingly.

The guidance emphasizes that fair-value 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, the guidance establishes a fair-value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). In instances where the determination of the fair-value measurement is based on inputs from different levels of the fair-value hierarchy, the level in the fair-value hierarchy within which the entire fair-value measurement falls is based on the lowest level input that is significant to the fair-value measurement in its entirety. Our assessment of the significance of a particular input to the fair-value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following table represents the carrying value and fair value on a recurring basis of the Company’s financial assets and liabilities as of September 30, 2016 and December 31, 2015, respectively.

	September 30, 2016				December 31, 2015
Description	Carrying Value		Fair Value (Level 2)		Carrying Value		Fair Value (Level 2)
Investment in Marketable Securities	$	4,454,219	$	4,454,219*	$	5,001,722	$	5,001,722

$643,609 in principal repayments was received during the first nine-months of 2016.

The Company has investments in mortgage backed securities with either AA or AAA ratings fully guaranteed by US government agencies (the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation). The fair values of mortgage backed securities originated by US government agencies are based on a pricing model that incorporates coupon type, prepayment speeds and the type of collateral backing the securities. A discount rate is applied to the cash flows in the model to arrive at the fair value. Market quotes, current yields, and their spreads to benchmark indices are obtained for each type of security. With this data, a yield curve is derived for each category of mortgage backed securities. Each security is priced by discounting the cash flow stream by the appropriate yield found on the yield curve. As the significant inputs used to derive the value of the mortgage-backed securities are observable market inputs, the fair value of these securities are included in the Level 2 fair value hierarchy.

The Company estimates that fair value approximates carrying value for cash equivalents, rents receivable, prepaid and other assets, and accounts payable due to the relatively short maturity of the instruments.

Fair Value Measurements:

The following table presents the Company's assets and liabilities measured at fair value on a non-recurring basis as of September 30, 2016, aggregated by the level in the fair value hierarchy within which those measurements fall:

			Fair Value Measurements Using
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Real estate assets	$	28,910,000	$	—	$	—	$	28,910,000

The Company estimates the fair value of its real estate assets by using income and market valuation techniques including market information such as broker opinions of value, appraisals, and recent sales data for similar assets or discounted cash flow models, which primarily rely on Level 3 inputs. The cash flow models include estimated cash inflows and outflows over a specified holding period. These cash flows may include contractual rental revenues, projected future rental revenues and expenses and forecasted tenant improvements and lease commissions based upon market conditions determined through discussion with local real estate professionals, experience the Company has with its other owned properties in such markets and expectations for growth. Capitalization rates and discount rates utilized in these models are estimated by management based upon rates that management believes to be within a reasonable range of current market rates for the respective properties based upon an analysis of factors such as property and tenant quality, geographical location and local supply and demand observations. To the extent the Company under estimates forecasted cash outflows (tenant improvements, lease commissions and operating costs) or over estimates forecasted cash inflows (rental revenue rates), the estimated fair value of its real estate assets could be overstated. The following table represents the change in the fair value of the Company’s real estate assets during the nine-months ended September 30, 2016:

Real estate assets at December 31, 2015	$	46,950,000
Real estate sold during the nine-months ended September 30, 2016		(18,261,000	)
Change in value of real estate assets		221,000		(a)
Real estate assets at September 30, 2016	$	28,910,000

(a)

The net increase in value of $221,000 is attributable to an increase in value from the sale of the Fairfax Medical Center at $15,000 in excess of the estimated value and the sale of two buildings in the Port Jefferson Professional Park at $206,000 in excess of the estimated value at December 31, 2015. The combined net increase of $221,000 represents the net increase in value of the real estate compared to that which was reported in the Statement of Net Assets at December 31, 2015.

The Company owns a 10.12% limited partnership interest in Callery Judge Grove, L.P. (the “Grove”), a limited partnership which in 2013 sold its only assets, an undeveloped Florida property located in Palm Beach County, Florida (the “Grove Property”), which is the subject of a plan for mixed-use development.

On March 18, 2011, the Grove’s lender, Prudential Industrial Properties, LLC ("Prudential"), commenced a foreclosure action against the Grove. On September 19, 2013, the Grove Property was sold, the foreclosure lawsuit was dismissed and the Grove’s debt to Prudential was repaid. At December 31, 2014 and 2013, the Company’s interest in the Grove was held in a taxable REIT subsidiary of the Company with $0 value. The purchaser of the Grove Property, Minto Group, formally refers to the development project as Westlake.

As of December 31, 2013, the Company had a $1,315,000 deferred tax liability related to the Grove, which represented taxable losses not yet recorded pursuant to the equity method of accounting. Following certain taxable gains received in 2014 but not yet recorded, the Company reversed the deferred tax liability in total in 2014 and recorded a current tax liability of approximately $618,000 (which was paid in the second quarter of 2015) and a tax benefit of $697,000.

While the Company did not receive any distribution in connection with the sale of the Grove Property in 2013, the purchase and sale agreement provided that the Grove had the right to receive certain payments on the sale of single family residential units constructed on the property or on the sale of the property itself. Gyrodyne has been informed by the Grove’s managing partner that the purchaser of the Grove Property, Minto Group, transferred the property to an affiliate which triggered an appraisal process that resulted in the payment of a fee by Minto to the Grove of $1,968,750. The Grove’s managing partner also informed Gyrodyne that the fee along with some of its existing cash will be utilized to pay back in full debt obligations owed to certain limited partners in the amount of $2.7 million. In light of the foregoing, Gyrodyne believes that the Grove may not receive any additional payments from Minto beyond the aforementioned $1,968,750. In as much as the Grove’s obligations to certain limited partners exceed the payment it received from Minto, it is unclear what amount, if any, Gyrodyne could expect to receive, in any final liquidating distribution from the Grove, which may not occur until 2017 at the earliest. The amount of distributions, if any, ultimately received by Gyrodyne will depend on the Grove’s assets, liabilities and expenses that must be settled prior to any distributions to the Grove’s limited partners.

The Grove does not have an audit, review or compilation of its financial statements, therefore, the Company is challenged to determine the collectability of any income generated by the Grove. As a result, the Company will not recognize income from the Grove and will not include in the statement of net assets any potential distributions from the Grove until the earlier of when cash distributions are received or upon receiving financial data that substantiates its results of operations.

The Grove investment is a distressed asset operating in a distressed environment where an orderly transaction is not available. The facts and circumstances of the Grove make it unreasonable to present a fair value utilizing a Level 3 methodology, the lowest methodology which allows for broad assumptions. Therefore, in accordance with the exception rules for distressed assets that are thinly traded/lack of marketability, the Company is not presenting a fair value for its investment in the Grove. Prior to the Merger, the Company accounted for the investment under the equity method. As of September 30, 2016 and December 31, 2015, the carrying value of the Company’s investment was $0.