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Net Investment in Sales-type Leases and Ground Lease Receivables

12 Months Ended

Dec. 31, 2023

Net Investment in Sales-type Leases and Ground Lease Receivables

Note 4—Net Investment in Sales-type Leases and Ground Lease Receivables

The Company classifies certain of its Ground Leases as sales-type leases and records the leases within "Net investment in sales-type leases" on the Company’s consolidated balance sheets and records interest income in "Interest income from sales-type leases" in the Company’s consolidated statements of operations. In addition, the Company may enter into transactions whereby it acquires land and enters into Ground Leases directly with the seller. These Ground Leases qualify as sales-type leases and, as such, do not qualify for sale leaseback accounting and are accounted for as financing receivables in accordance with ASC 310 - Receivables and are included in "Ground Lease receivables" on the

Company’s consolidated balance sheets. The Company records interest income from Ground Lease receivables in "Interest income from sales-type leases" in the Company’s consolidated statements of operations.

In July 2022, the Company, pursuant to an agreement with iStar and upon certain construction related conditions being met, acquired an existing Ground Lease from iStar for $36.4 million inclusive of closing costs and was recorded in “Net investment in sales-type leases” and “Real estate-related intangible assets, net” on the Company’s consolidated balance sheet.

In September 2022, the Company sold a Ground Lease to a third-party for $136.0 million and recognized a gain of $55.8 million in “Gain on sale of Ground Leases” in the Company’s consolidated statements of operations for the year ended December 31, 2022. $9.5 million of the gain was attributable to noncontrolling interests, of which $0.7 million was attributable to redeemable noncontrolling interests. In December 2022, $8.5 million of proceeds from this transaction were distributed to noncontrolling interests inclusive of the portion distributed to redeemable noncontrolling interests.

In May 2023, the Company entered into a joint venture with a sovereign wealth fund, which is also an existing shareholder, focused on new acquisitions for certain Ground Lease investments. The Company committed approximately $275 million for a 55% controlling interest in the joint venture and the sovereign wealth fund committed approximately $225 million for a 45% noncontrolling interest in the joint venture. Each party’s commitment is discretionary. The joint venture is a voting interest entity and the Company consolidates the joint venture in its financial statements due to its controlling interest. The Company’s joint venture partners’ interest is recorded in “Noncontrolling interests” on the Company’s consolidated balance sheets. The Company receives a management fee, measured on an asset-by-asset basis, equal to 25 basis points on invested equity for such asset for the first five years following its acquisition, and 15 basis points on invested equity thereafter. The Company will also receive a promote of 15% over a 9% internal rate of return, subject to a 1.275x multiple on invested capital. The venture has first look rights on qualifying investments for 18 months. During the year ended December 31, 2023, the joint venture acquired three Ground Leases for an aggregate purchase price of $60.1 million, of which $36.2 million has been funded as of December 31, 2023.

In November 2023, the Company sold a Ground Lease to a third-party for $4.2 million and recognized a gain of $0.4 million in “Gain on sale of Ground Leases” in the Company’s consolidated statements of operations for the year ended December 31, 2023.

The Company’s net investment in sales-type leases were comprised of the following ($ in thousands):


	December 31, 2023		December 31, 2022
Total undiscounted cash flows⁽¹⁾	$	30,586,189	$	29,586,227
Unguaranteed estimated residual value⁽¹⁾		2,946,928		2,900,218
Present value discount		(30,277,457)		(29,379,846)
Allowance for credit losses		(465)		—
Net investment in sales-type leases⁽²⁾	$	3,255,195	$	3,106,599

(1)

As of December 31, 2023, total discounted cash flows were approximately $3,225 million and the discounted unguaranteed estimated residual value was $30.4 million. As of December 31, 2022, total discounted cash flows were approximately $3,077 million and the discounted unguaranteed estimated residual value was $29.1 million.

(2)	As of December 31, 2023, $16.4 million was attributable to noncontrolling interests.

The following table presents a rollforward of the Company’s net investment in sales-type leases and Ground Lease receivables for the year ended December 31, 2023 ($ in thousands):


	Net Investment in		Ground Lease
	Sales-type Leases		Receivables		Total
Beginning balance	$	3,106,599	$	1,374,716	$	4,481,315
Impact from adoption of new accounting standard (refer to Note 3)		(351)		(199)		(550)
Sales		—		(3,756)		(3,756)
Origination/acquisition/fundings⁽¹⁾		91,148		225,840		316,988
Accretion		57,913		25,867		83,780
Provision for credit losses		(114)		(170)		(284)
Ending balance⁽²⁾	$	3,255,195	$	1,622,298	$	4,877,493

(1)

The net investment in sales-type leases is initially measured at the present value of the fixed and determinable lease payments, including any guaranteed or unguaranteed estimated residual value of the asset at the end of the lease, discounted at the rate implicit in the lease. For newly originated or acquired Ground Leases, the Company’s estimate of residual value equals the fair value of the land at lease commencement.

(2)

As of December 31, 2023 and 2022, all of the Company’s net investment in sales-type leases and Ground Lease receivables were current in their payment status. As of December 31, 2023, the Company’s weighted average accrual rate for its net investment in sales-type leases and Ground Lease receivables was 5.2% and 5.4%, respectively. As of December 31, 2023, the weighted average remaining life of the Company’s 34 Ground Lease receivables was 97.9 years.

Allowance for Credit Losses—Changes in the Company’s allowance for credit losses on net investment in sales-type leases and Ground Lease receivables for the year ended December 31, 2023 were as follows ($ in thousands):


	Net investment in sales-type leases
	Stabilized		Development		Unfunded
Year Ended December 31, 2023	Properties		Properties		Commitments		Total
Allowance for credit losses at beginning of period	$	—	$	—	$	—	$	—
Impact from adoption of new accounting standard (refer to Note 3)⁽¹⁾		280		71		6		357
Provision for (recovery of) credit losses⁽²⁾		107		7		(6)		108
Allowance for credit losses at end of period⁽³⁾	$	387	$	78	$	—	$	465


	Ground Lease receivables
	Stabilized		Development		Unfunded
Year Ended December 31, 2023	Properties		Properties		Commitments		Total
Allowance for credit losses at beginning of period	$	—	$	—	$	—	$	—
Impact from adoption of new accounting standard (refer to Note 3)⁽¹⁾		102		97		84		283
Provision for (recovery of) credit losses⁽²⁾		21		149		(47)		123
Allowance for credit losses at end of period⁽³⁾	$	123	$	246	$	37	$	406

(1)

On January 1, 2023, the Company recorded an allowance for credit losses on net investment in sales-type leases of $0.4 million and an allowance for credit losses on Ground Lease receivables of $0.2 million upon the adoption of ASU 2016-13. The Company also recorded an allowance for credit losses of $0.1 million related to expected credit losses for unfunded commitments and was recorded in "Accounts payable, accrued expenses and other liabilities."

(2)

During the year ended December 31, 2023, the Company recorded a provision for credit losses on net investment in sales-type leases and Ground Lease receivables of $0.1 million and $0.2 million, respectively. The provision for credit losses was due primarily to a declining macroeconomic forecast since December 31, 2022.

(3)	Allowance for credit losses on unfunded commitments is recorded in “Accounts payable and accrued expenses” on the Company’s consolidated balance sheets.

The Company’s amortized cost basis in Ground Lease receivables, presented by year of origination and by stabilized or development status, was as follows as of December 31, 2023 ($ in thousands):


	Year of Origination
	2023		2022		2021		2020		2019		Prior to 2019		Total
Ground Lease receivables
Stabilized properties	$	19,106	$	152,966	$	171,664	$	180,739	$	450,123	$	—	$	974,598
Development properties		139		545,509		102,421		—		—		—		648,069
Total	$	19,245	$	698,475	$	274,085	$	180,739	$	450,123	$	—	$	1,622,667

Future Minimum Lease Payments under Sales-type Leases—Future minimum lease payments to be collected under sales-type leases accounted for under ASC 842 - Leases, excluding lease payments that are not fixed and determinable, in effect as of December 31, 2023, are as follows by year ($ in thousands):


					Fixed Bumps
	Fixed Bumps				with
	with Inflation		Fixed		Percentage
	Adjustments		Bumps		Rent		Total
2024	$	109,336	$	3,937	$	586	$	113,859
2025		104,600		4,001		586		109,187
2026		106,581		4,067		586		111,234
2027		108,509		4,135		586		113,230
2028		110,436		4,294		637		115,367
Thereafter		28,761,342		1,162,938		99,032		30,023,312
Total undiscounted cash flows	$	29,300,804	$	1,183,372	$	102,013	$	30,586,189

During the years ended December 31, 2023, 2022 and 2021, the Company recognized interest income from sales-type leases in its consolidated statements of operations as follows ($ in thousands):


	Net Investment		Ground
	in Sales-type		Lease
Year Ended December 31, 2023	Leases		Receivables		Total
Cash	$	101,306	$	50,417	$	151,723
Non-cash		57,913		25,867		83,780
Total interest income from sales-type leases	$	159,219	$	76,284	$	235,503

Year Ended December 31, 2022
Cash	$	90,487	$	37,780	$	128,267
Non-cash		53,104		20,887		73,991
Total interest income from sales-type leases	$	143,591	$	58,667	$	202,258

Year Ended December 31, 2021
Cash	$	52,091	$	22,925	$	75,016
Non-cash		30,899		12,909		43,808
Total interest income from sales-type leases	$	82,990	$	35,834	$	118,824