LEASES

12 Months Ended

Dec. 31, 2021

The Company leases land, buildings, equipment, and other capital assets which it plans to use for corporate purposes and the production and sale of cannabis products. We determine if an arrangement is a lease at inception and begin recording lease activity at the commencement date, which is generally the date in which we take possession of or control the physical use of the asset. ROU assets and lease liabilities are recognized based on the present value of lease payments over the lease term with lease expense recognized on a straight-line basis. We use our incremental borrowing rate to determine the present value of future lease payments unless the implicit rate is readily determinable. Our incremental borrowing rate is the rate of interest we would have to pay to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. This incremental borrowing rate is applied to the minimum lease payments within each lease agreement to determine the amounts of our ROU assets and lease liabilities.

Our lease terms range from 1 to 20 years. Some leases include one or more options to renew, with renewal terms that can extend the lease terms. We typically exclude options to extend the lease in a lease term unless it is reasonably certain that we will exercise the option and when doing so is at our sole discretion. The depreciable lives of assets and leasehold improvements are limited by the expected lease term unless there is a transfer of title or purchase option reasonably certain of exercise. Typically, if we decide to cancel or terminate a lease before the end of its term, we would owe the lessor the remaining lease payments under the term of such lease. Our lease agreements generally do not contain any material residual value guarantees or material restrictive covenants. We may rent or sublease to third parties certain real property assets that we no longer use.

Lease agreements may contain rent escalation clauses, rent holidays, or certain landlord incentives, including tenant improvement allowances. ROU assets include amounts for scheduled rent increases and are reduced by lease incentive amounts. Certain of our lease agreements include variable rent payments, consisting primarily of rental payments adjusted periodically for inflation and amounts paid to the lessor based on cost or consumption, such as maintenance and utilities. Variable rent lease components are not included in the lease liability.

The components of lease assets and lease liabilities and their classification on our Consolidated Balance Sheets were as follows:


		December 31,
(in thousands)	Classification	2021		2020
Lease assets
Operating leases	Operating lease right-of-use assets	$	103,958	$	84,642

Lease liabilities
Current liabilities
Operating leases	Operating lease liabilities, current	$	2,665	$	2,128
Noncurrent liabilities
Operating leases	Operating lease liabilities, noncurrent	197,295		156,400
Total lease liabilities		$	199,960	$	158,528

The components of lease costs and classification within the Consolidated Statements of Operations were as follows:


	Year Ended December 31,
(in thousands)	2021		2020		2019
Operating lease costs
Capitalized to inventory	$	19,844	$	11,958	$	969
General and administrative expenses	4,819		4,645		4,859
Total operating lease costs	$	24,663	$	16,603	$	5,828

At December 31, 2021 and 2020, $4,393 and $4,913, respectively, of lease costs remained capitalized in inventory. We recognized a gain of $59 during the year ended December 31, 2021 related to the termination of two of our leases, which is included in “General and administrative expenses” on the Consolidated Statements of Operations.

The following table presents information on short-term and variable lease costs:


	Year Ended December 31,
(in thousands)	2021		2020		2019


Total short-term and variable lease costs	$	2,540	$	2,615	$	735

Sublease income generated during the year ended December 31, 2021, 2020, and 2019 was immaterial.

The following table includes supplemental cash and non-cash information related to our leases:


	Year Ended December 31,
(in thousands)	2021		2020		2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	22,439	$	12,895	$	5,172


Lease assets obtained in exchange for new operating lease liabilities	$	41,917	$	91,367	$	45,108

The weighted-average remaining lease term for our operating leases is 15.8 years and 17.3 years at December 31, 2021 and 2020, respectively, and the weighted-average discount rate is 12.7% and 13.1% at December 31, 2021 and 2020, respectively.

The amounts of future undiscounted cash flows related to the lease payments over the lease terms and the reconciliation to the present value of the lease liabilities as recorded on our Consolidated Balance Sheet as of December 31, 2021 are as follows:


(in thousands)	Operating Lease Liabilities
2022	$	26,224
2023	27,007
2024	27,780
2025	28,577
2026	29,005
Thereafter	347,109
Total lease payments	485,702
Less: imputed interest	285,742
Present value of lease liabilities	$	199,960

Subsequent to December 31, 2021, we entered into operating lease arrangements which are effective for future periods. The total amount of ROU lease assets and lease liabilities related to these arrangements is not material.

Lease Amendment

Effective September 15, 2021, we amended the lease of our Barry, Illinois cultivation facility to increase the tenant improvement allowance to $52,000, which resulted in increased rent amounts. We accounted for the amendment as a lease modification and remeasured the ROU asset and liability as of the amendment date, which resulted in an additional ROU asset of $2,750, an additional tenant improvement allowance of $20,000, and an additional lease liability of $22,750.

Sale Leaseback Transactions

The following table presents cash payments due under transactions that did not qualify for sale-leaseback treatment. The cash payments are allocated between interest and liability reduction, as applicable. The “sold” assets remain within land, buildings, and leasehold improvements, as appropriate, for the duration of the lease and a financing liability equal to the amount of proceeds received is recorded within “Long-term debt, net” on the accompanying Consolidated Balance Sheets.


(in thousands)	2022		2023		2024		2025		2026		Thereafter		Total
Cash payments due under financing liabilities	$	2,082	$	2,143	$	2,206	$	2,271	$	2,338	$	6,811	$	17,851

2021 Activity

On June 29, 2021, a wholly owned subsidiary of the Company entered into a definitive agreement for the sale of certain real estate and related assets of a commercial property located in New Bedford, Massachusetts to a third-party for a total purchase price of $350, subject to certain adjustments. The closing is subject to certain conditions, including entering into an operating lease with the third-party. The Company anticipates this transaction will be accounted for either as a sale leaseback transaction or a finance liability, depending on the final lease terms.

2020 Activity

In March 2020, the Company sold and subsequently leased back one of its capital assets for total proceeds of $3,750, excluding transaction costs. This transaction did not meet the criteria to qualify for sale-leaseback treatment. The “sold” assets remain within land, buildings, and leasehold improvements, as appropriate, for the duration of the lease and a financing liability equal to the amount of proceeds received is recorded within “Long-term debt, net” on the accompanying Consolidated Balance Sheets. Upon expiration or termination of the underlying lease, the sale will be recognized by removing the carrying value of the capital assets and financing liability, with any difference recorded as a gain.

In April 2020, the Company sold and subsequently leased back one of its capital assets for total proceeds of $26,750, excluding transaction costs, and recorded a loss on sale of $286, which is included within “General and administrative expenses” on the accompanying Consolidated Statements of Operations. The transaction met the criteria for sale-leaseback treatment. As such, the lease was recorded as an operating lease and resulting in a lease liability of $55,287 and an ROU asset of $33,037, which was recorded net of a $22,250 tenant improvement allowance that is recorded in “Other current assets” on the accompanying Consolidated Balance Sheets.