Leases

9 Months Ended

Sep. 30, 2023

4. Leases

The Company estimates the collectability of its accrued rent and accounts receivable balances related to lease revenue. When evaluating the collectability of these accrued rent and accounts receivable balances, management considers tenant creditworthiness, current economic trends, and changes in tenants’ payment patterns, on a lease-by-lease basis. If the Company determines that the accrued rent and/or accounts receivable balances are no longer probable of collection then the balances are written-off and the lease is recognized on a cash basis.

If applicable, information related to write-offs of accrued rent, net balances and accounts receivable, net balances and reinstatements of accrued rent balances for the Company’s unconsolidated joint ventures can be found in Note 5.

Lessor

The following table summarizes the components of lease revenue recognized under the Company’s operating and sales-type leases for the three and nine months ended September 30, 2023 and 2022 and included within the Company's Consolidated Statements of Operations (in thousands):


	Three months ended September 30,				Nine months ended September 30,
Lease Revenue	2023		2022		2023		2022
Fixed contractual payments	$	626,738	$	610,878	$	1,877,573	$	1,811,836
Variable lease payments	140,210		128,377		407,528		367,438
Sales-type lease revenue	233		—		688		—
	$	767,181	$	739,255	$	2,285,789	$	2,179,274

Lessee, Operating Leases

Lessee

On August 1, 2023, a consolidated joint venture in which the Company has a 55% interest executed an up to 99-year ground lease with the Metropolitan Transportation Authority for an approximately 25,000 square foot site, the 343 Madison Avenue project in New York City (see Note 9). The 343 Madison Avenue project contemplates the construction of (1) a direct entrance to the Long Island Railroad’s new east side access project (Grand Central Madison) (“Phase 1”) and (2) an approximately 900,000 square foot premier workplace building with ground floor retail (“Phase 2”). The joint venture has the option until July 31, 2025 to terminate the ground lease prior to construction of the new building and receive reimbursement of up to $117.0 million for the cost of the construction of Phase 1. The Company is reasonably certain that it will not exercise this termination option as the Company completed a long-term competitive process to obtain the right to ground lease this site. There can be no assurance that Phase 1 will be completed on the terms currently contemplated or that Phase 2 of the development project will commence on the terms currently contemplated or at all.

There is no rent due under the ground lease for the period from August 1, 2023 through July 31, 2028, with the exception of a payment of approximately $21.8 million that is due on July 31, 2025. Beginning August 1, 2028, the lease requires rent of approximately $10.9 million per year with adjustments every five years, with a minimum increase of 110% of the ground rent from the prior year. The incremental borrowing rate for this lease is 8.41% per annum. The net present value of the ground lease payments is approximately $134.5 million. The lease required the joint venture to pay a non-refundable deposit totaling $25.0 million, of which $15.0 million was placed in escrow in 2022 with the signing of a pre-lease agreement and $10.0 million was paid in 2023 as a requirement of entering into the ground lease. The consolidated joint venture classifies this ground lease as an operating lease. As a result, the consolidated joint venture recorded a Right of Use Assets – Operating Leases and Lease Liabilities – Operating Leases of approximately $160.1 million and $134.5 million, respectively, on its Consolidated Balance Sheets. The 343 Madison Avenue ground lease had operating lease costs of approximately $5.0 million and $5.0 million for the three and nine months ended September 30, 2023, respectively.

The following table provides a maturity analysis for the 343 Madison Avenue operating lease as of August 1, 2023 (in thousands):


	Operating
Period from August 1, 2023 through December 31, 2023	$	—
2024	—
2025	21,795
2026	—
2027	—
2028	4,541
Thereafter	3,027,718
Total lease payments	3,054,054
Less: Interest portion	(2,919,545)
Present value of lease payments	$	134,509