Shutterfly 2015 Annual Report Download - page 97

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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 237,000 square foot
production facility in Tempe, Arizona. This facility consolidated all of the Company’s locations in the greater
Phoenix area, including the acquired R&R Images facility, offers flexibility for future expansion, and became
operational in the second quarter of 2015. Both 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
is the “deemed owner” of the building (for accounting purposes only) during the construction period. As of
December 31, 2015 and 2014, the landlord incurred $17.2 million and $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.
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 facilities in Fort Mill, South Carolina; Shakopee, Minnesota; and Tempe, Arizona were
completed in 2013, 2014, and 2015, respectfully, and at that time the Company concluded that it had forms of
continued economic involvement in the facilities. 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, 2015, the total future rent payments under these build-to-suit leases are as follows (in
thousands):
Year Ending:
2016 ........................................................................... $ 6,082
2017 ........................................................................... 6,218
2018 ........................................................................... 6,358
2019 ........................................................................... 6,501
2020 ........................................................................... 6,646
Thereafter ....................................................................... 26,742
Total future rent payments under build-to-suit leases ..................................... $ 58,547
Indemnifications
In the normal course of business, the Company enters into contracts and agreements that contain a variety of
representations and warranties and provide for general indemnifications. The Company’s exposure under these
agreements is unknown because it involves future claims that may be made against the Company, but have not
yet been made. To date, the Company has not paid any claims or been required to defend any action related to its
indemnification obligations. However, the Company may record charges in the future as a result of these
indemnification obligations.
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