Build-to-Suit Lease Obligation

6 Months Ended

Jun. 30, 2015

NOTE 8. BUILD-TO-SUIT LEASE OBLIGATION

In the fourth quarter of 2013, the Company entered into a property lease for approximately 51,632 square feet of space located in San Francisco, California. In the second quarter of 2015, the Company entered into an amended lease agreement to reduce the amount of leased space at this property to approximately 43,625 square feet. The lease agreement expires in August 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 has also recognized, as an additional build-to-suit lease property and obligation, structural tenant improvements totaling $3.9 million for amounts paid by the landlord and $2.5 million for capitalized interest during the construction period through June 30, 2015.

As a result of the amended agreement, the Company surrendered a portion of the property totaling approximately 8,007 square feet to the lessor. The Company has no continuing involvement with the portion of the property surrendered to the lessor. Accordingly, the Company derecognized a portion of the build-to-suit asset totaling $3.2 million and a portion of the build-to-suit lease obligation totaling $3.1 million during the second quarter of 2015 related to the portion of the property that was surrendered to the lessor.

A portion of the monthly lease payment is 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 is applied to reduce the build-to-suit lease obligation. At June 30, 2015, $0.2 million of the build-to-suit lease obligation representing the expected reduction in the liability over the next twelve months was classified as a current liability and the remaining $16.9 million was classified as a non-current liability on the consolidated balance sheet. Expected reductions in the build-to-suit lease obligation are as follows:


Years Ending December 31,	Build-To-Suit Lease Obligation
Remainder of 2015	$	197
2016		10
2017		77
2018		149
2019		228
2020 and thereafter		16,455

Total	$	17,116

The amounts included in the table above represent the reductions in the build-to-suit lease obligation included on the Company’s consolidated balance sheet at June 30, 2015 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. The expected reductions in the build-to-suit lease obligation presented in the table above are impacted by the timing of the completion of the construction project. Actual expected lease payments under the build-to-suit lease obligation are included in Note 14, “Commitments and Contingencies.”