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Basis of Presentation | 3 Months Ended
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Mar. 31, 2019
Accounting Policies [Abstract] |
BASIS OF PRESENTATION | 2. BASIS OF PRESENTATION Basis of Presentation The consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments consist solely of normal recurring matters, and result in a fair statement of the financial position of the Company as of March 31, 2019, the results of its operations for the three-month periods ended March 31, 2019 and 2018 and its cash flows for the three-month periods ended March 31, 2019 and 2018 have been included. The results of operations for such interim periods are not necessarily indicative of the results for a full year. These consolidated financial statements should be read in conjunction with the Parent Company’s and the Operating Partnership’s consolidated financial statements and footnotes included in their combined 2018 Annual Report on Form 10-K filed with the SEC on February 22, 2019. The Company's Annual Report on Form 10-K for the year ended December 31, 2018 contains a discussion of our significant accounting policies under Note 2, "Summary of Significant Accounting Policies". Other than the adoption of ASU-2016-02, Leases (Topic 842), there have been no significant changes in our significant accounting policies since December 31, 2018. Management discusses our significant accounting policies and management’s judgments and estimates with the Company's Audit Committee. Out of Period Adjustment The Company recorded $0.8 million of depreciation expense during the three-month period ended March 31, 2019, which should have been recorded in the consolidated financial statements for the three and twelve-month periods ended December 31, 2018. Management concluded that this misstatement was not material to the consolidated financial statements as of and for the twelve-month period ended December 31, 2018 or the three-month period ended March 31, 2019. Reclassifications The Company reclassified tenant reimbursements and termination fees within the “Rents” caption on the consolidated statements of operations as a result of the adoption of Topic 842, Leases as of January 1, 2019. Tenant reimbursements and termination fees, which were reclassified retrospectively for all periods, were formerly presented separately in the “Tenant reimbursements” and “Termination fees” captions, respectively, on the consolidated statements of operations. The prior year reclassifications were made to conform to current-year presentation under Topic 842 and did not result in any change in total revenue. Adoptions of New Accounting Guidance In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), modifying the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard 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 is effectively a financed purchase by the lessee. This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and lease liability for all leases with a term of greater than twelve months regardless of their classification. Leases with a term of twelve months or less will be accounted for in the same manner as operating leases under ASC 840, Leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to previous guidance for sales-type leases, direct financing leases, and operating leases. The guidance supersedes previously issued guidance under ASC 840. The Company adopted Topic 842 effective January 1, 2019. In applying the modified retrospective transition method, the Company elected the package of practical expedients available for implementation, which allows for the following:
| • | An entity need not reassess whether any expired or existing contracts are or contain leases;
| • | An entity need not reassess the lease classification for any expired or existing leases; and
| • | An entity need not reassess initial indirect costs for any existing leases.
Furthermore, the Company elected the optional transition method to make January 1, 2019 the initial application date of the standard. This package of practical expedients allows entities to account for their existing leases for the remainder of their respective lease terms following the previous accounting guidance. The Company also elected to adopt the optional transition practical expedient provided in ASU 2018-01 to not evaluate under Topic 842 for existing or expired land easements prior to the application date to determine if they meet the definition of a lease. The Company also elected to adopt the practical expedient offered in ASU 2018-11 that allows lessors to not allocate the total consideration to lease and nonlease components, such as tenant reimbursements, based on their relative standalone selling prices as the timing and pattern of revenue recognition of the combined single lease component is the same and the leases are classified as operating leases. The Company elected to adopt ASU 2018-20, which allows lessors to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. Instead, lessors will account for those costs as if they are lessee costs. All collections from lessees of taxes within the scope of the election are excluded from the consideration of the contract and from variable payments not included in the consideration of the contract. Lessor accounting The Company generates revenue under leases with tenants occupying the Properties. Generally, leases with tenants are accounted for as operating leases. As of March 31, 2019, the Company does not have any leases classified as direct-financing or sales-type leases. The operating leases have various expiration dates. Lease payments on non-cancellable leases at March 31, 2019 are as follows (in thousands):
Year |  | Lease payments |
2019 (nine months remaining) |  | $ | 292,215 |
2020 |  |  | 377,088 |
2021 |  |  | 354,913 |
2022 |  |  | 309,125 |
2023 |  |  | 281,437 |
Thereafter |  |  | 1,270,928 |
Total |  | $ | 2,885,706 |
Lease payments on non-cancellable leases at December 31, 2018 are as follows (in thousands):
Year |  | Lease payments |
2019 |  | $ | 392,058 |
2020 |  |  | 372,619 |
2021 |  |  | 349,160 |
2022 |  |  | 304,445 |
2023 |  |  | 277,388 |
Thereafter |  |  | 1,265,810 |
Total |  | $ | 2,961,480 |
Fixed lease payments under tenant leases are recognized on a straight-line basis over the term of the related lease. The cumulative difference between lease revenue recognized under the straight-line method and contractual lease payments are recorded as “Accrued rent receivable” on the consolidated balance sheets. Variable lease payments are recognized as lease revenue in the period in which changes in facts and circumstances on which the variable lease payments are based occur. In November 2018, the FASB issued ASU No. 2018-19, which clarifies that operating lease receivables are not within the scope of ASC 326-20 and should instead be accounted for under the new leasing standard, ASC 842. Topic 842 requires a binary approach to evaluating leases for collectability. Lessors are required to determine if it is probable that substantially all of the lease payments will be collected from the tenant over the lease term. Should the lessor determine that it is not probable that substantially all of the lease payments will be collected, the standard requires that the lessor writes off any accrued rent receivable and begin recognizing lease payments on a cash-basis. The Company has evaluated all leases for collectability and is recognizing lease payments for certain leases on a cash-basis as collectability of substantially all of the lease payments is not probable. As a result, during the quarter ended March 31, 2019, the write off of the accrued rent receivable of $0.7 million was recorded by the Company upon adoption of Topic 842 as a cumulative effect of accounting change adjustment to equity through the “Cumulative earnings” caption on the consolidated balance sheets. The Company maintains a general reserve of $11.3 million relating to leases that existed prior to adoption of Topic 842 for which the Company has determined that collectability of substantially all of lease payments remains probable as of March 31, 2019. The Company’s lease revenue is impacted by the Company’s determination of whether improvements to the property, whether made by the Company or by the tenant, are landlord assets. The determination of whether an improvement is a landlord asset requires judgment. In making this judgment, the Company’s primary consideration is whether an improvement would be utilizable by another tenant upon move out of the improved space by the then-existing tenant. If the Company has funded an improvement that it determines not to be landlord assets, then it treats the cost of the improvement as a lease incentive. If the tenant has funded the improvement that the Company determines to be landlord assets, then the Company treats the costs of the improvement as deferred revenue and amortizes this costs into revenue over the lease term. For certain leases, the Company also makes significant assumptions and judgments in determining the lease term, including assumptions when the lease provides the tenant with an early termination option or purchase option. The lease term impacts the period over which the Company determines and records lease payments and also impacts the period of which it amortizes lease-related costs. The Company considers all relevant factors that create an economic incentive for the lessee and uses judgement to determine if those factors, considered together, signify that the lessee is reasonably certain to exercise the option. For leases where a tenant executes a lease termination, termination fees are recognized over the modified term of the lease as rental income. Additionally, any deferred rents receivable are accelerated over the modified lease term. The Company’s leases also typically provide for tenant reimbursement of a portion of common area maintenance expenses and other operating expenses to the extent that a tenant’s pro rata share of expenses exceeds a base year level set in the lease or to the extent that the tenant has a lease on a triple net basis. The Company also contracts with third-party vendors and suppliers for goods and services to fulfill certain of the Company’s obligations to tenants. Tenant reimbursements are billed in the period in which the related expenses are incurred. The table below sets forth the allocation of lease revenue recognized between fixed contractual payments and variable lease payments (in thousands):
|  | Three Months Ended March 31, |
Lease Revenue |  | 2019 |
Fixed lease payments |  | $ | 108,033 |
Variable lease payments |  |  | 30,064 |
Total |  | $ | 138,097 |
Fixed lease payments include contractual rents under lease agreements with tenants recognized on a straight-line basis over the lease term, including amortization of lease incentives and above or below market rent intangibles, and parking income that is fixed under a long-term contract. Variable lease payments include reimbursements billed to tenants, termination fees, bad debt expense, and parking income that is not fixed under a long-term contract. Lessee Accounting The Company is the lessee under six long-term ground leases classified as operating leases. While adoption of the practical expedient allows the Company to not revisit the classification of existing leases, the Company measured the present value of the future lease payments for each ground lease agreement and recognized a right of use asset and lease liability in the aggregate amount of $22.4 million, each as of January 1, 2019 in accordance with Topic 842. The right of use assets and lease liabilities are presented in the “Right of use asset – operating leases” and “Lease liability – operating leases” captions, respectively, on the consolidated balance sheets as of March 31, 2019. The Company makes significant assumptions and judgements when determining the discount rate for the lease to calculate the present value of the lease payments. As the rate implicit in the lease is not readily determinable, the Company estimates the incremental borrowing rate (“IBR”) that it would need to pay to borrow on a collateralized basis over a similar lease term an amount equal to the lease payments in a similar economic environment. The Company utilized a market-based approach to estimate the IBR for each individual lease. The base IBR was estimated utilizing observable mortgage and corporate bond rates, which were then adjusted to account for considerations related to the Company’s credit rating and the lease term to select an incremental borrowing rate for each lease. The lease liabilities and right of use assets are amortized on a straight-line basis over the lease term with the corresponding expense classified in the “Property operating expenses” caption on the consolidated statement of operations. Certain of the Company’s ground leases contain extension options. The Company has exercised judgment in considering all economic factors to determine that it is not reasonably certain to exercise the extension options and therefore has not included the extension period in the remaining lease term. With the exception of certain ground leases that are subject to rent increases periodically based on the CPI index, all lease payments under the ground lease are fixed. Topic 842 requires use of the most recent CPI adjustment when determining the present value of the lease payments for an indexed lease. As such, the 2018 CPI index was used to determine the right of use asset and corresponding lease liability as of January 1, 2019. Additional rent payments for amounts in excess of this estimated growth rate will be expensed on a cash basis as incurred and are considered variable lease costs. The table below summarizes the Company’s operating lease cost (in thousands) recognized through the “Property operating expenses” caption on the consolidated statement of operations:
|  | Three Months Ended March 31, |
Lease Cost |  | 2019 |
Fixed lease cost |  | $ | 525 |
Variable lease cost |  |  | 14 |
Total |  | $ | 539 |
Weighted-average remaining lease term (years) |  |  | 53.2 |
Weighted-average discount rate |  |  | 6.3 | %
Marine Piers Sublease Interest Sale On March 15, 2017, the Company sold its sublease interest in the Piers at Penn’s Landing (the “Marine Piers”), which includes leasehold improvements containing 181,900 net rentable square feet, and a marina, located in Philadelphia, Pennsylvania, for an aggregate sales price of $21.4 million. On the closing date, the buyer paid $12.0 million in cash and the Company received cash proceeds of $11.2 million, after closing costs and prorations. The $9.4 million balance of the purchase is due on (a) January 31, 2020, in the event that the tenant at the Marine Piers does not exercise an option it holds to extend the term of the sublease or (b) January 15, 2024, in the event that the tenant does exercise the option to extend the term of the sublease. In accordance with ASU 2017-05, the Company determined that it is appropriate to recognize the sale of the sublease interest in the Marine Piers and to defer the amount of the pending payment due from the buyer because the Company cannot determine the collectability of the remaining $9.4 million balance due under the purchase and sale agreement. The net book value of the Marine Piers was $4.7 million, resulting in a gain on sale of $6.5 million. The remaining gain on sale of $9.4 million arising from the pending payment will be recognized at the earlier of: (i) the time that the Company determines collection of the deferred payment is probable or (ii) on the second purchase price installment date. Based on the facts and circumstances, revenue recognition under ASU 2017-05 coincides with the Company’s previous conclusion under ASC 360-20, and therefore no restatement of the consolidated financial statements is necessary as a result of implementing the guidance for the sale of nonfinancial assets. During the first quarter of 2019, the tenant at the Marine Piers exercised its option to extend the term of its sublease. Therefore, the Company expects to receive the $9.4 million balance on January 15, 2024. Recent Accounting Pronouncements In March 2019, the FASB issued ASU No. 2019-01, an amendment to the lease ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing essential information about leasing transactions. The amendments in this update reinstate the exception in Topic 842 for lessors that are not manufacturers or dealers. The amendment is effective with Topic 842. Specifically, those lessors will use their cost, reflecting any volume or trade discounts that may apply, as the fair value of the underlying asset. However, if significant time lapses between the acquisition of the underlying asset and lease commencement, those lessors will be required to apply the definition of fair value (exit price) in Topic 820. The Company has evaluated the impact of this new guidance and determined that it will not have a material impact on its consolidated financial statements. In June 2016, the FASB issued ASU No. 2016-13 that changes how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance replaces the current incurred loss model with an expected loss approach, resulting in more timely recognition of such losses. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted after December 2018. The Company is in the process of evaluating the impact of this new guidance on reserves for notes receivable. The Company has not quantified the impact that this guidance will have on its consolidated financial statements.

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- Definition The entire disclosure for the basis of presentation and significant accounting policies concepts. Basis of presentation describes the underlying basis used to prepare the financial statements (for example, US Generally Accepted Accounting Principles, Other Comprehensive Basis of Accounting, IFRS). Accounting policies describe all significant accounting policies of the reporting entity. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -URI http://asc.fasb.org/topic&trid=2122369 + Details
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