Restoration Hardware 2015 Annual Report Download - page 98

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95
Lease payments that depend on factors that are not measurable at the inception of the lease, such as future sales volume,
represent contingent rent expense and are excluded from minimum lease payments and included in the determination of total rent
expense when it is probable that the expense has been incurred and the amount is reasonably estimable. Future payments for
insurance, real estate taxes and repair and maintenance to which the Company is obligated are excluded from minimum lease
payments. Minimum and contingent rent under lease agreements accounted for as operating leases and lease agreements accounted for
as build-to-suit lease transactions are as follows (in thousands):
Year Ended
January 30, January 31, February 1,
2016 2015 2014
Lease agreements accounted for as operating leases
Minimum rent ..................................................................... $ 76,246 $ 75,654 $ 66,686
Contingent rent .................................................................... 10,209 7,989 6,208
Total operating leases .................................................... $ 86,455 $ 83,643 $ 72,894
Lease agreements accounted for as build-to-suit lease
transactions (1)
Minimum rent ..................................................................... $ 12,755 $ 7,375 $ 1,980
Contingent rent .................................................................... 442 122 —
Total build-to-suit lease transactions ............................. $ 13,197 $ 7,497 $ 1,980
(1) As described in Note 3—Significant Accounting Policies, the cash payments made under leases accounted for as build-to-suit
lease transactions get allocated to land rent expense and as debt service payments (a portion to interest expense and a portion to
financing obligation). Minimum rent payments recognized as interest expense within the consolidated statements of income
were $9.9 million, $5.3 million and $1.1 million in fiscal 2015, fiscal 2014 and fiscal 2013, respectively. The remaining
minimum rent in fiscal 2015, fiscal 2014 and fiscal 2013 are included in cost of goods sold on the consolidated statements of
income. Contingent rent under build-to-suit lease transactions is recognized as interest expense within the consolidated
statements of income.
In addition to the above, non-cash rent expense recognized within the consolidated statements of income was $2.9 million, $2.9
million and $3.9 million in fiscal 2015, fiscal 2014 and fiscal 2013, respectively, which represents the straight-line impact and
amortization of tenant allowances under operating leases and land rent expense recorded for build-to-suit lease transactions prior to
cash payments occurring under the leases.
Commitments
The Company had no material off balance sheet commitments as of January 30, 2016.
Contingencies
The Company is involved in lawsuits, claims and proceedings incident to the ordinary course of its business. These disputes are
increasing in number as the business expands and the Company grows larger. Litigation is inherently unpredictable. As a result, the
outcome of matters in which the Company is involved could result in unexpected expenses and liability that could adversely affect the
Company’s operations. In addition, any claims against the Company, whether meritorious or not, could be time consuming, result in
costly litigation, require significant amounts of management time and result in the diversion of significant operational resources.
The Company reviews the need for any loss contingency reserves and establishes reserves when, in the opinion of management,
it is probable that a matter would result in liability, and the amount of loss, if any, can be reasonably estimated. Generally, in view of
the inherent difficulty of predicting the outcome of those matters, particularly in cases in which claimants seek substantial or
indeterminate damages, it is not possible to determine whether a liability has been incurred or to reasonably estimate the ultimate or
minimum amount of that liability until the case is close to resolution, in which case no reserve is established until that time. As of
January 30, 2016, the Company has recorded a liability for the estimated loss related to these disputes. There is a possibility that
additional losses may be incurred in excess of the amounts that the Company has accrued. However, the Company believes that the
ultimate resolution of these current matters will not have a material adverse effect on its consolidated financial statements.