Build-to-Suit Lease Obligation

3 Months Ended

Mar. 31, 2016

Leases [Abstract]

Build-to-Suit Lease Obligation

NOTE 7. BUILD-TO-SUIT LEASE OBLIGATION

In the fourth quarter of 2013, the Company entered into a property lease for approximately 52,000 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 44,000 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 was deemed, for accounting purposes only, to be the owner of the entire project including the building shell, even though it was 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 property and obligation, structural tenant improvements totaling $3.6 million for amounts paid by the landlord and $3.5 million for capitalized interest during the construction period through 2015. As a result of the amended agreement, the Company surrendered a portion of the property totaling approximately 8,000 square feet 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 $3.2 million during 2015 related to the portion of the property that was surrendered to the lessor.

During the first quarter of 2016, construction on the property was substantially completed and the property was placed in service. As such, the Company evaluated its lease to determine whether it had met the requirements for sale-leaseback accounting, including evaluating whether all risks of ownership have been transferred back to the landlord, as evidenced by a lack of continuing involvement in the leased property. The Company determined that the construction project did not qualify for sale-leaseback accounting and will instead be accounted for as a financing lease, given the Company’s expected continuing involvement after the conclusion of the construction period. As a result, the building asset remains on the Company’s unaudited condensed consolidated balance sheets at its historical cost of $18.4 million and the Company began depreciating the asset over its estimated useful life in the first quarter of 2016. Additionally, the Company is allocating its monthly lease payments between land rent, which is recorded as an operating lease expense, interest expense, and reduction of the related lease obligation. As of March 31, 2016, the total amount of the build-to-suit lease obligation was $17.4 million, of which $17.3 million was classified as a non-current liability on the unaudited condensed consolidated balance sheets. The Company expects to derecognize the build-to-suit lease asset and lease obligation at the end of the lease term.

Expected future lease payments under the build-to-suit lease as of March 31, 2016 are included in Note 13, “Commitments and Contingencies.”