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Leases | 9 Months Ended
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Sep. 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 nine months ended September 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 nine months ended September 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 nine months and quarter ended September 30, 2019 (amounts in thousands):
|  | Nine Months Ended September 30, 2019 |  |  | Quarter Ended September 30, 2019 |
Lease Income Type |  | Residential Leases |  |  | Retail Leases |  |  | Total |  |  | Residential Leases |  |  | Retail Leases |  |  | Total |
Residential and retail rent |  | $ | 1,801,749 |  |  | $ | 54,616 |  |  | $ | 1,856,365 |  |  | $ | 611,020 |  |  | $ | 18,453 |  |  | $ | 629,473 |
Parking rent |  |  | 27,874 |  |  |  | 259 |  |  |  | 28,133 |  |  |  | 9,405 |  |  |  | 100 |  |  |  | 9,505 |
Storage rent |  |  | 2,796 |  |  |  | 51 |  |  |  | 2,847 |  |  |  | 940 |  |  |  | 20 |  |  |  | 960 |
Pet rent |  |  | 8,714 |  |  |  | — |  |  |  | 8,714 |  |  |  | 2,916 |  |  |  | — |  |  |  | 2,916 |
Total lease revenue (1) |  | $ | 1,841,133 |  |  | $ | 54,926 |  |  | $ | 1,896,059 |  |  | $ | 624,281 |  |  | $ | 18,573 |  |  | $ | 642,854 |
(1) | Excludes other rental income of $120.7 million for the nine months ended September 30, 2019 and $42.2 million for the quarter ended September 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 September 30, 2019 (amounts in thousands):
|  | 2019 |
Right-of-use assets: |  |  |  |
Corporate office leases |  | $ | 43,739 |
Ground leases (finance) |  |  | 23,201 |
Ground leases (operating) |  |  | 414,104 |
Right-of-use assets |  | $ | 481,044 |
Lease liabilities: |  |  |  |
Corporate office leases |  | $ | 45,237 |
Ground leases (finance) |  |  | 23,210 |
Ground leases (operating) |  |  | 264,865 |
Lease liabilities |  | $ | 333,312 |
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 at adoption. Since the Company’s credit backs the corporate office lease obligations and the lease terms are generally ten years or less, the discount rate range was estimated by using the Company’s borrowing rates for actual pricing data. 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 data 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 23 years (inclusive of applicable extension options). The Company’s corporate office leases continue to be accounted for as operating leases under the new standard. During the quarter ended September 30, 2019, the Company modified two office leases that continue to be classified as operating leases and recorded an additional lease liability and ROU asset at initial remeasurement of approximately $29.1 million. The Company leases its corporate headquarters from an entity affiliated with EQR’s Chairman of the Board of Trustees. The lease term expires on November 30, 2032 and contains two five-year extension options. The amount incurred for such office space for the nine months and quarter ended September 30, 2019 was approximately $2.0 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 and one project under development with lease expiration dates ranging from 2042 through 2113 (inclusive of applicable purchase options). 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 the 14 operating property leases continue to be accounted for as operating leases. During the quarter ended September 30, 2019, the Company entered into a new ground lease for a project under development that is being accounted for as a finance lease and recorded an initial lease liability and ROU asset of approximately $23.2 million. Additional disclosures The following table illustrates the quantitative disclosures for lessees as of and for the nine months and quarter ended September 30, 2019 (amounts in thousands):
|  | Nine Months Ended September 30, 2019 |  |  | Quarter Ended September 30, 2019 |
Lease cost: |  |  |  |  |  |  |  |
Finance lease cost: |  |  |  |  |  |  |  |
Amortization of right-of-use assets |  | $ | — |  |  | $ | — |
Interest on lease liabilities (capitalized) |  |  | 55 |  |  |  | 55 |
Operating lease cost: |  |  |  |  |  |  |  |
Corporate office leases |  |  | 2,753 |  |  |  | 935 |
Ground leases |  |  | 16,650 |  |  |  | 5,550 |
Short-term lease cost: |  |  |  |  |  |  |  |
Corporate office leases |  |  | 168 |  |  |  | 56 |
Ground leases |  |  | — |  |  |  | — |
Variable lease cost: |  |  |  |  |  |  |  |
Corporate office leases |  |  | 1,130 |  |  |  | 361 |
Ground leases |  |  | 2,575 |  |  |  | 880 |
Total lease cost |  | $ | 23,331 |  |  | $ | 7,837 |
The following table illustrates the quantitative disclosures for lessees as of and for the nine months ended September 30, 2019 (amounts in thousands):
|  | September 30, 2019 |
Other information: |  |  |  |
Cash paid for amounts included in the measurement of lease liabilities: |  |  |  |
Investing cash flows from finance leases (capitalized) |  | $ | 47 |
Operating cash flows from operating leases: |  |  |  |
Corporate office leases |  | $ | 4,128 |
Ground leases |  | $ | 12,035 |
ROU assets obtained in exchange for new finance lease liabilities |  | $ | 23,201 |
ROU assets obtained in exchange for new operating lease liabilities: |  |  |  |
Corporate office leases |  | $ | 45,791 |
Ground leases |  | $ | 422,018 |
Weighted-average remaining lease term – finance leases |  | 19.9 years |
Weighted-average remaining lease term – operating leases: |  |  |  |
Corporate office leases |  | 19.2 years |
Ground leases |  | 56.4 years |
Weighted-average discount rate – finance leases |  |  | 3.0 | %
Weighted-average discount rate – operating leases: |  |  |  |
Corporate office leases |  |  | 3.2 | %
Ground leases |  |  | 5.0 | %
The following table summarizes the Company’s undiscounted cash flows for contractual obligations for minimum rent payments/receipts under operating and financing leases for the next five years and thereafter as of September 30, 2019:
(Payments)/Receipts Due by Year (in thousands) |
|  | Remaining 2019 |  |  | 2020 |  |  | 2021 |  |  | 2022 |  |  | 2023 |  |  | 2024 |  |  | Thereafter |  |  | Total |
Finance Leases: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Minimum Rent Payments (a) |  | $ | (141 | ) |  | $ | (567 | ) |  | $ | (578 | ) |  | $ | (590 | ) |  | $ | (601 | ) |  | $ | (614 | ) |  | $ | (33,850 | ) |  | $ | (36,941 | )
Operating Leases: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Minimum Rent Payments (a) |  | $ | (4,175 | ) |  | $ | (16,840 | ) |  | $ | (16,862 | ) |  | $ | (16,602 | ) |  | $ | (16,687 | ) |  | $ | (17,014 | ) |  | $ | (977,238 | ) |  | $ | (1,065,418 | )
Minimum Rent Receipts (b) |  | $ | 16,194 |  |  | $ | 63,409 |  |  | $ | 60,140 |  |  | $ | 56,624 |  |  | $ | 49,150 |  |  | $ | 41,950 |  |  | $ | 149,208 |  |  | $ | 436,675 |
(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 as of September 30, 2019 (amounts in thousands):
|  | 2019 |
Total minimum rent payments |  | $ | 1,102,359 |
Less: Lease discount |  |  | 769,047 |
Lease liabilities |  | $ | 333,312 |

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