LEASES

3 Months Ended

Mar. 31, 2022

The Company leases land, buildings, equipment, and other capital assets which it uses 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. Right-of-use (“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 unaudited Condensed Consolidated Balance Sheets were as follows:


(in thousands)	Classification	March 31, 2022		December 31, 2021
Lease assets
Operating leases	Operating lease right-of-use assets	$	107,279	$	103,958



Lease liabilities
Current liabilities
Operating leases	Operating lease liabilities, current	$	3,606	$	2,665

Noncurrent liabilities
Operating leases	Operating lease liabilities, noncurrent	223,981		197,295

Total lease liabilities		$	227,587	$	199,960

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


	Three Months Ended March 31,
(in thousands)	2022		2021
Operating lease costs
Capitalized to inventory	$	7,058	$	4,494
General and administrative expenses	332		1,280
Total operating lease costs	$	7,390	$	5,774

At March 31, 2022 and December 31, 2021, $6,699 and $4,393, respectively, of lease costs remained capitalized in inventory. We recognized a gain of $128 during the three months ended March 31, 2022 related to the termination of two of our leases, which is included in “General and administrative expenses” on the unaudited Condensed Consolidated Statement of Operations.

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


	Three Months Ended March 31,
(in thousands)	2022		2021


Total short-term and variable lease costs	$	1,206	$	652

Sublease income generated during the three months ended March 31, 2022 and 2021 was immaterial.

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


	Three Months Ended March 31,
(in thousands)	2022		2021
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	6,829	$	5,069


ROU assets obtained in exchange for new lease obligations
Operating leases	$	30,746	$	11,442

The weighted-average remaining lease term for our real estate leases is 16.6 years and 15.8 years at March 31, 2022 and December 31, 2021, respectively, and the weighted-average discount rate is 14.8% and 12.7% at March 31, 2022 and December 31, 2021, 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 unaudited Condensed Consolidated Balance Sheet as of March 31, 2022 are as follows:


(in thousands)	Operating Lease Liabilities
Remainder of 2022	$	24,060
2023	33,028
2024	33,952
2025	34,903
2026	35,488
Thereafter	472,009
Total lease payments	633,440
Less: imputed interest	405,853
Present value of lease liabilities	$	227,587

Lease Amendments

In March 2022, we amended the leases related to our Athol, Massachusetts and Lansing, Michigan cultivation facilities to increase the tenant improvement allowance for each, which resulted in increased rent amounts. We accounted for the amendments as lease modifications and remeasured each ROU asset and lease liability as of the amendment dates. The modifications resulted in a total additional tenant improvement allowance of $19,300, a reduction of $22,483 to total ROU assets, and a reduction of $3,183 to total lease liabilities.

Sale Leaseback Transactions

In February 2022, the Company sold and subsequently leased back one of its capital assets in Franklin, New Jersey for total proceeds of $35,400, excluding transaction costs. The transaction met the criteria for sale leaseback treatment. The lease was recorded as an operating lease and resulted in a lease liability of $33,707 and an ROU asset of $29,107, which was recorded net of a $4,600 tenant improvement allowance.

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.

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 unaudited Condensed Consolidated Balance Sheets.


(in thousands)	Remainder of 2022		2023		2024		2025		2026		Thereafter		Total
Cash payments due under financing liabilities	$	1,567	$	2,143	$	2,206	$	2,271	$	2,338	$	6,811	$	17,336