8. Commitments and contingencies

On June 3, 2013, the Company entered into a nine-year building lease for approximately 43,600 square feet of space located at 150 Second Street, Cambridge, Massachusetts, which commenced in December 2013. This lease was amended in June 2014 to add approximately 9,900 additional square feet. The lease originally had monthly lease payments of $0.2 million for the first 12 months, which increased to $0.3 million per month beginning in December 2014 due to the lease amendment, with annual rent escalations thereafter. Rent expense is recognized on a straight-line basis over the term of the lease. The lease provided a contribution from the landlord towards the initial build-out of the space of up to $7.8 million. The Company capitalizes the leasehold improvements as property and equipment and records the landlord incentive payments received as deferred rent and amortizes these amounts as reductions to rent expense over the lease term. In addition, in accordance with the lease, the Company entered into a cash-collateralized irrevocable standby letter of credit in the amount of $1.3 million, naming the landlord as beneficiary, which had a balance of $0.6 as of December 31, 2016 and 2015.

On September 30, 2016, the Company entered into an Assignment and Assumption of Lease (“Assignment”) relating to its lease at 150 Second Street. Under the Assignment, the Company will assign all of its rights, interests, obligations and responsibilities under the lease, to be effective as of the later of May 1, 2017 or the first day following the Company’s surrender of the leased premises in accordance with the lease. The Company expects to vacate the premises during the second quarter of 2017.

On June 29, 2015, the Company entered into a lease agreement for additional office space located at 215 First Street, Cambridge, Massachusetts. Under the terms of the lease, the Company leased approximately 15,120 square feet starting on July 13, 2015 for $0.5 million per year in base rent, which is subject to a 3% annual rent increase plus certain operating expenses and taxes. The lease may continue until the end of the 60^th full calendar month following the date the landlord delivers the premises to the Company, and includes early termination provisions that allows the Company to terminate the lease at the end of the 20^th full calendar month following the delivery of the premises now that the Company has met certain conditions specified within the lease. Under the terms of the lease, the Company has also leased an additional 8,075 square feet of office space in the same premises starting on January 1, 2016 for an additional $0.3 million per year in base rent, which is subject to a 3% annual rent increase plus certain operating expenses and taxes. The Company has provided its landlord with notice of termination of this lease, with termination to be effective April 12, 2017.

On June 3, 2016, the Company entered into a strategic manufacturing agreement for the future commercial production of the Company’s Lenti-D and LentiGlobin product candidates with a contract manufacturing organization. Under this 12 year agreement, the contract manufacturing organization will complete the design, construction, validation and process validation of the leased suites prior to anticipated commercial launch of the product candidates. During construction, the Company is required to pay $12.5 million upon the achievement of certain contractual milestones, and may pay up to $8.0 million in additional contractual milestones if the Company elects its option to lease additional suites. The Company paid $5.0 million for the achievement of the first and second contractual milestones during 2016 and paid the third milestone of $3.0 million in January 2017, which is reflected as a component of accrued expenses and other current liabilities within the consolidated balance sheet at December 31, 2016. Following construction completion, the Company will pay $5.1 million per year in fixed suite fees as well as certain fixed labor, raw materials, testing and shipping costs for manufacturing services, and may pay additional suite fees if it elects its option to reserve or lease additional suites. The Company estimates completion to occur in 2018. The Company may terminate this agreement any time after July 1, 2016 upon payment of a one-time termination fee and up to 24 months of fixed suite and labor fees. The Company concluded that this agreement contains an embedded lease as the suites are designated for the Company’s exclusive use during the term of the agreement. The Company concluded that it is not the deemed owner during construction nor is it a capital lease under ASC 840-10, Leases - Overall. As a result, the Company will account for the agreement as an operating lease and expense the rental payments on a straight-line basis over the term of the embedded lease.

On November 18, 2016, the Company entered into an agreement for future clinical and commercial production of the Company’s LentiGlobin gene therapy drug products with a contract manufacturing organization at an existing facility. The term of the agreement is five years with a three year renewal at the mutual option of each party. Under the agreement, the Company is required to pay an up-front fee of €3.0 million, €2.0 million of which was paid in the fourth quarter of 2016 and €1.0 million of which is expected to be paid in mid-2018, and annual maintenance and production fees of up to €9.8 million, depending on its production needs. The Company may terminate this agreement with six months’ notice and a one-time termination fee prior to July 1, 2018, or twelve months’ notice and a one-time termination fee thereafter. The Company concluded that this agreement contains an embedded lease as the clean rooms are designated for the Company’s exclusive use during the term of the agreement, and determined that it is not a capital lease under ASC 840-10, Leases – Overall. As a result, the Company will account for the agreement as an operating lease and expense the rental payments on a straight-line basis over the term of the embedded lease.

60 Binney Street Lease Commitments

On September 21, 2015, the Company entered into a lease agreement for additional office and laboratory space located in a building (the “Building”) under construction at 60 Binney Street, Cambridge, Massachusetts (the “60 Binney Street Lease”). Under the terms of the 60 Binney Street Lease, starting on October 1, 2016, the Company will lease approximately 253,108 square feet of office and laboratory space at $72.50 per square foot per year, or $18.4 million per year in base rent, which is subject to scheduled annual rent increases of 1.75% plus certain operating expenses and taxes. The Company also executed a $9.2 million letter of credit upon signing the 60 Binney Street Lease, which was required to be collateralized with a bank account at a financial institution in accordance with the 60 Binney Street Lease agreement. This letter of credit was increased to $13.8 million during the third quarter of 2016 as required under the terms of the lease. Subject to the terms of the lease and certain reduction requirements specified therein, including market capitalization requirements, this amount may decrease back to $9.2 million over time. The 60 Binney Street Lease will continue until the end of the 120^th full calendar month following April 2017 or the earlier the date the Company occupies the Building or other conditions specified in the 60 Binney Street Lease occur. Pursuant to a work letter entered into in connection with the 60 Binney Street Lease, the landlord will contribute an aggregate of $42.4 million toward the cost of construction and tenant improvements for the Building. The purpose of the 60 Binney Street Lease is to supplement and eventually replace the Company’s current leased premises at 150 Second Street and 215 First Street in Cambridge, Massachusetts and the Company intends to move its corporate headquarters to 60 Binney Street during the second quarter of 2017. The Company has the option to extend the 60 Binney Street Lease for two successive five-year terms.

Because the Company is involved in the construction project, including having responsibility to pay for a portion of the costs of finish work and mechanical, electrical, and plumbing elements of the Building, among other items, the Company is deemed for accounting purposes to be the owner of the Building during the construction period. Accordingly, construction costs that have been incurred by the landlord directly or indirectly through reimbursement to the Company as part of its tenant improvement allowance have been recorded as an asset in “Property and equipment, net” with a related financing obligation in “Construction financing lease obligation” on the Company’s consolidated balance sheets. Tenant improvement costs that are reimbursable by the landlord and have not yet been paid to the Company are also recorded in “Prepaid expenses and other current assets” on the Company’s consolidated balance sheets. Tenant improvement costs that are not reimbursable by the landlord are only recorded in “Property and equipment, net” on the Company’s consolidated balance sheets.

As of December 31, 2016, Property and equipment, net, includes $126.9 million related to construction costs for the Building, of which $120.1 million has been incurred by the landlord. As of December 31, 2016, Prepaid expenses and other current assets includes $8.5 million of tenant improvement costs reimbursable by the landlord that had not yet been received, $7.8 million of which was received by the Company in January 2017. The Company incurred tenant improvement costs of $1.8 million through December 31, 2016 that are not reimbursable by the landlord. No payments were made by the Company to the landlord during the twelve months ended December 31, 2016.

The Company bifurcates its future lease payments pursuant to the 60 Binney Street Lease into (i) a portion that is allocated to the Building and (ii) a portion that is allocated to the land on which the Building is being constructed, which is recorded as rental expense. Although the Company estimates that the Company will not begin making lease payments pursuant to the 60 Binney Street Lease until April 2017, the portion of the lease obligation allocated to the land is treated for accounting purposes as an operating lease that commenced upon execution of the 60 Binney Street Lease in September 2015. During the year ended December 31, 2016, the Company recognized $1.9 million of non-cash rental expense attributable to the land.

In the event that the landlord completes the construction of the Building in 2017 as planned, the Company will evaluate the 60 Binney Street Lease in order to determine whether or not the 60 Binney Street Lease meets the criteria for “sale-leaseback” treatment. If the 60 Binney Street Lease meets the “sale-leaseback” criteria, the Company will remove the asset and the related liability from its consolidated balance sheet and treat the 60 Binney Street Lease as either an operating or a capital lease based on the Company’s assessment of the accounting guidance. The Company expects that upon completion of construction of the Building the 60 Binney Street Lease will not meet the “sale-leaseback” criteria. If the 60 Binney Street Lease does not meet “sale-leaseback” criteria, the Company will treat the 60 Binney Street Lease as a financing obligation and will depreciate the asset in accordance with the Company’s accounting policy.

As of December 31, 2016, future minimum commitments under the 60 Binney Street Lease and facility operating leases were as follows (in thousands):

Years ended December 31,	60 Binney Street Lease		150 Second Street Lease		Other Operating Leases		Total Lease Commitments
2017	$	13,102	$	1,359	$	11,963	$	26,424
2018		18,647		-		10,368		29,015
2019		18,974		-		9,841		28,815
2020		19,305		-		9,841		29,146
2021		19,643		-		9,841		29,484
2022 and thereafter		108,875		-		32,725		141,600
Total minimum lease payments	$	198,546	$	1,359	$	84,579	$	284,484

(1)	Amounts are subject to increase if the Company does not vacate the leased premise during the second quarter of 2017 as planned.

For the 60 Binney Street Lease, the table above sets forth the future minimum rental payments that the Company is obligated to pay after taking occupancy including amounts reflected on the consolidated balance sheet under the caption “Construction financing lease obligation.” The Company expects to commence these rental payments upon completion of the Building in April 2017.

Rent expense is calculated on a straight-line basis over the term of the lease. Rent expense recognized under all leases, including additional rent charges for utilities, parking, maintenance, and real estate taxes, and including rental expense attributable to the 60 Binney Street Lease land was $8.3 million, $5.7 million, and $4.3 million for the years ended December 31, 2016, 2015 and 2014, respectively.

The Company is party to various agreements, principally relating to licensed technology, that require future payments relating to milestones not met at December 31, 2016 and December 31, 2015 or royalties on future sales of specified products.

The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to the agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements.

On June 30, 2014, the Company acquired Pregenen. During 2016, two milestones under the Stock Purchase Agreement were achieved, which resulted in a $5.0 million payment to the former equityholders of Pregenen during 2016. During 2015, one milestone was achieved, which resulted in a $1.0 million payment to the former equityholders of Pregenen. The Company may be required to make up to an additional $129.0 million in future contingent cash payments to the former equityholders of Pregenen upon the achievement of certain preclinical, clinical and commercial milestones related to the Pregenen technology, of which $9.0 million relates to preclinical milestones, $20.1 million relates to clinical milestones and $99.9 million relates to commercial milestones. In accordance with accounting for business combinations guidance, contingent consideration liabilities are required to be recognized on the consolidated balance sheets at fair value. Estimating the fair value of contingent consideration requires the use of significant assumptions primarily relating to probabilities of successful achievement of certain preclinical, clinical and commercial milestones, the expected timing in which these milestones will be achieved and discount rates. The use of different assumptions could result in materially different estimates of fair value. See Note 4, “Fair value measurements” for additional information.