Direct financing lease, allowance for credit loss

  
  
5.    LEASES (continued)  
As of September 30, 2022, our estimated credit loss related to our direct financing lease was $2.8 million. No adjustment to the estimated credit loss balance was required during the three and nine months ended September 30, 2022. For further details, refer to the “Allowance for credit losses” section in Note 2 – “Summary of significant accounting policies” to our unaudited consolidated financial statements.  
Future lease payments to be received under the terms of our direct financing lease as of September 30, 2022 are outlined in the table below (in thousands):

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
| Year |  | Total |
| 2022 |  | $ | 454  |  |
| 2023 |  | 1,863  |  |
| 2024 |  | 1,919  |  |
| 2025 |  | 1,976  |  |
| 2026 |  | 2,036  |  |
| Thereafter |  | 247,393  |  |
| Total |  | $ | 255,641  |  |

  
Income from rentals  
Our total income from rentals includes revenue related to agreements for the rental of our real estate, which primarily includes revenues subject to the lease accounting standard and the revenue recognition accounting standard as shown below (in thousands):

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  | Three Months Ended September 30, |  | Nine Months Ended September 30, |
|  |  | 2022 |  | 2021 |  | 2022 |  | 2021 |
| Income from rentals: |  |  |  |  |  |  |  |  |
| Revenues subject to the lease accounting standard: |  |  |  |  |  |  |  |  |
| Operating leases |  | $ | 646,662  |  |  | $ | 538,880  |  |  | $ | 1,879,534  |  |  | $ | 1,515,396  |  |
| Direct financing and sales-type leases |  | 642  |  |  | 1,012  |  |  | 2,449  |  |  | 2,473  |  |
| Revenues subject to the lease accounting standard |  | 647,304  |  |  | 539,892  |  |  | 1,881,983  |  |  | 1,517,869  |  |
| Revenues subject to the revenue recognition accounting standard |  | 9,549  |  |  | 6,635  |  |  | 28,383  |  |  | 15,724  |  |
| Income from rentals |  | $ | 656,853  |  |  | $ | 546,527  |  |  | $ | 1,910,366  |  |  | $ | 1,533,593  |  |

  
Our revenues that are subject to the revenue recognition accounting standard and are classified in income from rentals consist primarily of short-term parking revenues that are not considered lease revenues under the lease accounting standard. Refer to the “Revenues” and “Recognition of revenue arising from contracts with customers” sections in Note 2 – “Summary of significant accounting policies” to our unaudited consolidated financial statements for additional information.  
Residual value risk management strategy  
Our leases do not have guarantees of residual value on the underlying assets. We manage risk associated with the residual value of our leased assets by (i) evaluating each potential acquisition of real estate to determine whether it meets our business objective to invest primarily in high-demand markets with limited supply of available space, (ii) directly managing our leased properties, conducting frequent property inspections, proactively addressing potential maintenance issues before they arise, and timely resolving any occurring issues, and (iii) carefully selecting our tenants and monitoring their credit quality throughout their respective lease terms.   
Leases in which we are the lessee  
Operating lease agreements  
We have operating lease agreements in which we are the lessee consisting of ground and office leases. Certain of these leases have options to extend or terminate the contract terms upon meeting certain criteria. There are no notable restrictions or covenants imposed by the leases, nor guarantees of residual value.  
We recognize a right-of-use asset, which is classified within other assets in our consolidated balance sheets, and a related liability, which is classified within accounts payable, accrued expenses, and other liabilities in our consolidated balance sheets, to account for our future obligations under ground and office lease arrangements in which we are the lessee. Refer to the “Lessee accounting” subsection of the “Lease accounting” section in Note 2 – “Summary of significant accounting policies” to our unaudited consolidated financial statements.  
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