Table of Contents WEWORK COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2018 Members’ Service Retainers—Prior to moving into an office, members are generally required to provide the Company with a service retainer as detailed in their membership agreement. In the event of non-payment of membership or other fees by a member, pursuant to the terms of the membership agreements, the amount of the service retainer may be applied against the member’s unpaid balance. Leases and Deferred Rent Liabilities—The Company leases property for its collaborative workspaces and other locations. At the inception of each lease, management determines its classification as an operating or capital lease. For leases that qualify as operating leases, the Company recognizes the associated rent expense on a straight-line basis over the term of the lease beginning on the date of initial possession, which is generally when the Company enters the leased premises and begins to make improvements in preparation for its intended use. A large majority of the lease agreements contain provisions for free rent periods, rent escalation, tenant improvement allowances, brokerage commissions received by the Company for negotiating the Company’s leases, and/or contingent rent. The Company expends cash for leasehold improvements and to build out and equip its leased locations. Generally, a portion of the cost of leasehold improvements is reimbursed to us by our landlords as a tenant improvement allowance. The Company may also receive a broker commission for negotiating certain of the Company’s leases. When contractually due to us, these amounts are recorded as a lease incentive receivable and an increase in the deferred rent liability on the consolidated balance sheets and then the deferred rent liability established is amortized on a straight-line basis over the lease term as a reduction to rent expense. The lease incentive receivable is reduced when the cash has been collected from the landlord. Free rent periods and rent escalation clauses are also recorded on a straight-line basis over the lease term. In the initial years of a lease term that includes a free rent period and rent escalation clauses, cash payments are generally less than the rent expense recorded on a straight-line basis and the difference is recorded as an increase to the deferred rent liability on the consolidated balance sheets. In the later years of a lease term that includes a free rent period and rent escalation clauses, cash rental payments are generally higher than the amount of expense recognized on a straight-line basis and the deferred rent liability established in the earlier years of the lease term will amortize down to zero at the end of the lease. As a result, the portion of the unamortized balance of the deferred rent liability related to free rent periods and rent escalation clauses represents a future obligation to expend cash. The current portion of the deferred rent liability, that represents the net decrease in the deferred rent liability over the next twelve months, relating to the scheduled amortization of the tenant improvement allowances and broker commissions received and the amortization of the straight-line impact of free rent periods and rent escalations, is included as a component of other current liabilities on the accompanying consolidated balance sheets. Certain leases provide for contingent rent, determined in whole or in part, based on attainment of certain performance metrics. Once the achievement of the relevant thresholds are deemed to be probable and the contingent rent is estimable, contingent rent is accrued in proportion to the relevant performance during the period. Contingent rent reported in rent expense was $3.7 million, $7.7 million and $22.7 million for the years ended December 31, 2016, 2017 and 2018, respectively. All rent expense incurred before a workspace location opens for business is recorded in pre-opening location expenses on the accompanying consolidated statements of operations. Once a location opens for business to its members, the location’s rent expense is included in location operating expenses on the accompanying consolidated statements of operations. In addition, most leases require payment of real estate taxes, insurance, and certain common area maintenance costs in addition to minimum rent payments. These amounts are also included in location operating expenses or pre-opening location expenses on the accompanying consolidated statement of operations based on the status of the respective workspace location. F-16