Leases (Notes)

12 Months Ended

Dec. 31, 2018

Operating Leases

We lease both real estate and equipment used in our operations. As of December 31, 2018, the remaining term of our operating leases ranged from 1 to 79 years with various automatic extensions. For the years ended December 31, 2018, 2017 and 2016, rent expense for operating leases was $118 million, $84 million and $74 million, respectively. In addition to minimum rental commitments, certain of our operating leases provide for contingent rentals based on a percentage of revenues in excess of specified amounts. However, such amounts are not considered material.

Failed Sale-Leaseback Financing Obligations

As described in Note 1 and Note 4, in conjunction with CEOC’s emergence from bankruptcy, OpCo, which was acquired by CEC and then immediately merged with and into CEOC LLC, with CEOC LLC as the surviving entity, entered into leases with VICI on the Effective Date related to certain real property assets formerly held by CEOC (each a “CEOC LLC Lease Agreement,” and,

collectively, the “CEOC LLC Lease Agreements”): (i) for Caesars Palace Las Vegas, (ii) for a portfolio of properties at various locations throughout the United States, and (iii) for Harrah’s Joliet Hotel & Casino. Additionally, on December 22, 2017, Harrah’s Las Vegas sold certain real estate assets to VICI and simultaneously entered into the Harrah’s Las Vegas lease. On July 11, 2018, we sold Octavius Tower to VICI and continue to operate the Octavius Tower under the current terms of the long-term agreement with VICI relating to Caesars Palace. On December 26, 2018, we sold all land and real property improvements used in the operation of Harrah’s Philadelphia to VICI and now lease the real property of Harrah’s Philadelphia from VICI pursuant to the CEOC LLC Lease Agreement relating to certain of our other domestic properties, which was amended to include Harrah’s Philadelphia.

Each lease agreement provides for fixed rent (subject to escalation) during an initial term, then rent consisting of both base rent and variable percentage rent elements, and has a 15-year initial term and four five-year renewal options, subject to certain restrictions on extension applicable to certain of the leased properties. The CEOC LLC Lease Agreements and the Harrah’s Las Vegas lease provide for annual fixed rent of $695 million and $87 million, respectively. Each of the leases includes escalation provisions beginning in year two of the initial term and continuing through the renewal terms. The leases also include provisions for contingent rental payments calculated, in part, based on increases or decreases of net revenue of the underlying lease properties, commencing in year eight of the initial term and continuing through the renewal terms.

On December 26, 2018, we and VICI consummated modifications to certain of our existing lease agreements. The modifications bring certain of the lease terms into alignment with other master leases in the sector and the long-term performance of the properties and create additional flexibility to facilitate our future development strategies. The modifications include, among other things: (i) the inclusion of Harrah’s Philadelphia in a CEOC LLC Lease Agreement; (ii) certain changes to a CEOC LLC Lease Agreement to reflect that the Octavius Tower is now owned by VICI and leased directly by VICI to a subsidiary of CEC pursuant to the lease; (iii) from the commencement of the eighth lease year, the implementation of EBITDAR to rent coverage tests in the CEOC LLC Lease Agreements that cap base rent escalations in the leases; and (iv) certain modifications to the rent escalators and the reduction of variable rent increases (or decreases, as applicable) for certain of the leases.

The leases were evaluated as a sale-leaseback of real estate. Under the terms of the lease agreements, we contribute to reserve accounts for which VICI has the right to collaterally assign the security interest in a future VICI financing. We determined that this contingent-collateral arrangement represents a prohibited form of continuing involvement. Among other things, we estimated that the length of the leases, including optional renewal periods, would represent substantially all (90% or more) of the remaining economic lives of the properties and facilities subject to the leases, and the terms of the renewal options give the Company the ability to renew the lease at a rate that has the potential of being less than a fair market value rate as determined at the time of renewal. These, among certain other conditions, represent a prohibited form of continuing involvement. Therefore, we determined that these transactions did not qualify for sale-leaseback accounting, and we accounted for the transaction as a financing.

For a failed sale-leaseback transaction, the real estate assets generally remain on the consolidated balance sheet at their historical net book value and are depreciated over their remaining useful lives while a failed sale-leaseback financing obligation is recognized for the proceeds received. For the CEOC LLC leases transaction, the real estate assets that were sold to VICI and leased back by OpCo were first adjusted to fair value upon CEOC’s emergence from bankruptcy and the failed sale-leaseback financing obligation was recognized at an amount equal to this fair value. CEC then recognized a failed sale-leaseback financing obligation equal to this fair value as part of the acquisition of OpCo (see Note 4).

As described above, for failed sale-leaseback transactions, we continue to reflect the real estate assets on our Balance Sheets in Property and equipment, net as if we were the legal owner, and we continue to recognize depreciation expense over the estimated useful lives. We do not recognize rent expense related to the leases, but we have recorded a liability for the failed sale-leaseback obligations and the majority of the periodic lease payments are recognized as interest expense. In the initial periods, cash payments are less than the interest expense recognized in the Statements of Operations, which causes the related sale-leaseback liability to increase during the beginning of the lease term.

Future Minimum Lease Commitments

(In millions)	Operating Leases		Financing Obligation
2019	$	82	$	753
2020	70		809
2021	57		822
2022	53		836
2023	51		855
Thereafter	966		34,333
Total minimum rental commitments	$	1,279	$	38,408

Guarantee for Failed Sale-Leaseback

Subject to certain exceptions, the payment of all monetary obligations under the CEOC LLC Lease Agreements are guaranteed by CEC and the payment of all monetary obligations under the Harrah’s Las Vegas lease is guaranteed by CRC.