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Description of leasing arrangements

3 Months Ended

Mar. 31, 2019

5.	Description of leasing arrangements:

Long-term land leases:

As of March 31, 2019, the Company had entered into ten long-term land leases. Seven of the ten parcels have completed construction of improvements thereon. On Parcel 6B, construction of a 169-unit residential complex commenced in November 2016 and is substantially complete. Parcel 6C is being used as a construction staging area for the construction on Parcel 6B.

On September 28, 2017, the Company entered into a long-term ground lease of Parcel 20. Under the terms of the lease until the tenant took possession, the Company received all rents from the existing tenants and paid all expenses with respect to Parcel 20. On May 4, 2018, the Company and the lessee entered into an Amended and Restated Ground Lease (“Restated Lease”). The lessee took possession of Parcel 20 on December 1, 2018 and the Company conveyed title to the existing building. In addition to the ground lease rent, for 360 months following December 1, 2018, the lessee will pay acquisition period rent consisting of monthly payments of $7,471 for the first thirty-six months and monthly payments thereafter of $8,488 plus an amount equal to 1/12^th of the product of (a) 5.5% and the difference between (x) $2,750,000 and (y) the aggregate of the prior monthly payments of $8,488. The Restated Lease is a triple net lease.

The Restated Lease for Parcel 20, as it relates specifically to the Steeple Street Building, was accounted for as a sales-type lease due to the transfer of the Steeple Street Building to the lessee. The land directly under the Steeple Street Building was allocated in the determination of the value of the property transferred in accordance with ASC 360-20, Property, Plant and Equipment - Real Estate Sales. Since the initial investment by the lessee is insufficient to recognize the transaction as a sale, in accordance with ASC 360-20 the Company will report the acquisition period rent and an allocable portion of the ground rent collected as a deposit liability, which is included in other liabilities, on its condensed consolidated balance sheets and will continue to include the property transferred in properties and equipment until the transaction can be reported as a sale in accordance with GAAP. The fair value of the property transferred was determined under a present value technique using the rental payments to be made under the lease (significant other observable inputs (Level 2) as defined by GAAP). As the carrying value of the property transferred to the lessee exceeds its fair value, the Company recognized an impairment loss of $1,832,000 as of December 31, 2018. The long-term ground lease of the land on Parcel 20 (exclusive of the Steeple Street Building) is accounted for as an operating lease, consistent with the Company’s other long-term ground leases.

Under the ten land leases, the tenants may negotiate tax stabilization treaties or other arrangements, appeal any changes in real property assessments, and must pay real property taxes assessed on land and improvements under these arrangements. Accordingly, with the exception of Parcel 20 through December 1, 2018, real property taxes payable by the tenants are excluded from leasing revenues and leasing expenses on the accompanying condensed consolidated statements of income and retained earnings. Real property taxes attributable to the Company’s land under these leases totaled $341,000 and $308,000 for the three months ended March 31, 2019 and 2018.

Under two of the long-term land leases, the Company receives contingent rentals (based on a fixed percentage of gross revenue received by the tenants) which totaled $27,000 and $29,000 for the three months ended March 31, 2019 and 2018.

With respect to the Parcel 6C, the lessee has the right to terminate its lease at any time during the remaining term of the lease upon thirty days’ notice. To date, no notice of termination has been received by the Company. The current annual rent on Parcels 6C is $200,000 and annual real estate taxes paid by the lessee equals $311,000.

Lamar lease:

The Company, through a wholly-owned subsidiary, leases 23 outdoor advertising locations containing 44 billboard faces along interstate and primary highways in Rhode Island and Massachusetts to Lamar under a lease which expires in 2045. The Lamar lease provides, among other things, for the following: (1) the base rent will increase annually at the rate of 2.75% for each leased billboard location on June 1 of each year, and (2) in addition to base rent, for each 12-month period commencing each June 1 (each 12-month period a “Lease Year”), Lamar must pay to the Company within thirty days after the close of the Lease Year 30% of the gross revenues from each standard billboard and 20% of the gross revenues from each electronic billboard for such 12-month period, reduced by the sum of (a) commissions paid to third parties and (b) base monthly rent for each leased billboard display for each Lease Year.

Parking lease:

The Company leases the undeveloped parcels of land in the Capital Center area and, through December 1, 2018 the undeveloped Parcel 20 land, for public parking purposes to Metropark under a ten year lease. The lease is cancellable as to all or any portion of the leased premises at any time on thirty day’s written notice in order for the Company or any new tenant of the Company to develop all or any portion of the leased premises. The parking lease provides for contingent rentals (based on a fixed percentage of gross revenue in excess of the base rent) which totaled $47,000 and $21,000 for the three months ended March 31, 2019 and 2018, respectively, inclusive of an additional $23,000 in 2019 for contingent rent in excess of the 2018 estimate.

Parcel 20, Steeple Street:

With the execution of the Parcel 20 lease, effective December 1, 2018, the lessee receives all rental income associated with the Steeple Street building and the Parcel 20 undeveloped land leased to Metropark pending its development. At March 31, 2018 the Company had four tenants occupying 49 percent of the Steeple Street Building under short-term leases of five years or less at an annual rental of $95,000 and the Company reported as revenue tenant reimbursements for common area costs and real property taxes in the amount of $9,000 through March 31, 2018.