NEW ACCOUNTING PRONOUNCEMENTS

February 2016,

the FASB issued an ASU that sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a lease agreement (i.e., lessees and lessors). Subsequently, the FASB issued additional ASUs that further clarified the original ASU. The ASUs became effective for us on

January 1, 2019.

Upon adoption of the lease ASUs on

January 1, 2019,

we elected the following practical expedients provided by these ASUs:

	●	Package of practical expedients – requires the Company not to reevaluate its existing or expired leases as of January 1, 2019, under the new lease accounting ASUs.
	●	Optional transition method practical expedient – requires the Company to apply the new lease ASUs prospectively from the adoption date of January 1, 2019.
	●	Land easements practical expedient – requires the Company to account for land easements existing as of January 1, 2019, under the accounting standards applied to them prior to January 1, 2019.
	●	Single component practical expedient – requires the Company to account for lease and nonlease components associated with that lease under the new lease ASUs, if certain criteria are met.
	●	Short-term leases practical expedient – for operating leases with a term of 12 months or less in which the Company is the lessee, this expedient allows us not to record on the Company’s balance sheets related lease liabilities, taxes collected from lessees, lessor costs paid directly by lessee to a third party and right-of-use assets.

Lessor accounting

The Company recognized revenue from our lease agreements aggregating

$1.7

million for the

three

months ended

March 31, 2019.

This revenue consisted primarily of rental revenue, percentage rental revenue, and tenant recoveries.

The Company recognizes rental revenue from its operating leases on a straight-line basis over the respective lease terms. The Company commences recognition of rental revenue at the date the property is ready for its intended use and the tenant takes possession of or controls the physical use of the property.

Under the lease ASU, each lease agreement will be evaluated to identify the lease components and nonlease components at lease inception. The total consideration in the lease agreement will be allocated to the lease and nonlease components based on their relative standalone selling prices. Lessors will continue to recognize the lease revenue component using an approach that is substantially equivalent to existing guidance for operating leases (straight-line basis).

January 1, 2019,

the Company elected the single component practical expedient, which requires the Company, by class of underlying asset,

not

to allocate the total consideration to the lease and nonlease components based on their relative stand-alone selling prices. This single component practical expedient requires the Company to account for the lease component and nonlease component(s) associated with that lease as a single component if (i) the timing and pattern of transfer of the lease component and the nonlease component(s) associated with it are the same and (ii) the lease component would be classified as an operating lease if it were accounted for separately. If it is determined that the lease component is the predominant component, the Company accounts for the single component as an operating lease in accordance with the new lease ASUs. Conversely, the Company is required to account for the combined component under the new revenue recognition ASU if it is determined that the nonlease component is the predominant component.

As a result of this assessment, rental revenues and tenant recoveries from the lease of real estate assets that qualify for this expedient are accounted for as a single component under the new lease ASUs, with tenant recoveries primarily as variable consideration. Tenant recoveries that do

not

qualify for the single component practical expedient and are considered nonlease components are accounted for under the revenue recognition ASUs. The Company’s operating leases commencing or modified after

January 1, 2019,

for which the Company is the lessor are expected to qualify for the single component practical expedient accounting under the new lease ASUs. The adoption of this guidance will

not

have a material impact on the Company’s financial statements.

Costs to execute leases

The new lease ASU will require that lessors and lessees capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease (e.g. commissions paid to leasing brokers). Under the new lease ASU, allocated payroll costs and other costs such as legal costs incurred as part of the leasing process prior to the execution of a lease will

longer qualify for classification as initial direct costs but will instead be expensed as incurred. Under the package of practical expedients that the Company elected on

January 1, 2019,

it is

not

required to reassess whether initial direct leasing costs capitalized prior to the adoption of the new lease ASUs in connection with the leases that commenced prior to

January 1, 2019,

qualify for capitalization under the new lease ASUs. Effective

January 1, 2019,

costs that the Company incurs to negotiate or arrange a lease regardless of its outcome, such as fixed employee compensation, tax, or legal advice to negotiate lease terms, and costs related to advertising or soliciting potential tenants are expensed as incurred.

Lessee accounting

Under the new lease ASUs, lessees are required to apply a dual approach by classifying leases as either finance or operating leases based on the principle of whether the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, which corresponds to a similar evaluation performed by lessors. In addition to this classification, a lessee is also required to recognize a right-of-use asset and a lease liability for all leases regardless of their classification, whereas a lessor is

not

required to recognize a right-of-use asset and a lease liability for any operating leases.

For the

three

months ended

March 31, 2019,

the Company recognized rent expense of approximately

$7,000

for these leases. As of

March 31, 2019,

the remaining contractual payments under the office and equipment leases are

$50,000.

All of the aforementioned leases for which the Company is the lessee are currently classified as operating leases.

Under the package of practical expedients that the Company elected upon adoption of the new lease ASUs, all of its operating leases existing as of

January 1, 2019,

for which the Company is the lessee, continue to be classified as operating leases subsequent to the adoption of the new lease ASUs. The Company has also evaluated the effect of the new lease ASUs on the calculation of its debt covenants as of

March 31, 2019

and noted

significant effect on the calculation.

June 2016,

FASB issued ASU

No.

2016

13,

Financial Instruments-Credit Losses. This ASU replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of information to determine credit loss estimates. This ASU will be effective for annual reporting periods beginning after

December 15, 2019

for public business entities. The Company is in the process of assessing the impact of ASU

No.

2016

on its financial statements.

August 28, 2018,

the FASB issued ASU

2018

which amends ASC

715

to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The ASU’s changes related to disclosures are part of the FASB’s disclosure framework project which was aimed to improve the effectiveness of disclosures in notes to financial statements. This ASU is effective for public business entities for annual reporting periods beginning after

December 15, 2020,

with early adoption permitted. The Company is in the process of assessing the impact of ASU on its financial statements and expects to adopt the new disclosure requirements on

January 1, 2021.