Leases (Notes)

12 Months Ended

Dec. 31, 2019

Finance Leases

The Company leases land and a building for one of its data centers from an entity in which a member of its Board of Directors has a beneficial ownership interest. The building lease expires in 2033 with two subsequent 10-year and one five-year renewal option periods and the land lease expires in 2069. As of December 31, 2019, the finance lease ROU assets, net of accumulated amortization, related to the land and building were $37.6 million and $10.7 million, respectively. As of December 31, 2018, the capital lease asset related to the building, net of accumulated amortization, was $11.4 million.

In February 2016, a wholly-owned subsidiary of Switch, Ltd. acquired rights and interests to manage, construct and use the Nevada Broadband Telemedicine Initiative (“NBTI”) fiber network. The right to use the NBTI fiber network is accounted for as a finance lease. As of December 31, 2019, finance lease ROU assets related to the NBTI fiber network, net of accumulated amortization, were $10.5 million. As of December 31, 2018, capital lease assets related to the NBTI fiber network, net of accumulated amortization, were $12.3 million. There are no future minimum payment obligations related to this finance lease. The finance lease expires in 2042 with a 25-year renewal option.

The Company is the sole consumer of output from feeders related to substations owned by NV Energy. The Company accounts for these arrangements as finance leases. As of December 31, 2019, finance lease ROU assets related to the feeders, net of accumulated amortization, were $1.0 million. As of December 31, 2018, capital lease assets related to the feeders were $0.1 million. There are no future minimum payment obligations related to these finance leases. The finance leases expire in 2049 through 2058.

In December 2018, the Company purchased a taxable industrial development revenue bond (the “Bond”) issued by a local government agency (the “Agency”) in order to reduce certain tax expenditures for data center facilities under construction. The Bond matures in December 2031. Pursuant to the terms of the Bond, the Company transferred title to certain of its property and equipment with total costs of $133.1 million and $6.1 million as of December 31, 2019 and 2018, respectively, to the Agency. The Company leases the property and equipment from the Agency subject to an option to purchase for nominal consideration, which the Company may exercise at any time, upon tendering the Bond to the Agency. The title to these assets will revert to the Company upon retirement or cancellation of the Bond. As the Company is both the bondholder and the lessee for the property and equipment, the Company exercised its right to offset the amounts invested in and the obligations for this Bond on the consolidated balance sheets. The underlying assets remain in property and equipment, net on the consolidated balance sheets as all risks and rewards remain with the Company.

The Company has entered into lease agreements for indefeasible rights of use in fibers with non-cancellable terms expiring in 2039. The rights to use these fibers are accounted for as finance leases. As of December 31, 2019, finance lease ROU assets related to these fiber agreements, net of accumulated amortization, were $1.1 million.

The Company includes its finance lease ROU assets within property and equipment, net on its consolidated balance sheets.

Operating Leases

The Company leases land, warehouse storage space, and data center buildings under operating leases that have non-cancellable terms expiring in 2021 through 2066 with entities in which a member of its Board of Directors has a beneficial ownership interest.

In addition, the Company leases an aircraft, warehouse storage space, and storage yards for fiber, construction materials, and equipment under operating leases that have non-cancellable terms expiring in 2021 through 2055.

Operating lease ROU assets of $30.6 million were included within other assets on the Company’s consolidated balance sheet as of December 31, 2019.

Lease Expense

The components of lease expense are as follows:



	Year Ended December 31, 2019
	(in thousands)
Finance lease cost
Amortization of ROU assets	$	1,993
Interest on lease liabilities	3,255
Operating lease cost⁽¹⁾	7,136
Short-term lease cost	17
Variable lease cost	625
Sublease income	(13		)
Total lease cost	$	13,013

________________________________________


(1)	Related party rent included in operating lease cost was $4.7 million.

Other Information

Other supplemental information related to leases is as follows:



	Year Ended December 31, 2019
	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	3,484
Operating cash flows from operating leases	$	7,167
Financing cash flows from finance leases	$	876



	December 31, 2019
Weighted average remaining lease term (in years)
Finance leases	37
Operating leases	25
Weighted average discount rate
Finance leases	6.9	%
Operating leases	7.2	%

Maturity of Lease Liabilities

Maturities of lease liabilities as of December 31, 2019 are as follows:



	Finance Leases									Operating Leases
	Related Parties			Other			Total			Related Parties			Other			Total
	(in thousands)
2020	$	4,430		$	29		$	4,459		$	4,348		$	2,459		$	6,807
2021	4,780			21			4,801			4,216			635			4,851
2022	4,843			21			4,864			2,863			207			3,070
2023	4,969			22			4,991			2,051			30			2,081
2024	5,036			22			5,058			2,051			26			2,077
Thereafter	139,307			407			139,714			52,552			603			53,155
Total undiscounted future cash flows	163,365			522			163,887			68,081			3,960			72,041
Less: amount representing interest	(106,038		)	(223		)	(106,261		)	(40,511		)	(583		)	(41,094		)
Present value of undiscounted future cash flows	$	57,327		$	299		$	57,626		$	27,570		$	3,377		$	30,947

Leases Not Yet Commenced

A wholly-owned subsidiary of Switch, Ltd. entered into three power purchase and sale agreements for electricity over a term of 25 years and two battery energy storage system agreements for battery capacity over a term of 20 years. While the Company determined these agreements contain leases under ASC 842, these agreements have not yet commenced as of December 31, 2019. These agreements result in an aggregate lease commitment of $848.0 million during the respective lease terms to commence on the earlier of October 1, 2022, or upon delivery of the battery energy storage system.

Disclosures Related to Periods Prior to Adoption of ASC 842

As of December 31, 2018, minimum payment obligations for capital leases are as follows (in thousands):



2019	$	2,064
2020	2,124
2021	2,243
2022	2,306
2023	2,432
Thereafter	28,898
	40,067
Less: amount representing interest	(20,601		)
Present value of minimum capital lease payments⁽¹⁾	$	19,466

________________________________________


(1)	Until 2023, capital lease payments are applied only to accrued interest; thus, there is no current portion.

As of December 31, 2018, future minimum lease payments for all operating leases with remaining terms in excess of one year are as follows (in thousands):



	Related Parties		Other		Total
2019	$	4,824	$	2,482	$	7,306
2020	4,872		2,487		7,359
2021	4,260		625		4,885
2022	2,863		197		3,060
2023	2,051		20		2,071
Thereafter	54,603		623		55,226
	$	73,473	$	6,434	$	79,907

During the years ended December 31, 2018 and 2017, rent expense related to operating leases was $7.7 million and $7.4 million, respectively. Related party rent included in these amounts was $5.0 million and $4.8 million during the years ended December 31, 2018 and 2017, respectively.

Leases

Finance Leases

The Company includes its finance lease ROU assets within property and equipment, net on its consolidated balance sheets.

Operating Leases

Operating lease ROU assets of $30.6 million were included within other assets on the Company’s consolidated balance sheet as of December 31, 2019.

Lease Expense

The components of lease expense are as follows:



	Year Ended December 31, 2019
	(in thousands)
Finance lease cost
Amortization of ROU assets	$	1,993
Interest on lease liabilities	3,255
Operating lease cost⁽¹⁾	7,136
Short-term lease cost	17
Variable lease cost	625
Sublease income	(13		)
Total lease cost	$	13,013

________________________________________


(1)	Related party rent included in operating lease cost was $4.7 million.

Other Information

Other supplemental information related to leases is as follows:



	Year Ended December 31, 2019
	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	3,484
Operating cash flows from operating leases	$	7,167
Financing cash flows from finance leases	$	876



	December 31, 2019
Weighted average remaining lease term (in years)
Finance leases	37
Operating leases	25
Weighted average discount rate
Finance leases	6.9	%
Operating leases	7.2	%

Maturity of Lease Liabilities

Maturities of lease liabilities as of December 31, 2019 are as follows:



	Finance Leases									Operating Leases
	Related Parties			Other			Total			Related Parties			Other			Total
	(in thousands)
2020	$	4,430		$	29		$	4,459		$	4,348		$	2,459		$	6,807
2021	4,780			21			4,801			4,216			635			4,851
2022	4,843			21			4,864			2,863			207			3,070
2023	4,969			22			4,991			2,051			30			2,081
2024	5,036			22			5,058			2,051			26			2,077
Thereafter	139,307			407			139,714			52,552			603			53,155
Total undiscounted future cash flows	163,365			522			163,887			68,081			3,960			72,041
Less: amount representing interest	(106,038		)	(223		)	(106,261		)	(40,511		)	(583		)	(41,094		)
Present value of undiscounted future cash flows	$	57,327		$	299		$	57,626		$	27,570		$	3,377		$	30,947

Leases Not Yet Commenced

Disclosures Related to Periods Prior to Adoption of ASC 842

As of December 31, 2018, minimum payment obligations for capital leases are as follows (in thousands):



2019	$	2,064
2020	2,124
2021	2,243
2022	2,306
2023	2,432
Thereafter	28,898
	40,067
Less: amount representing interest	(20,601		)
Present value of minimum capital lease payments⁽¹⁾	$	19,466

________________________________________


(1)	Until 2023, capital lease payments are applied only to accrued interest; thus, there is no current portion.

As of December 31, 2018, future minimum lease payments for all operating leases with remaining terms in excess of one year are as follows (in thousands):



	Related Parties		Other		Total
2019	$	4,824	$	2,482	$	7,306
2020	4,872		2,487		7,359
2021	4,260		625		4,885
2022	2,863		197		3,060
2023	2,051		20		2,071
Thereafter	54,603		623		55,226
	$	73,473	$	6,434	$	79,907