NOTE 6 — BUILD-TO-SUIT LEASE OBLIGATION

In the fourth quarter of 2013, the Company entered into a long-term property lease for approximately 52,000 square feet of laboratory space located in San Francisco, California. The lease agreement expires in July 2024, and the Company has an option to extend the lease term for up to an additional five years.

The Company is deemed, for accounting purposes only, to be the owner of the entire project including the building shell, even though it is not the legal owner. In connection with the Company’s accounting for this transaction, the Company capitalized $14.5 million as a build-to-suit property within property and equipment, net, and recognized a corresponding build-to-suit lease obligation for the same amount. The Company also recognized, as an additional build-to-suit lease obligation, structural tenant improvements totaling $2.3 million for amounts paid by the landlord and capitalized interest during the construction period of $0.5 million.

A portion of the monthly lease payment will be allocated to land rent and recorded as an operating lease expense and the non-interest portion of the amortized lease payments to the landlord related to the rent of the building will be applied to reduce the build-to-suit lease obligation. At June 30, 2014, $0.6 million of the build-to-suit lease obligation representing the expected reduction in the liability over the next twelve months is included as a current liability, and the remaining $16.6 million is included as a non-current liability on the consolidated balance sheet. Expected reductions (increases) in the build-to-suit lease obligation at June 30, 2014 were as follows:


	Build-To-Suit Lease Obligation
Years Ending December 31,
Remainder of 2014	$	135
2015		621
2016		(50	)
2017		24
2018		107
2019 and thereafter		16,413

Total	$	17,250

The amounts included in the table above represent the reductions (increases) in the build-to-suit lease obligation on the Company’s consolidated balance sheet in each of the periods presented. The amount in the terminal period includes the amount to derecognize the build-to-suit lease obligation at the end of the lease term. Actual expected lease payments under the build-to-suit lease obligation are included in Note 12, “Commitments and Contingencies.”