The Company accounts for its leases in accordance with ASU No. 2016-02, Leases (Topic 842) (“ASC 842”). ASC 842 requires lessees to (i) recognize a right of use asset (“ROU asset”) and a lease liability that is measured at the present value of the remaining lease payments on the Consolidated Balance Sheets, (ii) recognize a single lease cost, calculated over the lease term on a straight-line basis and (iii) classify lease related cash payments within operating and financing activities. The Company has made an accounting policy election to not recognize short-term leases on the Consolidated Balance Sheets and all non-lease components, such as common area maintenance, were excluded. At any given time during the lease term, the lease liability represents the present value of the remaining lease payments, and the ROU asset is measured as the amount of the lease liability, adjusted for pre-paid rent, unamortized initial direct costs and the remaining balance of lease incentives received. Both the lease ROU asset and liability are reduced to zero at the end of the lease term.

The Company leases distribution centers and warehouses, manufacturing facilities, showrooms, and office space. At the lease inception date, the Company determines if an arrangement is, or contains a lease. Some of the Company’s leases include options to renew at similar terms. The Company assesses these options to determine if the Company is reasonably certain of exercising these options based on relevant economic and financial factors. Options that meet these criteria are included in the lease term at the lease commencement date.

On August 20, 2021, Flexsteel entered into a lease agreement for the construction of a 507,830 square foot manufacturing facility in Mexicali, Mexico. The lease commencement date under ASC842 guidance will be April 1, 2022, the date the lessor makes the building available for use by the Company for purposes of completing any leasehold improvements required by the Company prior to beginning operations. The 12-year lease term begins on June 1, 2022, and ends on May 31, 2034, with options for two five-year extensions. Annual base rent under the lease is $3.1 million plus taxes, insurance, and common area maintenance costs.

On September 28, 2021, Flexsteel entered into a Warehousing Agreement, a component of which meets the definition of a lease under ASC842. The lease component includes a 241,920 square foot facility in Greencastle, Pennsylvania, and all improvements and equipment necessary to operate the facility. The lease commencement date is October 1, 2021, the date the building became available for use by the Company. The 125-month lease term began on October 1, 2021, and ends on February 28, 2034, with an option for a 5-year extension. Annual base rent under the lease is $1.8 million plus taxes, insurance, utilities, and common area maintenance costs.

For purposes of measuring the Company’s ROU asset and lease liability, the discount rate utilized by the Company was based on the average interest rates effective for the Company’s line of credit. Some of the Company’s leases contain variable rent payments, including common area maintenance and utilities. Due to the variable nature of these costs, they are not included in the measurement of the ROU asset and lease liability.

The components of the Company’s leases reflected on the Company’s Consolidated Statements of Income were as follows:



	Three Months Ended
(in thousands)	September 30, 2021		September 30, 2020
Operating lease expense	$	1,389	$	1,074
Variable lease expense		75		69
Total lease expense	$	1,464	$	1,143

Other information related to leases and future minimum lease payments under non-cancellable operating leases were as follows:



	Three Months Ended
	September 30, 2021		September 30, 2020
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,074	$	1,035

Right-of-use assets obtained in exchange for lease liabilities:
Operating leases	$	—	$	2,741

Weighted-average remaining lease term (in years):
Operating leases		3.8		1.6

Weighted-average discount rate:
Operating leases		2.9%		3.3%

Future minimum lease payments under non-cancellable operating leases were as follows:


	Three Months Ended
	September 30, 2021		September 30, 2020
(in thousands)
Within one year	$	6,591	$	4,601
After one year and within two years		5,517		4,327
After two years and within three years		4,563		3,159
After three years and within four years		2,620		2,189
After four years and within five years		2,469		200
After five years		11,273		—
Total future minimum lease payments	$	33,033	$	14,476
Less – Discount		3,957		809
Lease liability	$	29,076	$	13,667