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Leases | 6 Months Ended
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Jun. 30, 2019
Leases [Abstract] |
Leases |
8. | Leases
Lessor Accounting The Company is the lessor for its residential and retail leases (including commercial leases) and these leases will continue to be accounted for as operating leases under the new standard as described in Note 2. Therefore, the Company did not have significant changes in the accounting for its lease revenues. For the six months ended June 30, 2019, approximately 97.1% of the Company’s total lease revenue is generated from residential apartment leases that are generally for twelve months or less in length. The residential apartment leases may include lease income related to such items as parking, storage and pet rent that the Company treats as a single lease component because the amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same. The collection of lease payments at lease commencement is probable and therefore the Company subsequently recognizes lease income over the lease term on a straight-line basis. Residential leases are renewable upon consent of both parties on an annual or monthly basis. For the six months ended June 30, 2019, approximately 2.9% of the Company’s total lease revenue is generated by retail leases that are generally for terms ranging between 5-10 years. The retail leases generally consist of ground floor retail spaces and master-leased parking garages that serve as additional amenities for our residents. The retail leases may include lease income related to such items as parking and storage rent that the Company treats as a single lease component because the amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same. The collection of lease payments at lease commencement is probable and therefore the Company subsequently recognizes lease income over the lease term on a straight-line basis. Retail leases are renewable with market-based renewal options. The Company elected the practical expedient to account for both its lease and non-lease components (specifically common area maintenance charges) as a single lease component under the leases standard. The following table presents the lease income types relating to lease payments for residential and retail leases for the six months and quarter ended June 30, 2019 (amounts in thousands):
|  | Six Months Ended June 30, 2019 |  |  | Quarter Ended June 30, 2019 |
Lease Income Type |  | Residential Leases |  |  | Retail Leases |  |  | Total |  |  | Residential Leases |  |  | Retail Leases |  |  | Total |
Residential and retail rent |  | $ | 1,190,729 |  |  | $ | 36,163 |  |  | $ | 1,226,892 |  |  | $ | 598,209 |  |  | $ | 17,693 |  |  | $ | 615,902 |
Parking rent |  |  | 18,469 |  |  |  | 159 |  |  |  | 18,628 |  |  |  | 9,332 |  |  |  | 87 |  |  |  | 9,419 |
Storage rent |  |  | 1,856 |  |  |  | 31 |  |  |  | 1,887 |  |  |  | 937 |  |  |  | (13 | ) |  |  | 924 |
Pet rent |  |  | 5,798 |  |  |  | — |  |  |  | 5,798 |  |  |  | 2,911 |  |  |  | — |  |  |  | 2,911 |
Total lease revenue (1) |  | $ | 1,216,852 |  |  | $ | 36,353 |  |  | $ | 1,253,205 |  |  | $ | 611,389 |  |  | $ | 17,767 |  |  | $ | 629,156 |
(1) | Excludes other rental income of $78.5 million for the six months ended June 30, 2019 and $40.2 million for the quarter ended June 30, 2019, which is accounted for under the revenue recognition standard.
Lessee Accounting The Company is the lessee under various corporate office and ground leases for which the Company recognized ROU assets and related lease liabilities effective January 1, 2019. The following table presents the Company’s ROU assets and related lease liabilities as of June 30, 2019 (amounts in thousands):
|  | 2019 |
Right-of-use assets: |  |  |  |
Corporate office leases (1) |  | $ | 15,381 |
Ground leases |  |  | 416,372 |
Right-of-use assets |  | $ | 431,753 |
Lease liabilities: |  |  |  |
Corporate office leases (1) |  | $ | 16,879 |
Ground leases |  |  | 264,741 |
Lease liabilities |  | $ | 281,620 |
(1) | The Company has two corporate office leases that are considered short-term and therefore, there is no balance sheet impact and both leases continue to be expensed on a straight-line basis throughout the year.
As the standard requires the recognition of a liability for the lease obligation, discount rates are used to determine the net present value of the lease payments. The discount rate for the lease is the rate implicit in the lease or, if that rate cannot be readily determined, the incremental borrowing rate. As the Company does not know the amount of the lessors’ initial direct costs, it cannot readily determine the rate implicit in the lease and instead must apply the incremental borrowing rate. The Company has estimated the discount rate ranges of 3.3% to 3.9% for corporate office leases and 4.4% to 5.5% for ground leases. Since the Company’s credit backs the corporate office lease obligations and the lease terms are ten years or less, the discount rate range was estimated by using the Company’s borrowing rates for actual pricing. The discount rate range for ground leases takes into account various factors, including the longer life of the ground leases, and was estimated by using the Company’s borrowing rates for actual pricing through 30 years and other long-term market rates. Corporate office leases The Company leases nine corporate offices with remaining lease terms of one to ten years. The Company’s corporate office leases continue to be accounted for as operating leases under the new standard. When there is a material lease modification, the Company is required to remeasure the lease liability. The Company leases its corporate headquarters from an entity affiliated with EQR’s Chairman of the Board of Trustees. The lease terminates on January 31, 2022. The amount incurred for such office space for the six months and quarter ended June 30, 2019 was approximately $1.3 million and $0.7 million, respectively. The Company believes this amount approximates market rates for such rental space. Ground leases The Company maintains long-term ground leases for 14 operating properties with lease expiration dates ranging from 2042 through 2113. The Company owns the building and improvements. Based on its election of the package of practical expedients, the Company was not required to reassess the classification of existing ground leases and therefore these leases continue to be accounted for as operating leases. However, in the event we materially modify existing ground leases and/or enter into new ground leases, such leases will likely be classified as finance leases. Additional disclosures The following table illustrates the quantitative disclosures for lessees as of and for the six months and quarter ended June 30, 2019 (amounts in thousands):
|  | Six Months Ended June 30, 2019 |  |  | Quarter Ended June 30, 2019 |
Lease cost: |  |  |  |  |  |  |  |
Operating lease cost: |  |  |  |  |  |  |  |
Corporate office leases |  | $ | 1,818 |  |  | $ | 900 |
Ground leases |  |  | 11,100 |  |  |  | 5,550 |
Short-term lease cost: |  |  |  |  |  |  |  |
Corporate office leases |  |  | 112 |  |  |  | 56 |
Ground leases |  |  | — |  |  |  | — |
Variable lease cost: |  |  |  |  |  |  |  |
Corporate office leases |  |  | 769 |  |  |  | 508 |
Ground leases |  |  | 1,695 |  |  |  | 844 |
Total lease cost |  | $ | 15,494 |  |  | $ | 7,858 |
The following table illustrates the quantitative disclosures for lessees as of and for the six months ended June 30, 2019 (amounts in thousands):
|  | June 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: |  |  |  |
Operating cash flows from operating leases: |  |  |  |
Corporate office leases |  | $ | 2,776 |
Ground leases |  | $ | 8,635 |
ROU assets obtained in exchange for new operating lease liabilities: |  |  |  |
Corporate office leases |  | $ | 16,687 |
Ground leases |  | $ | 422,018 |
Weighted-average remaining lease term – operating leases: |  |  |  |
Corporate office leases |  | 6.4 years |
Ground leases |  | 56.6 years |
Weighted-average discount rate – operating leases: |  |  |  |
Corporate office leases |  |  | 3.7 | %
Ground leases |  |  | 5.0 | %
The following table summarizes the Company’s undiscounted cash flows for contractual obligations for minimum rent payments/receipts under operating leases for the next five years and thereafter as of June 30, 2019:
(Payments)/Receipts Due by Year (in thousands) |
|  | Remaining 2019 |  |  | 2020 |  |  | 2021 |  |  | 2022 |  |  | 2023 |  |  | 2024 |  |  | Thereafter |  |  | Total |
Operating Leases: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Minimum Rent Payments (a) |  | $ | (8,339 | ) |  | $ | (17,208 | ) |  | $ | (17,148 | ) |  | $ | (14,993 | ) |  | $ | (14,843 | ) |  | $ | (15,101 | ) |  | $ | (938,561 | ) |  | $ | (1,026,193 | )
Minimum Rent Receipts (b) |  | $ | 31,779 |  |  | $ | 61,674 |  |  | $ | 57,935 |  |  | $ | 54,099 |  |  | $ | 46,417 |  |  | $ | 39,356 |  |  | $ | 139,599 |  |  | $ | 430,859 |
(a) | Minimum basic rent due for corporate office leases and base rent due on ground leases where the Company is the lessee.
(b) | Minimum basic rent receipts due for various retail space where the Company is the lessor. Excludes residential leases due to their short-term nature.
The following table provides a reconciliation of lease liabilities from our undiscounted cash flows for minimum rent payments for the six months ended June 30, 2019 (amounts in thousands):
|  | 2019 |
Total minimum rent payments |  | $ | 1,026,193 |
Less: Lease discount |  |  | 744,573 |
Lease liabilities |  | $ | 281,620 |

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