Description of leasing arrangements

9 Months Ended

Sep. 30, 2020

Leases [Abstract]

Description of leasing arrangements

5. Description of leasing arrangements:

Long-term land leases:

Through September 30, 2020, excluding the Parcel 6C lease, the Company had entered into nine long-term land leases.  The lessee of Parcel 6C had the right to terminate its lease at any time during the remaining term of the lease upon thirty days’ notice.  On July 30, 2020, the Company received notice that the lessee would exercise their right to terminate the ground lease effective August 29, 2020. As of September 30, 2020, eight of the nine parcels under lease (excluding Parcel 20) have completed construction of improvements thereon.  The leases generally have a term of 99 years or more, are triple net, provide for periodic adjustment in rent of various types depending on the particular lease, and otherwise contain terms and conditions normal for such instruments.

With the exception of the Metropark Lease and Parcel 20 Lease, all of the Company’s tenants were current in their lease payment obligations as of November 6, 2020.

The Restated Lease for Parcel 20 (“Parcel 20 Lease”), 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 deferred revenue, 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 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 nine 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.  Accordingly, real property taxes payable by the tenants are excluded from both leasing revenues and leasing expenses on the accompanying condensed consolidated statements of income and shareholders’ equity.  Real property taxes attributable to the Company’s land under these leases totaled $315,000 and $997,000 for the three and nine months ended September 30, 2020 and $341,000 and $1,023,000 for the three and nine months ended September 30, 2019.

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 $18,000 and $76,000 for the three and nine months ended September 30, 2020 and  $24,000 and $87,000 for the three and nine months ended September 30, 2019, respectively.  

On the termination date, the annual rent on Parcel 6C was $220,000 and annual real estate taxes paid by the lessee equaled $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 the positive difference, if any, between (a) 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 commissions paid to unrelated third parties but in no event more than 15% as to each billboard face; and (b) base location rent paid for each leased billboard for each 12-month period (“percentage rent”). For the lease years ended May 31, 2020 and 2019, the percentage rent totaled $139,000 and $133,000, respectively, which amounts are included in leasing revenue on the accompanying condensed consolidated statements of income and shareholders’ equity.

Parking lease:

The Company leases the undeveloped parcels of land in the Capital Center area (other than Parcel 6C) for public parking purposes to Metropark under a ten-year lease (the “Parking Lease”).  The lease is cancellable as to all or any portion of the leased premises at any time on thirty days’ 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).   There was no contingent rent for the three months ended September 30, 2020 and revenue for the nine months ended September 30, 2020 includes a $34,000 reduction due to the revision of the estimate of 2019’s contingent rent.  Revenue for the three and nine months ended September 30, 2019 includes contingent rent which totaled $24,000 and $95,000, respectively.  

The COVID-19 pandemic and stay-at-home orders have had a significant adverse impact on Metropark’s parking operations.  On July 31, 2020, Metropark and the Company entered into an agreement for revenue sharing at various percentages until parking revenues received by Metropark equal or exceed $70,000 per month whereupon Metropark would be obligated to resume regularly scheduled rental payments under its lease.  Upon resumption of regularly scheduled rent payments, Metropark and the Company will share fifty (50) percent of the revenue in excess of $70,000 until the arrearage has been paid in full.  If prior to payment in full of the arrearage one or more of the lots is removed from the Metropark lease for development, the amount of the then unpaid arrearage in the ratio of the number of parking spaces on the removed lot to the total parking spaces on all lots prior to such lot’s removal shall be deemed paid in full.

For the three months ended September 30, 2020, Metropark paid $11,000 towards the rent due for this period resulting in a receivable of $227,000 which the Company has fully reserved.  The Company will continue to report as revenue only the amount collected from Metropark until their operations return to approximately 80% of pre-pandemic levels.