Leases

6 Months Ended

Mar. 28, 2020

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets and operating lease obligations on our Consolidated Balance Sheets. Our operating leases are primarily for office space, cars, servers, and office equipment. We made an election not to separate lease components from non-lease components for office space, servers and office equipment. Finance leases are included in property and equipment, accrued expenses and other current liabilities, and other liabilities on our Consolidated Balance Sheets.

Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the leases. Right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The right-of-use assets include any lease payments made and exclude lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Our operating leases expire at various dates through 2037. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Certain office space leases require us to pay for taxes, insurance, maintenance and other operating expenses in addition to rent.

Our headquarters are located at 121 Seaport Boulevard, Boston, Massachusetts (the Boston lease). The Boston lease is for approximately 250,000 square feet and runs from January 1, 2019 through June 30, 2037. Base rent for the first year of the lease is $11.0 million and will increase by $1 per square foot per year thereafter ($0.3 million per year) with base rent first becoming payable on July 1, 2020. In addition to the base rent, we are required to pay our pro rata portions of building operating costs and real estate taxes (together, “Additional Rent”). Additional Rent is estimated to be approximately $7.1 million for the first year we begin paying rent. The lease provides for $25 million in landlord funding for leasehold improvements ($100 per square foot). The leasehold improvement funding provision was fully utilized by us and was reflected as a derecognition adjustment to the right-of-use asset.

The components of lease cost reflected in the Consolidated Statement of Operations for the second quarter and first six months ended March 28, 2020 were as follows:



(in thousands)	Three months ended			Six months ended
	March 28, 2020			March 28, 2020
Operating lease cost	$	10,386		$	19,143
Short-term lease cost	1,017			2,890
Variable lease cost	575			2,490
Sublease income	(1,013		)	(2,025		)
Total lease cost	$	10,965		$	22,498

Supplemental cash flow and right-of use assets information for the three and six months ended March 28, 2020 was as follows:



(dollar amounts in thousands)	Three months ended			Six months ended
	March 28, 2020			March 28, 2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	9,642		$	15,140

Right-of-use assets obtained in exchange for new operating lease liabilities⁽¹⁾	$	(1,230	)	$	4,151
Right-of-use assets obtained in exchange for new financing lease liabilities	$	—		$	1,500


(1)	For the three months ending March 28, 2020, right-of-use assets obtained in exchange for new operating lease liabilities is a net reduction to the right-of-use assets due to lease incentives being earned for right-of-use asset obtained in the first quarter of 2020.

Supplemental balance sheet information related to the leases as of March 28, 2020 was as follows:



	As of
	March 28, 2020
Weighted-average remaining lease term - operating leases	12.32 years
Weighted-average remaining lease term - financing leases	5 years
Weighted-average discount rate - operating leases	5.5	%
Weighted-average discount rate - financing leases	3.0	%

Maturities of lease liabilities as of March 28, 2020 are as follows:



(in thousands)	Operating Leases
Remainder of 2020	$	22,462
2021	42,670
2022	28,457
2023	21,174
2024	17,757
Thereafter	186,554
Total future lease payments	$	319,074
Less: imputed interest	(94,916		)
Total	$	224,158

As of March 28, 2020, we have operating leases that have not yet commenced. These leases will commence in 2020 with lease terms between 3 years to 5 years and approximate future lease payments of $2.2 million.

Under the prior lease standard (ASC 840), as of September 30, 2019, future minimum lease payments under non-cancellable operating leases are as follows (in thousands):



2020	$	31,868
2021	33,094
2022	25,624
2023	19,279
2024	16,909
Thereafter	186,037
Total minimum lease payments	$	312,811

Exited (Restructured) Facilities

As of March 28, 2020, we have net liabilities of $17.1 million related to excess facilities (compared to $16.5 million at September 30, 2019), representing $4.5 million of right-of-use assets and $21.6 million of lease obligations, of which $13.3 million is classified as short term and $8.3 million is classified as long term.

In determining the amount of right-of-use assets for restructured facilities, we are required to estimate such factors as future vacancy rates, the time required to sublet properties and sublease rates. Updates to these estimates may result in revisions to the value of right-of-use assets recorded. The amounts recorded are based on the net present value of estimated sublease income. As of March 28, 2020, the right-of-use assets for exited facilities reflects discounted committed sublease income of approximately $3.3 million and uncommitted sublease income of approximately $1.2 million. As a result of changes in our sublease income assumptions and an incremental obligation to exit a portion of our former headquarters facility early, in the three months ended March 28, 2020, we recorded a facility impairment charge of $4.0 million. In addition, in the second quarter of 2020, we exited the former Onshape headquarters lease and recorded a related $0.7 million impairment charge.

In the second quarter and the first six months ended March 28, 2020 we made payments of $2.1 million and $4.5 million, respectively, related to lease costs for exited facilities.