Real Estate

9 Months Ended

Sep. 30, 2019

3. Real Estate

Boston Properties, Inc.

Real estate consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):



	September 30, 2019			December 31, 2018
Land	$	5,087,029		$	5,072,568
Right of use assets - finance leases	237,394			—
Right of use assets - operating leases	149,231			—
Land held for future development (1)	246,972			200,498
Buildings and improvements	13,396,648			13,356,751
Tenant improvements	2,559,907			2,396,932
Furniture, fixtures and equipment	44,908			44,351
Construction in progress	953,336			578,796
Total	22,675,425			21,649,896
Less: Accumulated depreciation	(5,164,353		)	(4,897,777		)
	$	17,511,072		$	16,752,119

_______________


(1)	Includes pre-development costs.

Boston Properties Limited Partnership

Real estate consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):



	September 30, 2019			December 31, 2018
Land	$	4,986,576		$	4,971,475
Right of use assets - finance leases	237,394			—
Right of use assets - operating leases	149,231			—
Land held for future development (1)	246,972			200,498
Buildings and improvements	13,101,302			13,059,488
Tenant improvements	2,559,907			2,396,932
Furniture, fixtures and equipment	44,908			44,351
Construction in progress	953,336			578,796
Total	22,279,626			21,251,540
Less: Accumulated depreciation	(5,061,727		)	(4,800,475		)
	$	17,217,899		$	16,451,065

_______________


(1)	Includes pre-development costs.

Developments/Redevelopments

On May 9, 2019, the Company entered into a 15-year lease with Google, LLC for approximately 379,000 net rentable square feet of Class A office space in a build-to-suit development project located at the Company’s 325 Main Street property at Kendall Center in Cambridge, Massachusetts. 325 Main Street currently consists of an approximately 115,000 net rentable square foot Class A office property that will be demolished and developed into an approximately 420,000 net rentable square foot Class A office property, including approximately 41,000 net rentable square feet of retail space. On May 9, 2019, the Company commenced development of the project. Boston Properties, Inc. and Boston Properties Limited Partnership recognized approximately $9.9 million and $9.5 million, respectively, of depreciation expense associated with the acceleration of depreciation on the assets being removed from service and demolished as part of the redevelopment of the property.

On June 1, 2019, the Company partially placed in-service 20 CityPoint, a Class A office project with approximately 211,000 net rentable square feet located in Waltham, Massachusetts.

On September 30, 2019, the Company commenced the redevelopment of 200 West Street, a Class A office project with approximately 261,000 net rentable square feet located in Waltham, Massachusetts. The redevelopment is a conversion of a 126,000 square foot portion of the property to laboratory space.

Ground Leases

On January 24, 2019, the ground lessor under the Company’s 65-year ground lease for land totaling approximately 5.6 acres at Platform 16 located in San Jose, California made available for lease to the Company the remaining land parcels. As a result, the Company recognized the remaining portion of the right of use finance lease asset and finance lease liability. During 2018, the Company executed the ground lease. However, at the inception of the ground lease only a portion of the land was available for lease from the lessor, resulting in the Company recognizing only a portion of the ground lease. In the aggregate, the land will support the development of approximately 1.1 million square feet of commercial office space. The ground lease provides the Company with the right to purchase all of the land during a 12-month period commencing February 1, 2020 at a purchase price of approximately $134.8 million. The Company is reasonably certain it will exercise the option to purchase the land and as a result, the Company has concluded that the lease should be accounted for as a finance lease. As a result, the Company recorded an approximately $122.6 million right of use asset - finance lease and a lease liability - finance lease on the Company’s Consolidated Balance Sheets reflecting the remaining land parcels made available for lease to the Company. Finance lease assets and liabilities are accounted for at the lower of fair market value or the present value of future lease payments. For land leases classified as finance leases because of a purchase option that the Company views as an economic incentive, the Company follows its existing policy and does not depreciate land because it is assumed to have an indefinite life. See also Dispositions below and Note 5.

As of January 24, 2019, the lease payments from the finance lease related to the remaining parcels made available for lease to the Company were as follows (in thousands):



Period from January 24, 2019 through December 31, 2019	$	17,918
2020	109,460
Total expected minimum lease payments	127,378
Interest portion	(4,815		)
Present value of expected net lease payments	$	122,563

On July 16, 2019, the Company executed a 75-year ground lease with The George Washington University for land parcels at 2100 Pennsylvania Avenue located in Washington, DC and commenced development of an approximately 470,000 net rentable square foot Class A office property pursuant to a development agreement that the Company entered into with The George Washington University in 2016. The development agreement provided for the execution of the ground lease upon completion of the entitlement process and relocation of existing tenants. Also in 2016, the Company made a deposit of $15.0 million that, upon execution of the ground lease, is being credited against ground rent payable under the ground lease. The present value of the lease payments exceeds substantially all of the fair value of the underlying asset and as a result, the Company has concluded that the ground lease should be accounted for as a finance lease. As a result, the Company recorded an approximately $185.1 million right of use asset - finance lease and an approximately $165.0 million lease liability - finance lease on the Company’s Consolidated Balance Sheets. The difference between the right of use asset - finance lease and lease liability - finance lease is the $15.0 million deposit that was made in 2016 and approximately $5.1 million of initial direct costs. Although the finance lease is for land only, as this was not classified as a finance lease because of a purchase option, the right of use asset will be amortized over the shorter of the useful life of the asset or the lease term. As land is assumed to have an indefinite life, the right of use asset - finance lease will be amortized on a straight-line basis over the 75-year term. In 2017, the Company entered into a 16-year lease with a tenant for approximately 300,000 net rentable square feet of space at the property.

As of July 16, 2019, the lease payments from the finance lease were as follows (in thousands):



Period from July 16, 2019 through December 31, 2019	$	—
2020	—
2021	3,863
2022	8,576
2023	8,669
Thereafter	1,358,518
Total expected minimum lease payments	1,379,626
Interest portion	(1,214,649		)
Present value of expected net lease payments	$	164,977

Acquisitions

On January 10, 2019, the Company acquired land parcels at its Carnegie Center property located in Princeton, New Jersey for a gross purchase price of approximately $51.5 million, which includes an aggregate of approximately $8.6 million of additional amounts that are payable in the future to the seller upon the development or sale of each of the parcels. The land parcels could support approximately 1.7 million square feet of development.

On August 27, 2019, the Company acquired 880 and 890 Winter Street located in Waltham, Massachusetts for a gross purchase price of approximately $106.0 million in cash. 880 and 890 Winter Street consists of two Class A office properties aggregating approximately 392,000 net rentable square feet. The following table summarizes the allocation of the purchase price, including transaction costs, of 880 and 890 Winter Street at the date of acquisition (in thousands):



Land	$	31,376
Building and improvements	57,922
Tenant improvements	6,024
In-place lease intangibles	11,494
Above-market lease intangibles	246
Below-market lease intangibles	(1,092		)
Net assets acquired	$	105,970

The following table summarizes the estimated annual amortization of the acquired in-place lease intangibles, the acquired above-market lease intangibles and the acquired below-market lease intangibles for 880 and 890 Winter Street for the remainder of 2019 and each of the next five succeeding fiscal years (in thousands):



	Acquired In-Place Lease Intangibles		Acquired Above-Market Lease Intangibles		Acquired Below- Market Lease Intangibles
Period from August 27, 2019 through December 31, 2019	$	1,801	$	28	$	(226	)
2020	4,485		80		(599		)
2021	2,391		80		(237		)
2022	1,121		43		(30		)
2023	179		15		—
2024	60		—		—

880 and 890 Winter Street contributed approximately $1.3 million of revenue and approximately ($0.2) million of earnings to the Company for the period from August 27, 2019 through September 30, 2019.

Dispositions

On January 24, 2019, the Company completed the sale of its 2600 Tower Oaks Boulevard property located in Rockville, Maryland for a gross sale price of approximately $22.7 million. Net cash proceeds totaled approximately $21.4 million, resulting in a loss on sale of real estate totaling approximately $0.6 million. The Company recognized an impairment loss totaling approximately $3.1 million for Boston Properties, Inc. and approximately $1.5 million for Boston Properties Limited Partnership during the year ended December 31, 2018. 2600 Tower Oaks Boulevard is an approximately 179,000 net rentable square foot Class A office property. 2600 Tower Oaks contributed approximately $(0.2) million of net loss to the Company for the period from January 1, 2019 through January 23, 2019 and contributed approximately $(0.2) million and $(0.5) million of net loss to the Company for the three and nine months ended September 30, 2018, respectively.

At March 31, 2019, the Company evaluated the expected hold period of its One Tower Center property and, based on a shorter-than-expected hold period, the Company reduced the carrying value of the property to its estimated fair value at March 31, 2019 and recognized an impairment loss totaling approximately $24.0 million for Boston Properties, Inc. and approximately $22.3 million for Boston Properties Limited Partnership. The Company’s estimated fair value was based on a pending offer from a third party to acquire the property and the subsequent execution of a purchase and sale agreement on April 18, 2019 for a gross sale price of $38.0 million. On June 3, 2019, the Company completed the sale of the property. Net cash proceeds totaled approximately $36.6 million, resulting in a loss on sale of real estate totaling approximately $0.8 million. One Tower Center is an approximately 410,000 net rentable square foot Class A office property located in East Brunswick, New Jersey. One Tower Center contributed approximately $(0.1) million and $(0.9) million of net loss to the Company for the period from April 1, 2019 through June 2, 2019 and the period from January 1, 2019 through June 2, 2019, respectively, and contributed approximately $(0.7) million and $(2.0) million of net loss to the Company for the three and nine months ended September 30, 2018, respectively.

On June 28, 2019, the Company completed the sale of its 164 Lexington Road property located in Billerica, Massachusetts for a gross sale price of $4.0 million. Net cash proceeds totaled approximately $3.8 million, resulting in a gain on sale of real estate totaling approximately $2.5 million for Boston Properties, Inc. and approximately $2.6 million for Boston Properties Limited Partnership. 164 Lexington Road is an approximately 64,000 net rentable square foot Class A office property. 164 Lexington Road contributed approximately $(0.1) million and $(0.1) million of net loss to the Company for the period from April 1, 2019 through June 27, 2019 and the period from January 1, 2019 through June 27, 2019, respectively, and contributed approximately $(0.05) million and $(0.2) million of net loss to the Company for the three and nine months ended September 30, 2018, respectively.

On September 20, 2019, the Company entered into a joint venture with Canada Pension Plan Investment Board (“CPPIB”) to develop Platform 16 located in San Jose, California. Platform 16 consists of a 65-year ground lease for land totaling approximately 5.6 acres that will support the development of approximately 1.1 million square feet of commercial office space. During 2018, the Company entered into the ground lease, which provides for the right to purchase all of the land during a 12-month period commencing February 1, 2020 at a purchase price of approximately $134.8 million. The Company contributed the ground lease interest and improvements totaling approximately $28.2 million for its initial 55% interest in the joint venture. CPPIB contributed cash totaling approximately $23.1 million for its initial 45% interest in the joint venture. Upon the CPPIB contribution, the Company ceased accounting for the joint venture entity on a consolidated basis and is accounting for the joint venture entity on an unconsolidated basis using the equity method of accounting as it has reduced its ownership interest in the joint venture entity and no longer has a controlling financial or operating interest in the joint venture entity (See Note 5). The Company did not recognize a gain on the retained or sold interest in the real estate contributed to the joint venture, as the fair value of the real estate approximated its carrying value.