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Leases | 3 Months Ended
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Mar. 31, 2019
Leases [Abstract] |
Leases of Lessee Disclosure | 4. Leases General Adoption In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease for accounting purposes is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to the prior guidance in ASC 840 -“Leases” (“Topic 840”). ASU 2016-02 requires lessors to account for leases using an approach that is substantially equivalent to Topic 840 for sales-type leases, direct financing leases and operating leases. ASU 2016-02 supersedes previous leasing standards. On July 30, 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”), that (1) simplifies transition requirements for both lessees and lessors by adding an option that permits an organization to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in its financial statements and (2) allows lessors to elect, as a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component and, instead, to account for those components as a single component if the nonlease components otherwise would be accounted for under the revenue guidance (ASU 2014-09, “Revenue from Contracts with Customers (Topic 606) ("ASC 606")) that was adopted on January 1, 2018, and both of the following are met: (1) the timing and pattern of transfer of the nonlease component(s) and associated lease components are the same; and (2) the lease component, if accounted for separately, would be classified as an operating lease. If the nonlease component or components associated with the lease component are the predominant component of the combined component, an entity is required to account for the combined component in accordance with ASC 606. The Company adopted ASU 2016-02 and ASU 2018-11 effective January 1, 2019. For purposes of transition, the Company elected the practical expedient package, which has been applied consistently to all of its leases but did not elect the hindsight practical expedient. The practical expedient package did not require the Company to reassess the following: (i) whether an expired or existing contract meets the definition of a lease; (ii) the lease classification at the adoption date for existing leases; and (iii) whether costs previously capitalized as initial direct costs would continue to be amortized. This allows the Company to continue to account for its ground leases as operating leases. However, as of January 1, 2019, any new or modified ground leases may be classified as financing leases unless they meet certain conditions. The Company also elected to apply the transition provisions as of the adoption date, January 1, 2019, and not change its comparative statements. The Company recorded an adjustment to the opening balance of retained earnings related to initial direct costs that, as of January 1, 2019, had not started to amortize and are no longer allowed to be capitalized in accordance with ASU 2016-02, totaling approximately $3.9 million to Dividends in Excess of Earnings of Boston Properties, Inc. and Partners' Capital of Boston Properties Limited Partnership, approximately $0.4 million to Noncontrolling interests - Common Units of Boston Properties, Inc. and Noncontrolling Interest - Redeemable Partnership Units of Boston Properties Limited Partnership and $70,000 to Noncontrolling Interests - Property Partnerships of Boston Properties, Inc. and Noncontrolling Interests in Property Partnerships of Boston Properties Limited Partnership on the corresponding Consolidated Balance Sheets. The Company made the policy election, when it is the lessee, to not apply the revenue recognition requirements of Topic 842 to short term leases. This policy election is made by class of underlying assets and as described below, the Company considers real estate to be a class of underlying assets, and will not be further delineating it into specific uses of the real estate asset as the risk profiles are similar in nature. The Company will recognize the lease payments in net income on a straight-line basis over the lease term. Lease payments from operating leases are recognized on a straight-line basis over the term of the leases. The cumulative difference between lease revenue recognized under this method and the contractual lease payment terms is recorded as deferred rent receivable on our consolidated balance sheets. The Company reviews its trade accounts receivable, including its straight-line rent receivable, related to base rents, straight-line rent, expense reimbursements and other revenues for collectability. The Company analyzes its accounts receivable, customer credit worthiness and current economic trends when evaluating the adequacy of the collectability of the lessee’s total accounts receivable balance on a lease by lease basis. In addition, tenants in bankruptcy are analyzed and considerations are made in connection with the expected recovery of pre-petition and post-petition claims. If a lessee’s accounts receivable balance is considered uncollectible the Company will write-off the receivable balances associated with the lease to Lease revenue and cease to recognize lease income, including straight-line rent unless cash is received. If the Company subsequently determines that it is probable it will collect substantially all the remaining lessee’s lease payments under the lease term, the Company will then reinstate the straight-line balance adjusting for the amount related to the period when the lease payments were considered not probable. The Company’s reported net earnings are directly affected by management’s estimate of the collectability of its trade accounts receivable. In January 2018, the FASB issued ASU 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842” (“ASU 2018-01”), which provides an optional transition practical expedient to not evaluate, under Topic 842, existing or expired land easements that were not previously accounted for as leases under the leases guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date that the entity adopts Topic 842. An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. The effective date and transition requirements for ASU 2018-01 are the same as the effective date and transition requirements in ASU 2016-02. The Company adopted ASU 2018-01 on January 1, 2019. Lessee For leases in which the Company is the lessee, (generally ground leases), on January 1, 2019, the Company recognized a right-of-use asset and a lease liability of approximately $151.8 million and $199.3 million, respectively. The leases liability was equal to the present value of the minimum lease payments in accordance with Topic ASC 840. In addition, the Company did not know the rate implicit in any of its ground leases which were classified as operating leases, and accordingly used the Company's incremental borrowing rate ("IBR") to determine the net present value of the minimum lease payments. In order to determine the IBR, the Company utilized a market-based approach to estimate the incremental borrowing rate for each individual lease. The approach required significant judgment. Therefore, the Company utilized different data sets to estimate base IBRs via an analysis of the following weighted-components:
• | The interpolated rates from yields on outstanding U.S. Treasury issuances for up to 30 years and for years 31 and beyond, longer term publicly traded educational institution debt issued by high credit quality educational institutions with maturity dates up to 2116,
• | Observable mortgage rates spread over U.S. Treasury issuances, and
• | Unlevered property yields and discount rates.
The Company then applied adjustments to account for considerations related to term and interpolated the IBR. The Company has four non-cancelable ground lease obligations, which were classified as operating leases, with various initial term expiration dates through 2114. The Company recognizes ground rent expense on a straight-line basis over the term of the respective ground lease agreements. None of the amounts disclosed below for these ground leases contain variable payments, extension options or residual value guarantees. One of the ground leases does have an extension option. However, lease payments for this ground lease are based on fair market value and as such have not been included in the analysis below. The Company has four finance lease obligations with various initial term expiration dates through 2036. The following tables provide quantitative information for the Company's operating and finance leases as of March 31, 2019 (dollars in thousands):
| Three months ended March 31, 2019
Lease costs |
Operating lease costs | $ | 3,677 |
Finance lease costs |
Amortization of right of use asset (1) | $ | 16 |
Interest on lease liabilities (2) | $ | 12 |
| March 31, 2019
Other information |
Weighted-average remaining lease term (in years) |
Operating leases | 52 |
Finance leases | 5 |
Weighted-average discount rate |
Operating leases | 5.7 | %
Finance leases | 4.1 | %
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(1) | The finance leases relate to either land, building or assets that remain in development. The Company's policy is not to depreciate finance lease assets related to land because it is assumed to have an indefinite life. For assets under development, depreciation may commence once the asset is placed in-service and depreciation would be recognized in accordance with the Company's policy.
(2) | Three of the finance leases relate to assets under development and as such the entire interest amount was capitalized.
The following table provides a maturity analysis for the Company's future contractual minimum lease payments to be made by the Company as of December 31, 2018, under non-cancelable ground leases which expire on various dates through 2114:
Years Ending December 31, | (in thousands)
2019 | $ | 11,425 |
2020 | 18,425 |
2021 | 25,310 |
2022 | 8,894 |
2023 | 9,084 |
Thereafter | 567,232 |
The following table provides a maturity analysis for the Company's future minimum lease payments, as of December 31, 2018, related to the four capital leases, through 2036:
Years Ending December 31, | (in thousands)
2019 | $ | 1,441 |
2020 | 12,682 |
2021 | 2,123 |
2022 | 1,253 |
2023 | 944 |
Thereafter | 73,241 |
Total expected minimum lease payments | 91,684 |
Interest portion | (27,497 | )
Present value of expected net minimum lease payments | $ | 64,187 |
The following table provides a maturity analysis for the Company's lease liabilities related to its operating and finance leases as of March 31, 2019 (in thousands):
| Operating |  | Finance (1)
April 1, 2019 - December 31, 2019 | $ | 7,317 |  |  | $ | 4,401 |
2020 | 17,488 |  |  | 122,070 |
2021 | 25,403 |  |  | 2,130 |
2022 | 11,376 |  |  | 1,121 |
2023 | 9,084 |  |  | 944 |
Thereafter | 567,232 |  |  | 73,241 |
Total lease payments | 637,900 |  |  | 203,907 |
Less: interest portion | (438,247 | ) |  | (30,784 | )
Present value of lease payments | $ | 199,653 |  |  | $ | 173,123 |
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(1) | Finance lease payments in 2020 and 2024 include approximately $119.8 million and $38.7 million, respectively, related to purchase options that the Company is reasonably certain that it will exercise.
Lessor, Operating Leases | Lessor The Company leases primarily Class A office, retail and residential space to tenants. These leases may contain extension and termination options, that are predominately at the sole discretion of the tenant. In a few instances, the leases also contain purchase options, which would be exercisable at fair market value. Also, certain of the Company's leases include rental payments that are based on a percentage of the tenant sales in excess of contractual amounts. ASU 2018-11 provides lessors a practical expedient to not separate nonlease components from the associated lease component if certain criteria stated above are met for each class of underlying assets. The guidance in Topic 842 defines "underlying asset" as "an asset that is the subject of a lease for which a right to use that asset has been conveyed to a lessee. The underlying asset could be a physically distinct portion of a single asset." Based on the above guidance, t he Company considers real estate assets as a class of underlying assets and will not be further delineating it into specific uses of the real estate asset as the risk profiles are similar in nature. Lease components are elements of an arrangement that provide the customer with the right to use an identified asset. Nonlease components are distinct elements of a contract that are not related to securing the use of the leased asset and revenue is recognized in accordance with ASC 606. The Company considers common area maintenance (CAM) and service income associated with tenant work orders to be nonlease components because they represent delivery of a separate service but are not considered a cost of securing the identified asset. In the case of the Company's business, the identified asset would be the leased real estate (office, retail or residential). The Company assessed and concluded that the timing and pattern of transfer for nonlease components and the associated lease component are the same. The Company determined that the predominate component was the lease component and as such its leases will continue to qualify as operating leases and the Company has made a policy election to account for and present the lease component and the nonlease component as a single component in the revenue section of the Consolidated Statements of Operations labeled Lease. Prior to the adoption of Topic 842, nonlease components had been included within Recoveries from Tenants Revenue, Parking and Other Revenue and Development and Management Services Revenue on the Company's Consolidated Statements of Operations. In addition, under ASU 2016-02, lessors will only capitalize incremental direct leasing costs. As a result, starting January 1, 2019, the Company no longer capitalizes non-incremental legal costs and internal leasing wages. These costs are expensed as incurred. The expensing of these items is included within General and Administrative Expense on the Consolidated Statements of Operations. The following table summarizes the components of lease revenue recognized during the three months ended March 31, 2019 included within the Company's Consolidated Statements of Operations (in thousands):
Lease Revenue | Three months ended March 31, 2019
Fixed Contractual Payments | $ | 553,986 |
Variable lease payments | 125,265 |
| $ | 679,251 |
The Company's properties are leased to tenants under operating leases with initial term expiration dates ranging from 2019 to 2049. The future contractual minimum lease payments to be received (excluding operating expense reimbursements) by the Company as of December 31, 2018, under non-cancelable operating leases which expire on various dates through 2049:
Years Ending December 31, | (in thousands)
2019 | $ | 2,088,171 |
2020 | 2,106,963 |
2021 | 2,015,031 |
2022 | 1,838,699 |
2023 | 1,736,636 |
Thereafter | 12,295,464 |
The future contractual lease payments to be received (excluding operating expense reimbursements) by the Company as of March 31, 2019, under non-cancelable operating leases which expire on various dates through 2049:
| (in thousands)
April 1, 2019 - December 31, 2019 | $ | 1,573,871 |
2020 | 2,147,464 |
2021 | 2,076,969 |
2022 | 1,910,362 |
2023 | 1,811,936 |
Thereafter | 12,821,229 |

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- Definition The entire disclosure for lessee entity's leasing arrangements including, but not limited to, all of the following: (a.) The basis on which contingent rental payments are determined, (b.) The existence and terms of renewal or purchase options and escalation clauses, (c.) Restrictions imposed by lease agreements, such as those concerning dividends, additional debt, and further leasing. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 842 -SubTopic 20 -URI http://asc.fasb.org/subtopic&trid=77888251 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 840 -URI http://asc.fasb.org/topic&trid=2208923 + Details
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