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Lease Accounting | 9 Months Ended
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Sep. 30, 2024
Leases [Abstract] |
Lease Accounting | Lease Accounting Lessor Operating Leases. The Company’s lease portfolio as a lessor primarily includes general purpose, single-tenant net-leased real estate assets. Most of the Company’s leases require tenants to pay fixed annual rental payments that escalate on an annual basis and variable payments for other operating expenses, such as real estate taxes, insurance, common area maintenance ("CAM"), and utilities, that are based on the actual expenses incurred. Certain leases allow for the tenant to renew the lease term upon expiration or earlier. Periods covered by a renewal option are included within the lease term only when renewals are deemed to be reasonably certain. Certain leases allow for the tenant to terminate the lease before the expiration of the lease term and certain leases provide the tenant with the right to purchase the leased property at fair market value or a stipulated price upon expiration of the lease term or before. Accounting guidance under ASC 842 requires the Company to make certain assumptions and judgments in applying the guidance, including determining whether an arrangement includes a lease and determining the lease term when the contract has renewal, purchase or early termination provisions. The Company analyzes its accounts receivable, customer creditworthiness 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 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 rental 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 of the lessee's remaining lease payments under the lease term; the Company will reinstate the straight-line balance adjusting for the amount related to the period when the lease was accounted for on a cash basis. The Company elected that the lease and non-lease components in its leases are a single lease component, which is, therefore, being recognized as rental revenue in its unaudited condensed consolidated statements of operations. The primary non-lease service included within rental revenue is CAM services provided as part of the Company’s real estate leases. ASC 842 requires that the Company capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease. For the nine months ended September 30, 2024 and 2023, the Company did not incur any costs that were not incremental to the execution of leases. The Company manages the risk associated with the residual value of its leased properties by including contract clauses that make tenants responsible for surrendering the space in good condition upon lease termination, holding a diversified portfolio, and other activities. The Company does not have residual value guarantees on specific properties. Sales-Type Leases. As of September 30, 2024, the Company had one lease that qualified as a sales-type lease. The Company has one ground lease for an industrial development land parcel located in the Phoenix, Arizona market that is classified as a sales-type lease. At the commencement date of the lease, the Company evaluated the lease classification and classified the lease as a sales-type lease. The lease contains a purchase option in the amount of $20.00 per land square foot starting on the second anniversary date of the lease (November 2024) and ending on the third anniversary date (November 2025). The Company determined that the purchase option was not reasonably certain of being exercised. The lease met the sales-type lease criteria because the present value of the lease payments was equal to substantially all of the fair value of the underlying asset on the lease commencement date. Rental Revenue Classification. The following table presents the Company’s classification of rental revenue for its operating leases and sales-type lease for the three and nine months ended September 30, 2024 and 2023:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
Classification |  | 2024 |  | 2023 |  | 2024 |  | 2023
Fixed |  | $ | 69,708 |  |  | $ | 68,849 |  |  | $ | 209,468 |  |  | $ | 205,984 |
Sales-type lease income |  | 1,863 |  |  | 1,865 |  |  | 5,679 |  |  | 5,546 |
Variable(1) |  | 12,978 |  |  | 13,130 |  |  | 39,377 |  |  | 40,796 |
Total |  | $ | 84,549 |  |  | $ | 83,844 |  |  | $ | 254,524 |  |  | $ | 252,326 |
(1) Primarily comprised of tenant reimbursements. Future fixed rental receipts for operating and sales-type leases, assuming no new or re-negotiated leases as of September 30, 2024 were as follows:
| Operating | Sales-Type
2024 - remainder | $ | 68,761 |  | $ | 1,269 |
2025 | 273,774 |  | 5,435 |
2026 | 260,207 |  | 5,652 |
2027 | 226,265 |  | 5,878 |
2028 | 192,161 |  | 6,114 |
2029 | 165,174 |  | 6,358 |
Thereafter | 459,784 |  | 721,541 |
Total | $ | 1,646,126 |  | $ | 752,247 |
Difference between undiscounted cash flow and present value |  | (686,893) |
Investment in a sales-type lease |  | $ | 65,354 |
The minimum lease payments above do not include reimbursements to be received from tenants for certain operating expenses and real estate taxes and do not include early termination payments provided for in certain leases, unless such payments are reasonably certain to be received. Certain leases allow for the tenant to terminate the lease if the property is deemed obsolete, as defined, and upon payment of a termination fee to the landlord, as stipulated in the lease. In addition, certain leases provide the tenant with the right to purchase the leased property at fair market value or a stipulated price. Lessee The Company, as lessee, has ground leases, corporate leases for office space, and office equipment leases. All leases were classified as operating leases as of September 30, 2024. The leases have remaining lease terms of up to 33 years. Renewal periods are included in the lease term only when renewal is deemed to be reasonably certain. The lease term also includes periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the termination option. The Company measures its lease payments by including fixed rental payments and variable rental payments that tie to an index or a rate, such as CPI. The Company recognizes lease expense for its operating leases on a straight-line basis over the lease term and variable lease expense not included in the lease payment measurement as incurred. The accounting guidance under ASC 842 requires the Company to make certain assumptions and judgments in applying the guidance, including determining whether an arrangement includes a lease, determining the term of a lease when the contract has renewal or termination provisions and determining the discount rate. The Company determines whether an arrangement is or includes a lease at contract inception by evaluating whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. If the Company has the right to obtain substantially all of the economic benefits from and can direct the use of, the identified asset for a period of time, the Company accounts for the contract as a lease. The Company uses the information available at the lease commencement date to determine the discount rate for any new leases. The Company used a portfolio approach to determine its incremental borrowing rate. Lease contracts were grouped based on similar lease terms and economic environments in a manner in which the Company reasonably expects that the outcome from applying a portfolio approach does not differ materially from an individual lease approach. The Company estimated a collateralized discount rate for each portfolio of leases. Supplemental information related to operating leases is as follows:
|  | Nine Months Ended
|  | September 30, 2024 |  | September 30, 2023
Weighted-average remaining lease term |  |  |
Operating leases (years) | 8.9 |  | 9.3
Weighted-average discount rate |  |  |
Operating leases | 4.1 | % |  | 4.1 | %
The components of lease expense for the nine months ended September 30, 2024 and 2023 were as follows:
Income Statement Classification | Fixed |  | Variable |  | Total
2024: |  |  |  |  |
Property operating | $ | 2,628 |  |  | $ | 15 |  |  | $ | 2,643 |
General and administrative(1) | 1,213 |  |  | 187 |  |  | 1,400 |
Total | $ | 3,841 |  |  | $ | 202 |  |  | $ | 4,043 |
2023: |  |  |  |  |
Property operating | $ | 2,657 |  |  | $ | 7 |  |  | $ | 2,664 |
General and administrative | 1,144 |  |  | 215 |  |  | 1,359 |
Total | $ | 3,801 |  |  | $ | 222 |  |  | $ | 4,023 |
(1) The general and administrative lease expense excludes a reduction of $492 to lease expense for the sublease of the Company's office space in New York, New York. The Company recognized sublease income related to its ground leases in rental revenue of $2,484 and $2,490 for the nine months ended September 30, 2024 and 2023, respectively. The following table shows the Company's maturity analysis of its operating lease liabilities as of September 30, 2024:
|  | Operating Leases
2024 - remainder |  | $ | 1,225 |
2025 |  | 5,098 |
2026 |  | 4,125 |
2027 |  | 3,643 |
2028 |  | 1,031 |
2029 |  | 193 |
Thereafter |  | 5,287 |
Total lease payments |  | $ | 20,602 |
Less: Imputed interest |  | (3,848) |
Present value of lease liabilities |  | $ | 16,754 |
Lease Accounting | Lease Accounting Lessor Operating Leases. The Company’s lease portfolio as a lessor primarily includes general purpose, single-tenant net-leased real estate assets. Most of the Company’s leases require tenants to pay fixed annual rental payments that escalate on an annual basis and variable payments for other operating expenses, such as real estate taxes, insurance, common area maintenance ("CAM"), and utilities, that are based on the actual expenses incurred. Certain leases allow for the tenant to renew the lease term upon expiration or earlier. Periods covered by a renewal option are included within the lease term only when renewals are deemed to be reasonably certain. Certain leases allow for the tenant to terminate the lease before the expiration of the lease term and certain leases provide the tenant with the right to purchase the leased property at fair market value or a stipulated price upon expiration of the lease term or before. Accounting guidance under ASC 842 requires the Company to make certain assumptions and judgments in applying the guidance, including determining whether an arrangement includes a lease and determining the lease term when the contract has renewal, purchase or early termination provisions. The Company analyzes its accounts receivable, customer creditworthiness 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 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 rental 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 of the lessee's remaining lease payments under the lease term; the Company will reinstate the straight-line balance adjusting for the amount related to the period when the lease was accounted for on a cash basis. The Company elected that the lease and non-lease components in its leases are a single lease component, which is, therefore, being recognized as rental revenue in its unaudited condensed consolidated statements of operations. The primary non-lease service included within rental revenue is CAM services provided as part of the Company’s real estate leases. ASC 842 requires that the Company capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease. For the nine months ended September 30, 2024 and 2023, the Company did not incur any costs that were not incremental to the execution of leases. The Company manages the risk associated with the residual value of its leased properties by including contract clauses that make tenants responsible for surrendering the space in good condition upon lease termination, holding a diversified portfolio, and other activities. The Company does not have residual value guarantees on specific properties. Sales-Type Leases. As of September 30, 2024, the Company had one lease that qualified as a sales-type lease. The Company has one ground lease for an industrial development land parcel located in the Phoenix, Arizona market that is classified as a sales-type lease. At the commencement date of the lease, the Company evaluated the lease classification and classified the lease as a sales-type lease. The lease contains a purchase option in the amount of $20.00 per land square foot starting on the second anniversary date of the lease (November 2024) and ending on the third anniversary date (November 2025). The Company determined that the purchase option was not reasonably certain of being exercised. The lease met the sales-type lease criteria because the present value of the lease payments was equal to substantially all of the fair value of the underlying asset on the lease commencement date. Rental Revenue Classification. The following table presents the Company’s classification of rental revenue for its operating leases and sales-type lease for the three and nine months ended September 30, 2024 and 2023:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
Classification |  | 2024 |  | 2023 |  | 2024 |  | 2023
Fixed |  | $ | 69,708 |  |  | $ | 68,849 |  |  | $ | 209,468 |  |  | $ | 205,984 |
Sales-type lease income |  | 1,863 |  |  | 1,865 |  |  | 5,679 |  |  | 5,546 |
Variable(1) |  | 12,978 |  |  | 13,130 |  |  | 39,377 |  |  | 40,796 |
Total |  | $ | 84,549 |  |  | $ | 83,844 |  |  | $ | 254,524 |  |  | $ | 252,326 |
(1) Primarily comprised of tenant reimbursements. Future fixed rental receipts for operating and sales-type leases, assuming no new or re-negotiated leases as of September 30, 2024 were as follows:
| Operating | Sales-Type
2024 - remainder | $ | 68,761 |  | $ | 1,269 |
2025 | 273,774 |  | 5,435 |
2026 | 260,207 |  | 5,652 |
2027 | 226,265 |  | 5,878 |
2028 | 192,161 |  | 6,114 |
2029 | 165,174 |  | 6,358 |
Thereafter | 459,784 |  | 721,541 |
Total | $ | 1,646,126 |  | $ | 752,247 |
Difference between undiscounted cash flow and present value |  | (686,893) |
Investment in a sales-type lease |  | $ | 65,354 |
The minimum lease payments above do not include reimbursements to be received from tenants for certain operating expenses and real estate taxes and do not include early termination payments provided for in certain leases, unless such payments are reasonably certain to be received. Certain leases allow for the tenant to terminate the lease if the property is deemed obsolete, as defined, and upon payment of a termination fee to the landlord, as stipulated in the lease. In addition, certain leases provide the tenant with the right to purchase the leased property at fair market value or a stipulated price. Lessee The Company, as lessee, has ground leases, corporate leases for office space, and office equipment leases. All leases were classified as operating leases as of September 30, 2024. The leases have remaining lease terms of up to 33 years. Renewal periods are included in the lease term only when renewal is deemed to be reasonably certain. The lease term also includes periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the termination option. The Company measures its lease payments by including fixed rental payments and variable rental payments that tie to an index or a rate, such as CPI. The Company recognizes lease expense for its operating leases on a straight-line basis over the lease term and variable lease expense not included in the lease payment measurement as incurred. The accounting guidance under ASC 842 requires the Company to make certain assumptions and judgments in applying the guidance, including determining whether an arrangement includes a lease, determining the term of a lease when the contract has renewal or termination provisions and determining the discount rate. The Company determines whether an arrangement is or includes a lease at contract inception by evaluating whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. If the Company has the right to obtain substantially all of the economic benefits from and can direct the use of, the identified asset for a period of time, the Company accounts for the contract as a lease. The Company uses the information available at the lease commencement date to determine the discount rate for any new leases. The Company used a portfolio approach to determine its incremental borrowing rate. Lease contracts were grouped based on similar lease terms and economic environments in a manner in which the Company reasonably expects that the outcome from applying a portfolio approach does not differ materially from an individual lease approach. The Company estimated a collateralized discount rate for each portfolio of leases. Supplemental information related to operating leases is as follows:
|  | Nine Months Ended
|  | September 30, 2024 |  | September 30, 2023
Weighted-average remaining lease term |  |  |
Operating leases (years) | 8.9 |  | 9.3
Weighted-average discount rate |  |  |
Operating leases | 4.1 | % |  | 4.1 | %
The components of lease expense for the nine months ended September 30, 2024 and 2023 were as follows:
Income Statement Classification | Fixed |  | Variable |  | Total
2024: |  |  |  |  |
Property operating | $ | 2,628 |  |  | $ | 15 |  |  | $ | 2,643 |
General and administrative(1) | 1,213 |  |  | 187 |  |  | 1,400 |
Total | $ | 3,841 |  |  | $ | 202 |  |  | $ | 4,043 |
2023: |  |  |  |  |
Property operating | $ | 2,657 |  |  | $ | 7 |  |  | $ | 2,664 |
General and administrative | 1,144 |  |  | 215 |  |  | 1,359 |
Total | $ | 3,801 |  |  | $ | 222 |  |  | $ | 4,023 |
(1) The general and administrative lease expense excludes a reduction of $492 to lease expense for the sublease of the Company's office space in New York, New York. The Company recognized sublease income related to its ground leases in rental revenue of $2,484 and $2,490 for the nine months ended September 30, 2024 and 2023, respectively. The following table shows the Company's maturity analysis of its operating lease liabilities as of September 30, 2024:
|  | Operating Leases
2024 - remainder |  | $ | 1,225 |
2025 |  | 5,098 |
2026 |  | 4,125 |
2027 |  | 3,643 |
2028 |  | 1,031 |
2029 |  | 193 |
Thereafter |  | 5,287 |
Total lease payments |  | $ | 20,602 |
Less: Imputed interest |  | (3,848) |
Present value of lease liabilities |  | $ | 16,754 |

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- Definition The entire disclosure for operating leases of lessee. Includes, but is not limited to, description of operating lease and maturity analysis of operating lease liability. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 842 -SubTopic 20 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/842-20/tableOfContent + Details
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