Direct financing lease, net investment in lease, before allowance for credit loss

  
  
5.    LEASESRefer to the “Lease accounting” section in Note 2 – “Summary of significant accounting policies” to our unaudited consolidated financial statements for information about lease accounting standards that set principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a lease agreement (i.e., lessees and lessors).  
Leases in which we are the lessor  
As of September 30, 2022, we had 431 properties aggregating 41.1 million operating RSF located in key clusters, including Greater Boston, the San Francisco Bay Area, New York City, San Diego, Seattle, Maryland, and Research Triangle. We focus on developing Class A properties in AAA innovation cluster locations, which we consider to be highly desirable for tenancy by life science, agtech, and technology entities. Such locations are generally characterized by high barriers to entry for new landlords, high barriers to exit for tenants, and a limited supply of available space. As of September 30, 2022, all leases in which we are the lessor were classified as operating leases, with the exception of one direct financing lease. Our leases are described below.  
Operating leases  
As of September 30, 2022, our 431 properties were subject to operating lease agreements. Two of these properties, representing two land parcels, are subject to lease agreements that each contain an option for the lessee to purchase the underlying asset from us at fair market value during each of the 30-day periods commencing on the dates that are 15 years, 30 years, and 74.5 years after the rent commencement date of October 1, 2017. The remaining lease term related to each of the two land parcels is 70.2 years. Our leases generally contain options to extend lease terms at prevailing market rates at the time of expiration. Certain operating leases contain early termination options that require advance notification and payment of a penalty, which in most cases is substantial enough to be deemed economically disadvantageous by a tenant to exercise. Future lease payments to be received under the terms of our operating lease agreements, excluding expense reimbursements, in effect as of September 30, 2022 are outlined in the table below (in thousands):

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
| Year |  | Amount |
| 2022 |  | $ | 413,509  |  |
| 2023 |  | 1,743,452  |  |
| 2024 |  | 1,831,621  |  |
| 2025 |  | 1,816,651  |  |
| 2026 |  | 1,771,008  |  |
| Thereafter |  | 13,261,005  |  |
| Total |  | $ | 20,837,246  |  |

  
Refer to Note 3 – “Investments in real estate” to our unaudited consolidated financial statements for additional information about our owned real estate assets, which are the underlying assets under our operating leases.  
Direct financing and sales-type leases  
As of September 30, 2022, we had one direct financing lease agreement, with a net investment balance of $39.2 million, for a parking structure with a remaining lease term of 70.2 years. The lessee has an option to purchase the underlying asset at fair market value during each of the 30-day periods commencing on the dates that are 15 years, 30 years, and 74.5 years after the rent commencement date of October 1, 2017.   
The components of our aggregate net investment in our direct financing and sales-type leases as of September 30, 2022 and December 31, 2021 are summarized in the table below (in thousands):

|  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |
|  | September 30, 2022 |  | December 31, 2021 |
| Gross investment in direct financing and sales-type leases | $ | 255,641  |  |  | $ | 403,388  |  |
| Add: estimated unguaranteed residual value of the underlying assets | —  |  |  | 31,839  |  |
| Less: unearned income on direct financing lease | (213,640) |  |  | (215,557) |  |
| Less: effect of discounting on sales-type leases | —  |  |  | (146,175) |  |
| Less: allowance for credit losses | (2,839) |  |  | (2,839) |  |
| Net investment in direct financing and sales-type leases | $ | 39,162  |  |  | $ | 70,656  |  |

  
In May 2022, we completed the sale of land at 9609, 9613, and 9615 Medical Center Drive in our Rockville submarket, which was subject to long-term sales-type leases, for the sales price of $47.8 million and recognized a gain of $11.9 million classified in gain on sales of real estate within our unaudited consolidated statements of operations for the nine months ended September 30, 2022. As of September 30, 2022, we had no sales-type leases. 27
