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Leases (Notes)

12 Months Ended

Dec. 31, 2019

On January 1, 2019, we adopted a new lease accounting standard that sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a lease agreement (i.e., lessees and lessors).

As a lessor, we are required to disclose, among other things, the following:


•	A description of the nature of leases, including terms for any variable payments, options to extend or terminate, and options to purchase the underlying asset;


•	Tabular presentation of undiscounted cash flows to be received over the next five years and thereafter separately for operating leases and direct financing leases;


•	The amount of lease income and its location on the statements of operations;


•	Income classified separately for operating leases and direct financing leases; and


•	Our risk management strategy to mitigate declines in residual value of the leased assets.

As a lessee, we are required to disclose, among other things, the following:


•	A description of the nature of leases, including terms for any variable payments, options to extend or terminate, and options to purchase the underlying asset;


•	The amounts of lease liabilities and corresponding right-of-use assets and their respective locations in the balance sheet;


•	The weighted-average remaining lease term and weighted-average discount rate of leases;


•	Tabular presentation of undiscounted cash flows of our remaining lease payment obligations over the next five years and thereafter; and


•	Total lease costs, including cash paid, amounts expensed, and amounts capitalized.

Refer to the “Lease Accounting” section in Note 2 – “Summary of Significant Accounting Policies” for additional information.

Leases in which we are the lessor

As of December 31, 2019, we had 291 properties aggregating 27.0 million operating RSF located in key locations, including Greater Boston, San Francisco, New York City, San Diego, Seattle, Maryland, and Research Triangle. We focus on developing Class A properties in AAA innovation cluster locations, which we consider to be highly desirable for tenancy by life science, technology, and agtech entities. Such locations are generally characterized by high barriers to entry for new landlords, high barriers to exit for tenants, and a limited supply of available space. As of December 31, 2019, all leases in which we are the lessor were classified as operating leases with the exception of one direct financing lease. Our operating leases and direct financing lease are described below.

Operating leases

As of December 31, 2019, our 291 properties were subject to operating lease agreements. Two of these properties, representing two land parcels, are subject to lease agreements that each contain an option for the lessee to purchase the underlying asset from us at fair market value during each of the 30-day periods commencing on the dates that are 15 years, 30 years, and 74.5 years after the rent commencement date of October 1, 2017. The remaining lease term related to each of the two land parcels is 72.9 years. Our leases generally contain options to extend lease terms at prevailing market rates at the time of expiration. Certain operating leases contain early termination options that require advance notification and payment of a penalty, which in most cases is substantial enough to be deemed economically disadvantageous by a tenant to exercise. Future lease payments to be received under the terms of our operating lease agreements, excluding expense reimbursements, in effect as of December 31, 2019, are outlined in the table below (in thousands):



Year	Amount
2020	$	1,074,698
2021	1,090,837
2022	1,076,898
2023	1,024,652
2024	948,223
Thereafter	6,238,082
Total	$	11,453,390

Refer to Note 3 – “Investments in Real Estate” to our consolidated financial statements for additional information on our owned real estate assets, which are the underlying assets under our operating leases.

Direct financing lease

As of December 31, 2019, we had one direct financing lease agreement for a parking structure with a remaining lease term of 72.9 years. The lessee has an option to purchase the underlying asset at fair market value during each of the 30-day periods commencing on the dates that are 15 years, 30 years, and 74.5 years after the rent commencement date of October 1, 2017. The components of our net investment in our direct financing lease as of December 31, 2019 and 2018, are summarized in the table below (in thousands):



	December 31,
	2019			2018
Gross investment in direct financing lease	$	260,457		$	262,111
Less: unearned income	(220,541		)	(222,962		)
Net investment in direct financing lease	$	39,916		$	39,149

Future lease payments to be received under the terms of our direct financing lease as of December 31, 2019, are outlined in the table below (in thousands):



Year	Total
2020	$	1,705
2021	1,756
2022	1,809
2023	1,863
2024	1,919
Thereafter	251,405
Total	$	260,457

Income from rentals

Our total income from rentals includes revenue related to agreements for rental of our investments in real estate, which primarily includes revenues subject to the guidance of the new lease accounting standard and revenues subject to the revenue recognition accounting standard as summarized below (in thousands):



	Year Ended December 31, 2019
Income from rentals:
Revenues subject to the new lease accounting standard:
Operating leases	$	1,465,692
Direct financing lease	2,421
Revenues subject to the new lease accounting standard	1,468,113
Revenues subject to the revenue recognition accounting standard	48,751
Income from rentals	$	1,516,864

Our revenues that are subject to the revenue recognition accounting standard and are classified in income from rentals relate primarily to parking revenues, which consist of short-term rental revenues that are not considered lease revenue under the new lease accounting standard. Refer to the “Revenues” and “Recognition of revenue arising from contracts with customers” sections in Note 2 – “Summary of Significant Accounting Policies” to our consolidated financial statements for additional information.

Deferred leasing costs

The following table summarizes our deferred leasing costs as of December 31, 2019 and 2018 (in thousands):



	December 31,
	2019			2018
Deferred leasing costs	$	631,416		$	557,791
Accumulated amortization	(361,373		)	(318,721		)
Deferred leasing costs, net	$	270,043		$	239,070

Residual value risk management strategy

Our leases do not have guarantees of residual value on the underlying assets. We manage risk associated with the residual value of our leased assets by (i) evaluating each potential acquisition of real estate to determine whether it meets our business objective to primarily invest in high-demand markets with limited supply of available space, (ii) directly managing our leased properties, conducting frequent property inspections, proactively addressing potential maintenance issues before they arise, and timely resolving any occurring issues, (iii) carefully selecting our tenants and monitoring their credit quality throughout their respective lease terms, and (iv) focusing on making continuous improvements to our sustainability efforts and achievement of our sustainability goals for ground-up development of new buildings, which are targeting Gold or Platinum LEED^® certification. Our environmentally focused design decisions, careful selection of construction materials, and continuous monitoring of our properties throughout their lives are expected to promote the durability of building infrastructure and enhance residual value of our properties.

Leases in which we are the lessee

We have operating lease agreements in which we are the lessee consisting of ground and office leases. Certain of these leases have options to extend or terminate the contract terms upon meeting certain criteria. There are no notable restrictions or covenants imposed by the leases, nor guarantees of residual value.

Under the new lease accounting standard, we are required to recognize a right-of-use asset and a related liability to account for our future obligations under ground and office lease arrangements in which we are the lessee. Refer to the “Lessee Accounting” section in Note 2 – “Summary of Significant Accounting Policies” to our consolidated financial statements.

As of December 31, 2019, the present value of the remaining contractual payments, aggregating $699.9 million, under our operating lease agreements, including our extension options that we are reasonably certain to exercise, was $271.8 million. Our corresponding operating lease right-of-use assets, adjusted for initial direct leasing costs and other consideration exchanged with the landlord prior to the commencement of the lease, aggregated $264.7 million. As of December 31, 2019, the weighted-average remaining lease term of operating leases in which we are the lessee was approximately 44 years, and the weighted-average discount rate was 5.24%. The weighted-average discount date is based on the incremental borrowing rate estimated for each lease, which is the interest rate that we estimate we would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments.

Ground lease obligations as of December 31, 2019, included leases for 31 of our properties, which accounted for approximately 11% of our total number of properties. Excluding one ground lease that expires in 2036 related to one operating property with a net book value of $7.7 million as of December 31, 2019, our ground lease obligations have remaining lease terms ranging from approximately 34 years to 95 years, including extension options that we are reasonably certain to exercise.

The reconciliation of future lease payments, under non-cancelable operating ground and office leases in which we are the lessee, to the operating lease liability reflected in our consolidated balance sheet as of December 31, 2019, is presented in the table below (in thousands):



Year	Total
2020	$	15,132
2021	15,931
2022	16,467
2023	16,628
2024	16,857
Thereafter	618,924
Total future payments under our operating leases in which we are the lessee	699,939
Effect of discounting	(428,131		)
Operating lease liability	$	271,808

Lessee operating costs

Operating lease costs relate to our ground and office leases in which we are the lessee. Ground leases generally require fixed annual rent payments and may also include escalation clauses and renewal options. Our operating lease obligations related to our office leases have remaining terms of up to 15 years, exclusive of extension options. For the years ended December 31, 2019, 2018, and 2017, our costs for operating leases in which we are the lessee were as follows (in thousands):



	Year Ended December 31,
	2019			2018			2017
Gross operating lease costs	$	19,740		$	16,102		$	14,307
Capitalized lease costs	(1,452		)	(340		)	(340		)
Expenses for operating leases in which we are the lessee	$	18,288		$	15,762		$	13,967

For the years ended December 31, 2019, 2018, and 2017, amounts paid and classified as operating activities in our consolidated statements of cash flows for leases in which we are the lessee, were $17.7 million, $14.8 million, and $14.6 million, respectively.

Leases

As a lessor, we are required to disclose, among other things, the following:


•	A description of the nature of leases, including terms for any variable payments, options to extend or terminate, and options to purchase the underlying asset;


•	Tabular presentation of undiscounted cash flows to be received over the next five years and thereafter separately for operating leases and direct financing leases;


•	The amount of lease income and its location on the statements of operations;


•	Income classified separately for operating leases and direct financing leases; and


•	Our risk management strategy to mitigate declines in residual value of the leased assets.

As a lessee, we are required to disclose, among other things, the following:


•	A description of the nature of leases, including terms for any variable payments, options to extend or terminate, and options to purchase the underlying asset;


•	The amounts of lease liabilities and corresponding right-of-use assets and their respective locations in the balance sheet;


•	The weighted-average remaining lease term and weighted-average discount rate of leases;


•	Tabular presentation of undiscounted cash flows of our remaining lease payment obligations over the next five years and thereafter; and


•	Total lease costs, including cash paid, amounts expensed, and amounts capitalized.

Refer to the “Lease Accounting” section in Note 2 – “Summary of Significant Accounting Policies” for additional information.

Leases in which we are the lessor

Operating leases



Year	Amount
2020	$	1,074,698
2021	1,090,837
2022	1,076,898
2023	1,024,652
2024	948,223
Thereafter	6,238,082
Total	$	11,453,390

Direct financing lease



	December 31,
	2019			2018
Gross investment in direct financing lease	$	260,457		$	262,111
Less: unearned income	(220,541		)	(222,962		)
Net investment in direct financing lease	$	39,916		$	39,149

Future lease payments to be received under the terms of our direct financing lease as of December 31, 2019, are outlined in the table below (in thousands):



Year	Total
2020	$	1,705
2021	1,756
2022	1,809
2023	1,863
2024	1,919
Thereafter	251,405
Total	$	260,457

Income from rentals



	Year Ended December 31, 2019
Income from rentals:
Revenues subject to the new lease accounting standard:
Operating leases	$	1,465,692
Direct financing lease	2,421
Revenues subject to the new lease accounting standard	1,468,113
Revenues subject to the revenue recognition accounting standard	48,751
Income from rentals	$	1,516,864

Deferred leasing costs

The following table summarizes our deferred leasing costs as of December 31, 2019 and 2018 (in thousands):



	December 31,
	2019			2018
Deferred leasing costs	$	631,416		$	557,791
Accumulated amortization	(361,373		)	(318,721		)
Deferred leasing costs, net	$	270,043		$	239,070

Residual value risk management strategy

Leases in which we are the lessee



Year	Total
2020	$	15,132
2021	15,931
2022	16,467
2023	16,628
2024	16,857
Thereafter	618,924
Total future payments under our operating leases in which we are the lessee	699,939
Effect of discounting	(428,131		)
Operating lease liability	$	271,808

Lessee operating costs



	Year Ended December 31,
	2019			2018			2017
Gross operating lease costs	$	19,740		$	16,102		$	14,307
Capitalized lease costs	(1,452		)	(340		)	(340		)
Expenses for operating leases in which we are the lessee	$	18,288		$	15,762		$	13,967

Leases

As a lessor, we are required to disclose, among other things, the following:


•	A description of the nature of leases, including terms for any variable payments, options to extend or terminate, and options to purchase the underlying asset;


•	Tabular presentation of undiscounted cash flows to be received over the next five years and thereafter separately for operating leases and direct financing leases;


•	The amount of lease income and its location on the statements of operations;


•	Income classified separately for operating leases and direct financing leases; and


•	Our risk management strategy to mitigate declines in residual value of the leased assets.

As a lessee, we are required to disclose, among other things, the following:


•	A description of the nature of leases, including terms for any variable payments, options to extend or terminate, and options to purchase the underlying asset;


•	The amounts of lease liabilities and corresponding right-of-use assets and their respective locations in the balance sheet;


•	The weighted-average remaining lease term and weighted-average discount rate of leases;


•	Tabular presentation of undiscounted cash flows of our remaining lease payment obligations over the next five years and thereafter; and


•	Total lease costs, including cash paid, amounts expensed, and amounts capitalized.

Refer to the “Lease Accounting” section in Note 2 – “Summary of Significant Accounting Policies” for additional information.

Leases in which we are the lessor

Operating leases



Year	Amount
2020	$	1,074,698
2021	1,090,837
2022	1,076,898
2023	1,024,652
2024	948,223
Thereafter	6,238,082
Total	$	11,453,390

Direct financing lease



	December 31,
	2019			2018
Gross investment in direct financing lease	$	260,457		$	262,111
Less: unearned income	(220,541		)	(222,962		)
Net investment in direct financing lease	$	39,916		$	39,149

Future lease payments to be received under the terms of our direct financing lease as of December 31, 2019, are outlined in the table below (in thousands):



Year	Total
2020	$	1,705
2021	1,756
2022	1,809
2023	1,863
2024	1,919
Thereafter	251,405
Total	$	260,457

Income from rentals



	Year Ended December 31, 2019
Income from rentals:
Revenues subject to the new lease accounting standard:
Operating leases	$	1,465,692
Direct financing lease	2,421
Revenues subject to the new lease accounting standard	1,468,113
Revenues subject to the revenue recognition accounting standard	48,751
Income from rentals	$	1,516,864

Deferred leasing costs

The following table summarizes our deferred leasing costs as of December 31, 2019 and 2018 (in thousands):



	December 31,
	2019			2018
Deferred leasing costs	$	631,416		$	557,791
Accumulated amortization	(361,373		)	(318,721		)
Deferred leasing costs, net	$	270,043		$	239,070

Residual value risk management strategy

Leases in which we are the lessee



Year	Total
2020	$	15,132
2021	15,931
2022	16,467
2023	16,628
2024	16,857
Thereafter	618,924
Total future payments under our operating leases in which we are the lessee	699,939
Effect of discounting	(428,131		)
Operating lease liability	$	271,808

Lessee operating costs



	Year Ended December 31,
	2019			2018			2017
Gross operating lease costs	$	19,740		$	16,102		$	14,307
Capitalized lease costs	(1,452		)	(340		)	(340		)
Expenses for operating leases in which we are the lessee	$	18,288		$	15,762		$	13,967