Lease Accounting

3 Months Ended

Mar. 31, 2019

The following is a summary of Company's accounting for leases as of and during the three-month period ended March 31, 2019:

Lessor

Lexington’s lease portfolio as a lessor primarily includes general purpose, single-tenant net-leased industrial and office real estate assets. Most of the Company’s leases require tenants to pay fixed annual rental payments that escalate on an annual basis and variable payments for other operating expenses, such as real estate taxes, insurance, common area maintenance ("CAM"), and utilities, that are based on the actual expenses incurred.

Certain leases allow for the tenant to renew the lease term upon expiration or earlier. Periods covered by a renewal option are included within the lease term only when renewals are deemed to be reasonably certain. Certain leases allow for the tenant to terminate the lease before the expiration of lease term and certain leases provide the tenant with the right to purchase the leased property at fair market value or a stipulated price upon expiration of the lease term or before.

Accounting guidance under Topic 842 requires the Company to make certain assumptions and judgments in applying the guidance, including determining whether an arrangement includes a lease and determining the lease term when the contract has renewal, purchase or early termination provisions.

From a lessor perspective, the Company concluded that revenue from lease components are primarily recognized on a straight-line basis over the lease term unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. Revenue is recognized on a contractual basis for leases with escalations tied to a Consumer Price Index (CPI) with no floor. If the Company funds tenant improvements and the improvements are deemed to be owned by the Company, revenue recognition commences when the improvements are substantially complete and control of the space is turned over to the tenant. If the Company determines that the tenant allowances are lease incentives, the Company commences revenue recognition when possession or control of the space is turned over to the tenant for tenant work to begin. The lease incentive is recorded as a deferred expense and amortized as a reduction of revenue on a straight-line basis over the respective lease term. The Company recognizes lease termination fees as rental revenue in the period received and writes off unamortized lease-related intangible and other lease-related account balances, provided there are no further Company obligations under the lease. Otherwise, such fees and balances are recognized on a straight-line basis over the remaining obligation period with the termination payments being recorded as a component of rent receivable-deferred on the unaudited condensed consolidated balance sheets.

In addition, the Company determined that the lease and non-lease components in its leases are a single lease component and is, therefore, being recognized as rental revenue in its unaudited condensed consolidated statements of operations. The primary non-lease service that is included within rental revenue is CAM services provided as part of the Company’s real estate leases. Topic 842 requires that the Company capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease. As of March 31, 2019, the Company incurred $127 of costs that were not incremental to the execution of leases, which are included in property operating expenses on its unaudited condensed consolidated statements of operations.

The Company manages the risk associated with the residual value of its leased properties by including contract clauses that make tenants responsible for surrendering the space in good condition upon lease termination, holding a diversified portfolio, and other activities. The Company does not have residual value guarantees on specific properties.

The following table presents the Company’s classification of rental revenue for its operating leases for the three months ended March 31, 2019:



Classification	Fixed		Variable⁽¹⁾		Total
Rental revenue	$	72,709	$	7,266	$	79,975


(1)	Primarily comprised of tenant reimbursements.

Future fixed rental receipts for leases, assuming no new or re-negotiated leases, for the next five years and thereafter as of March 31, 2019 are as follows:




2019 - remainder	$	204,916
2020	262,826
2021	247,071
2022	229,997
2023	228,736
2024	205,667
Thereafter	1,515,561
Total	$	2,894,774

Minimum future lease payments under the non-cancellable portion of tenant leases, assuming no new or re-negotiated leases, for the next five years and thereafter in accordance with ASC Topic 840 as of December 31, 2018 were as follows:



Year ending December 31,	Total
2019	$	270,557
2020	253,660
2021	233,192
2022	212,893
2023	211,387
Thereafter	1,619,848
	$	2,801,537

Lessee

The Company has ground leases, corporate leases for office space, and office equipment. All leases were classified as operating leases as of March 31, 2019. The leases have remaining lease terms of up to 44 years, some of which include options to extend the leases in 5 to 10-year increments for up to 54 years. Renewal periods are included in the lease term only when renewal is deemed to be reasonably certain. The lease term also includes periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the termination option. The Company measures its lease payments by including fixed rental payments and variable rental payments that tie to an index or a rate, such as CPI. Minimum lease payments for leases that commenced before the date of adoption of ASC 842 were determined based on previous leases guidance under ASC 840. The Company recognizes lease expense for its operating leases on a straight-line basis over the lease term and variable lease expense not included in the lease payment measurement as incurred.

The accounting guidance under Topic 842 requires the Company to make certain assumptions and judgments in applying the guidance, including determining whether an arrangement includes a lease, determining the term of a lease when the contract has renewal or termination provisions and determining the discount rate.

The Company determines whether an arrangement is or includes a lease at contract inception by evaluating whether the contract conveys the right to the control the use of an identified asset for a period of time in exchange for consideration. If the Company has the right to obtain substantially all of the economic benefits from and can direct the use of, the identified asset for a period of time, the Company accounts for the contract as a lease.

As the Company does not know the rate implicit in the respective leases, the Company used its incremental borrowing rate based on the information available at the transition date for such existing leases. The Company uses the information available at the lease commencement date to determine the discount rate for any new leases. The Company used a portfolio approach to determine its incremental borrowing rate. Lease contracts were grouped based on similar lease terms and economic environments in a manner in which the Company reasonably expects that the outcome from applying a portfolio approach does not differ materially from an individual lease approach. The Company estimated a collateralized discount rate for each portfolio of leases.

Supplemental information related to operating leases is as follows:



Weighted-average remaining lease term
Operating leases (years)	12.7
Weighted-average discount rate
Operating leases	4.1	%

The components of lease expense for the three months ended March 31, 2019 are as follows:



Income Statement Classification	Fixed		Variable		Total
Property operating	$	997	$	—	$	997
General and administrative	300		18		318
Total	$	1,297	$	18	$	1,315

The Company recognized sublease income of $941 for the three months ended March 31, 2019.

The following table shows the Company's maturity analysis of its operating lease liabilities as of March 31, 2019:



	Operating Leases
2019 - remainder	$	3,787
2020	5,220
2021	5,095
2022	5,138
2023	5,281
2024	5,301
Thereafter	25,622
Total lease payments	$	55,444
Less: Imputed interest	(13,440		)
Present value of lease liabilities	$	42,004

The following table shows the Company's future minimum lease rental payments under non-cancellable leasehold interests in accordance with ASC Topic 840 as of December 31, 2018:



Year ending December 31,	Total
2019	$	3,826
2020	3,827
2021	3,769
2022	3,834
2023	4,008
Thereafter	28,326
	$	47,590

Lease Accounting