Shutterfly 2014 Annual Report Download - page 97

the landlord and the Company incurred costs to construct the facility according to the Company’s
operating specifications, and as a result, the Company has concluded that it was the ‘‘deemed owner’’ of
the building (for accounting purposes only) during the construction period. Accordingly, the Company
recorded an asset and corresponding construction financing obligation, as a component of non-current
liabilities, of $13.7 million and 7.0 million for building uplift costs incurred by the landlord during 2014 and
2013, respectively.
Also during the year ended December 31, 2013 the Company executed a lease for a new 237,000
square foot production facility in Tempe, Arizona. This facility will consolidate all of the Company’s
locations in the greater Phoenix area as well as offer flexibility for future expansion, and is expected to
become operational during 2015. Both the landlord and the Company will incur costs to construct the
facility according to the Company’s operating specifications, and as a result, the Company has concluded
that it is the ‘‘deemed owner’’ of the building (for accounting purposes only) during the construction
period. As of December 31, 2014, the landlord incurred $9.1 million of building construction costs which
the Company has recorded as an asset, with a corresponding construction financing obligation, which is
recorded as a component of other non-current liabilities. The Company will increase the asset and
financing obligation as additional building uplift costs are incurred by the landlord during the construction
period.
Upon completion of construction of these facilities, the Company evaluates the de-recognition of the
asset and liability under the provisions of ASC 840.40 Leases — Sale-Leaseback Transactions. However, if
the Company does not comply with the provisions needed for sale-leaseback accounting, the lease will be
accounted for as a financing obligation and lease payments will be attributed to (1) a reduction of the
principal financing obligation; (2) imputed interest expense; and (3) land lease expense (which is
considered an operating lease and a component of cost of goods sold) representing an imputed cost to
lease the underlying land of the facility. In addition, the underlying building asset will be depreciated over
the building’s estimated useful life which is generally 30 years. And at the conclusion of the lease term, the
Company would de-recognize both the net book values of the asset and financing obligation.
Construction of the Fort Mill, South Carolina facility and the Shakopee, Minnesota facility were
completed in the second quarter of 2013 and 2014, respectfully, and at that time the Company concluded
that it had forms of continued economic involvement in the facility. As a result, the Company did not
comply with provisions for sale-leaseback accounting and the buildings are being accounted for as a
financing obligation.
At December 31, 2014, the total future rent payments under these build-to-suit leases are as follows (in
thousands):
Year Ending:
2015 .............................................................. $ 4,798
2016 .............................................................. 6,088
2017 .............................................................. 6,224
2018 .............................................................. 6,364
2019 .............................................................. 6,507
Thereafter .......................................................... 33,127
Total future rent payments under build-to-suit leases ............................ $ 63,108
96