6. Leases

The Company currently leases office space, vehicles and certain equipment under operating leases expiring through 2028. At May 30, 2020, the Company had no finance leases. The Company’s operating leases are primarily for real estates, which include fixed payments plus, in some cases, scheduled base rent increases over the term of the lease. Certain leases require variable payments of common area maintenance, operating expenses and real estate taxes applicable to the property. Variable payments are excluded from the measurements of lease liabilities and are expensed as incurred. Any tenant improvement allowances received from the lessor are recorded as a reduction to rent expense over the term of the lease. None of the Company’s lease agreements contained residual value guarantees or material restrictive covenants. The Company has not entered into any real estate lease arrangements where it occupies the entire building. As such, the Company does not have any separate land lease components embedded within any of its real estate leases.

The Company determines if an arrangement is a lease at the inception of the contract. Specially, the Company considers whether it can control the underlying asset and have the right to obtain substantially all of the economic benefits or outputs from the assets. The ROU assets represent the right to use the underlying assets for the lease term and the lease liabilities represent the Company’s obligation to make lease payments arising from the leases. The Company’s lease liability is recognized as of the lease commencement date at the present value of the lease payments over the lease term. The Company’s ROU asset is recognized as of the lease commencement date at the amount of the corresponding lease liability, adjusted for prepaid lease payments, lease incentives received, and initial direct costs incurred. The Company evaluates its ROU assets for impairment consistent with its impairment of long-lived assets policy. See Note 2 – Summary of Significant Accounting Policies. ROU assets are presented as operating right-of-use assets in the Company’s Consolidated Balance Sheet as of May 30, 2020. Operating lease liabilities are presented as operating lease liabilities, current or operating lease liabilities, noncurrent in the Company’s Consolidated Balance Sheet based on their contractual due dates. Operating lease expense is recognized on a straight-line basis over the lease term, and is recognized in selling, general and administrative expenses in the Company’s Consolidated Statements of Operations.

Most of the Company’s leases do not provide an implicit rate that can be readily determined. Therefore, the Company uses a discount rate based on its incremental borrowing rate and the information available at the commencement date. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a fully collateralized basis over a similar term in an amount equal to the total lease payments in a similar economic environment. The Company has a centrally managed treasury function; therefore, the portfolio approach is applied in determining the incremental borrowing rate. Application at the portfolio level is not materially different from applying guidance at the individual lease level.

Certain of the Company’s leases include one or more options to renew or terminate the lease at the Company’s discretion. Generally, the renewal and termination options are not included in the ROU assets and lease liabilities as they are not reasonably certain of exercise. The Company regularly evaluates lease renewal and termination options and, when they are reasonably certain of exercise, includes the renewal or termination option in the lease term.

In some instances, the Company subleases excess office space to third party tenants. The Company, as sublessor, continues to account for the head lease under the provisions of the adopted lease accounting standard described in Note 2 – Summary of Significant Accounting Policies. If the lease cost for the term of the sublease exceeds the Company’s anticipated sublease income for the same period, this indicates that the right-of-use asset associated with the head lease should be assessed for impairment under the long-lived asset impairment provisions. Sublease income is included in selling, general and administrative expenses in the Company’s Consolidated Statements of Operations.

The Company has elected the practical expedient that allows lessees to choose to not separate lease and non-lease components by class of underlying asset and is applying this expedient to all real estate asset classes. Additionally, the Company has also made an accounting policy election to recognize the lease payments under short-term leases as an expense on a straight-line basis over the lease term without recognizing the lease liability and the ROU asset.

Lease cost components are included within selling, general and administrative expenses in the Consolidated Statements of Operations were as follows (in thousands):


	For the Year Ended
	May 30, 2020
Operating lease cost	$	12,308
Short-term lease cost		345
Variable lease cost		2,808
Sublease income		(610)
Total lease cost	$	14,851

The weighted average lease terms and discount rates for operating leases at May 30, 2020 are presented in the following table:


	As of
	May 30, 2020
Weighted average remaining lease term		4.3 years
Weighted average discount rate		4.09%

Cash flow and other information related to operating leases is included in the following table for the year ended May 30, 2020 (in thousands):


	For the Year Ended
	May 30, 2020
Cash paid for amounts included in the measurement of operating lease liabilities	$	13,311
ROU assets obtained in exchange for new operating lease obligations	$	3,452

Future maturities of operating lease liabilities at May 30, 2020 are presented in the following table (in thousands):


Years Ending:	Operating Lease Maturity
May 29, 2021	$	12,610
May 28, 2022		10,942
May 27, 2023		8,584
May 25, 2024		7,046
May 31, 2025		3,412
Thereafter		3,168
Total minimum payments	$	45,762
Less: interest		(3,867)
Present value of operating lease liabilities	$	41,895

The Company leases approximately 13,000 square feet of the approximately 57,000 square feet of a Company owned building located in Irvine, California to independent third parties and has operating lease agreements for sub-let space with independent third parties expiring through fiscal 2025. Rental income received for the years ended May 30, 2020, May 25, 2019 and May 26, 2018 totaled $210,000, $240,000 and $305,000, respectively. Under the terms of these operating lease agreements, rental income from such third-party leases is expected to be $204,000, $219,000, $225,000, $232,000 and $78,000 in fiscal 2021 through 2025, respectively.