We lease substantially all of our hotels to a wholly owned subsidiary that qualifies as a taxable REIT subsidiary due to the federal income tax prohibition on the ability of a REIT to derive revenue directly from the operations of a hotel.

As of September 30, 2019, all or a portion of 23 of our hotels are subject to ground leases, generally with multiple renewal options, all of which are accounted for as operating leases. Payments for ground leases account for approximately 80% of our 2019 minimum lease payments and 99% of our total future minimum lease payments. For lease agreements with scheduled rent increases, we recognize the fixed portion of the lease expense ratably over the term of the lease. As the exercise of the renewal options were determined to be reasonably certain, the payments associated with the renewals have been included in the measurement of the lease liability and ROU asset. Contingent rental payments based on a percentage of sales in excess of stipulated amounts are not included in the measurement of the lease liability and ROU asset but will be recognized as variable lease expense if and when they are incurred. However, certain of these leases contain provisions that increase the minimum lease payments based on an average of the variable lease payments made

over the previous years, for which we will reevaluate the lease liability and ROU asset, as these payments now represent an increase in the minimum payments for the remainder of the lease term. Certain of these leases also contain provisions that increase the minimum lease payments based on an index such as the Consumer Price Index. Subsequent to the initial adoption of the new standard, such amounts are not included in the measurement of the lease liability and ROU asset but will be recognized as variable lease expense if and when they are incurred. The discount rate used to calculate the lease liability and ROU asset is based on our incremental borrowing rate (“IBR”), as the rate implicit in each lease is not readily determinable. To calculate our IBR, we obtained a forward curve using LIBOR swap rates, with terms ranging from one to fifty years, as well as corresponding bond spreads based on the terms of the leases and our credit risk. The resulting discount rates for our ground leases range from 4.3% to 5.7%.

We have office leases for our headquarters office in Bethesda, which expires in 2022, as well as satellite offices in Miami and San Diego, which leases expire in 2022 and 2021, respectively, with no renewal options. In addition, we have entered into a new lease agreement to lease office space in downtown Bethesda for our headquarters office. The lease is expected to commence in the fourth quarter, upon completion of construction. Our leasing activity also includes leases entered into by our hotels for various types of equipment that historically have been accounted for either as operating or capital leases, depending upon the characteristics of the particular lease arrangement. As we have elected to use the package of practical expedients, all existing capital leases now are classified as finance leases, which total $1 million at September 30, 2019.

As disclosed in Note 2 – Summary of Significant Accounting Policies, we adopted ASU No. 2016-02, Leases (Topic 842), as amended, using the effective date transition method. As a result, disclosures required under the new standard will not be provided for dates or periods prior to January 1, 2019. For the comparative periods, we will provide disclosures required by ASC 840, Leases.

The following table presents lease cost and other information for the quarter and year-to-date ended September 30, 2019 (in millions):

	Quarter ended September 30, 2019			Year-to-date ended September 30, 2019
Lease cost
Operating lease cost	$	11		$	34
Variable lease cost		10			29
Sublease income		(1	)		(1	)
Total lease cost	$	20		$	62

Other information
Operating cash flows used for operating leases for the year-to-date ended September 30, 2019				$	34
Weighted-average remaining lease term - operating leases				53 years
Weighted-average discount rate - operating leases					5.4	%

The following table presents a reconciliation of the total amount of lease payments, on an undiscounted basis, to the lease liability in the statement of financial position as of September 30, 2019 (in millions):

	As of September 30, 2019
	Ground Leases			Office Leases and Other			Total
Weighted-average discount rate - operating leases		5.4	%		4.0	%		5.4	%
October 1, 2019 - December 31, 2019	$	8		$	2		$	10
2020		32			7			39
2021		32			6			38
2022		32			3			35
2023		32			—			32
Thereafter		1,551			—			1,551
Total undiscounted cash flows	$	1,687		$	18		$	1,705

Present values
Long-term lease liabilities	$	541		$	17		$	558
Total lease liabilities	$	541		$	17		$	558
Difference between undiscounted cash flows and discounted cash flows	$	1,146		$	1		$	1,147

In addition, the $38 million lease liability associated with the ground lease at the Sheraton San Diego Hotel & Marina is classified as held for sale at September 30, 2019. The undiscounted cash flows for this ground lease total $130 million.

The following table presents the future minimum annual rental commitments, excluding renewal periods, as of December 31, 2018, for which we are the lessee, required under non-cancelable operating leases in accordance with ASC 840, under which we report prior to January 1, 2019 (in millions):

	As of December 31, 2018
2019	$	46
2020		44
2021		43
2022		40
2023		37
Thereafter		1,309
Total minimum lease payments	$	1,519