12. Leases

Operating Leases

The Company leases its office and laboratory facilities in Cambridge, Massachusetts under two noncancelable operating leases. The first lease expires in September 2021. The second lease is subject to two expiration dates based on two distinct leased spaces, expiring in January 2027 and August 2028. The lease agreements include lease incentives, payment escalations and rent holidays.

In January 2018, the Company entered into a lease for office and laboratory space in Cambridge, Massachusetts (the “Initial Space”). The lease term commenced on January 28, 2019 and expires eight years from the commencement date. The Company is entitled to one five-year option to extend, which is not included in the lease term. The initial annual base rent is approximately $3.8 million, and such amount will increase during the initial term by 3% annually on the anniversary of the commencement date. The Company is obligated to pay its portion of real estate taxes and costs related to the premises, including costs of operations, maintenance, repair, replacement and management of the new leased premises. In connection with the lease, the Company maintains a letter of credit for the benefit of the landlord in the amount of $0.9 million, which is collateralized by a cash deposit of the same amount. The lease agreement allows for a landlord-provided tenant improvement allowance of $9.4 million to be applied to the costs of the construction of the leasehold improvements, of which $0.5 million is repayable to the landlord over the term of the lease.

In November 2018, the Company entered into a lease amendment for office and laboratory space in the same building (the “Expansion Space”). The lease term for the Expansion Space commenced on August 8, 2019 and expires approximately nine years from the commencement date. The initial annual base rent for the Expansion Space is approximately $2.5 million and such amount will increase by 3% annually on the anniversary of the commencement date. The Company is obligated to pay its portion of real estate taxes and costs related to the Expansion Space, including costs of operations, maintenance, repair, replacement and property management. In connection with the lease amendment, the Company increased the letter of credit held for the benefit of the landlord by $0.6 million, which is collateralized by a cash deposit of the same amount. The lease amendment increased the landlord-provided tenant improvement allowance by $9.2 million, of which $2.0 million is repayable to the landlord over the term of the lease.

During 2018, in accordance with ASC 840, Leases, the Company was deemed to be the owner of the lease for the Initial and Expansion Space during the construction period due to certain indemnification provisions within the lease agreement. As a result, as of December 31, 2018, the Company capitalized approximately $45.1 million (equal to the estimated fair value of its leased portion of the premises) as construction-in-progress within property, plant and equipment and recorded a corresponding build-to-suit facility lease financing obligation.

Under ASC 842, the Company is no longer considered the accounting owner due to (1) the Company not having the right to obtain or control the leased premises during the construction period, (2) the lessor having no right of payment for the partially constructed assets, and the leased premises are not of a specialized nature and, thus, could be potentially leased to another tenant, and (3) the Company not legally owning or controlling the land on which the property improvements will be constructed. As such, upon adoption of ASU 2016-02 (Topic 842), the existing construction-in-progress balance within property and equipment, and the corresponding build-to-suit facility lease financing obligation balance were derecognized. Subsequently, the Company took control of the Initial Space on January 28, 2019 at which time the lease commenced and the Company assessed and determined the accounting treatment for the asset and corresponding liability under ASC 842.

The Company evaluated its vendor contracts to identify embedded leases, if any, and noted that an agreement with a contract manufacturing supplier constituted a lease under ASC 842 as the Company has the right to substantially all the economic benefits from the use of the asset and can direct the use of the asset. The Company entered into the agreement during the first quarter of 2019. The lease commenced during March 2019 and expires 22 months from commencement date with no stated option to extend the term.

As the Company’s leases do not provide an implicit rate, the Company utilized its incremental borrowing rate based on information available at the lease commencement date, which represents an internally developed rate that would be incurred to borrow, on a collateralized basis, over a similar term, an amount equal to the lease payments in a similar economic environment. The Company has elected to account for each lease component and its associated non-lease components as a single lease component and, therefore, has allocated all the contract consideration across lease components only. This may result in the initial and subsequent measurement of the balances of the right-of-use asset and lease liability for leases being greater than if the policy election was not applied. Assets under operating lease at September 30, 2019 were $47.9 million. The leases do not include any restrictions or covenants that had to be accounted for under the lease guidance.

As of September 30, 2019, minimum lease payments under the Company’s operating leases are as follows (in thousands):


Year Ending December 31,
2019 (three months ending December 31)	$	3,284
2020		9,224
2021		7,551
2022		7,186
2023		7,390
2024		7,601
Thereafter		22,058
		64,294
Less: imputed interest		(15,857)
	$	48,437

As of December 31, 2018, minimum commitments under the Company’s operating leases, as required under prior lease guidance in ASC 840, were as follows (in thousands):


Year Ending December 31,
2019	$	5,458
2020		7,141
2021		7,168
2022		6,820
2023		7,024
Thereafter		27,777
	$	61,388

The Company has not entered any material financing leases as of September 30, 2019.

Sublease

In February 2019, the Company entered into a sublease agreement with a related party to sublease all office and laboratory space under one of the Company’s operating leases in Cambridge, Massachusetts (see Note 14). The term of the sublease agreement commenced in February 2019 and expires at the end of the Company’s lease agreement with the landlord in September 2021, with no option to extend. The annual rent for the subleased premises is equal to the annual rent owed by the Company to the landlord for the leased premises. The sublessee is obligated to pay all real estate taxes and costs related to the subleased premises, including cost of operations, maintenance, repair, replacement and property management.

The Company concluded that the sublease is an operating lease. Consistent with the Company’s policy election for lessor operating leases, each lease component and its associated non-lease components is accounted for as a single lease component.

As of September 30, 2019, future undiscounted cash inflows under the sublease are as follows (in thousands):


Year Ending December 31,
2019 (three months ending December 31)	$	182
2020		735
2021		541
	$	1,458

Lease Portfolio

The components of lease cost and supplemental balance sheet information for the Company’s lease portfolio were as follows (in thousands, except term and discount rate amounts):


	Three Months Ended September 30,		Nine Months Ended September 30,
	2019		2019
Lease Cost
Operating lease cost	$	2,136	$	4,769
Short-term lease cost		20		116
Variable lease cost		624		1,554
Sublease income		(270)		(639)
Total lease cost	$	2,510	$	5,800

Operating Leases
Operating lease, right-of-use-asset			$	47,911
Operating lease liabilities			$	6,998
Operating lease liabilities, net of current portion			$	41,439

Other information:
Weighted average remaining lease term - operating leases				7.70 years
Weighted-average discount rate - operating leases				7.58%