NetFlix 2012 Annual Report Download - page 68

5. Commitments and Contingencies
Lease obligations
The Company leases facilities under non-cancelable operating leases with various expiration dates through
2018. Several lease agreements contain rent escalation clauses or rent holidays. For purposes of recognizing
minimum rental expenses on a straight-line basis over the terms of the leases, the Company uses the date of
initial possession to begin amortization, which is generally when the Company enters the space and begins to
make improvements in preparation for intended use. For scheduled rent escalation clauses during the lease terms
or for rental payments commencing at a date other than the date of initial occupancy, the Company records
minimum rental expenses on a straight-line basis over the terms of the leases in the Consolidated Statements of
Operations. The Company has the option to extend or renew most of its leases which may increase the future
minimum lease commitments.
Because the terms of the Company’s original facilities lease agreements for its current Los Gatos, California
headquarters site required the Company’s involvement in the construction funding of the buildings, the Company
is the “deemed owner” (for accounting purposes only) of these buildings. Accordingly, the Company recorded an
asset of $40.7 million, representing the total costs of the buildings and improvements, including the costs paid by
the lessor (the legal owner of the buildings), with corresponding liabilities. Upon completion of construction of
each building, the Company did not meet the sale-leaseback criteria for de-recognition of the building assets and
liabilities. Therefore the leases are accounted for as financing obligations.
In the first quarter of 2010, the Company extended the facilities leases for the current Los Gatos buildings
for an additional five year term after the remaining term of the original lease, thus increasing the future minimum
payments under lease financing obligations by approximately $14 million. The leases continue to be accounted
for as financing obligations and no gain or loss was recorded as a result of the lease financing modification. At
December 31, 2012, the lease financing obligation balance was $31.8 million, of which $1.2 million and
$30.6 million were recorded in “Accrued expenses” and “Other non-current liabilities,” respectively, on the
Consolidated Balance Sheets. The remaining future minimum payments under the lease financing obligation are
$15.1 million. The lease financing obligation balance at the end of the extended lease term will be approximately
$25.8 million which approximates the net book value of the buildings to be relinquished to the lessor.
In the fourth quarter of 2012, the Company entered into a facilities lease agreement to expand its Los Gatos
headquarters to a nearby site. The ten year lease term will commence after the construction of the buildings is
complete. Future minimum lease payments associated with this lease are $63.4 million as of December 31, 2012
and are included below.
Future minimum payments under lease financing obligations and non-cancelable operating leases as of
December 31, 2012 are as follows:
Year Ending December 31,
Future
Minimum
Payments
(in thousands)
2013 .......................................................... $ 24,016
2014 .......................................................... 16,651
2015 .......................................................... 17,393
2016 .......................................................... 17,718
2017 .......................................................... 13,839
Thereafter ...................................................... 49,741
Total minimum payments ......................................... $139,358
Rent expense associated with the operating leases was $29.7 million, $16.9 million and $14.9 million for the
years ended December 31, 2012, 2011 and 2010, respectively. Rent expense for the year ended
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