Notes to Consolidated Financial Statements

(Unaudited)

1. Nature of Operations

Business Activities

Switch, Ltd. ("Switch") and its subsidiaries (collectively, the "Company") are limited liability companies that provide colocation space and related services to global enterprises, financial companies, government agencies, and others that conduct critical business on the internet. The Company develops and operates data centers in Nevada, which are Tier IV Gold certified, and Michigan, and is developing data centers in Georgia, delivering redundant services with low latency and super capacity transport environments.

2. Summary of Significant Accounting Policies

Basis of Presentation and Accounting

The accompanying consolidated financial statements are presented in accordance with generally accepted accounting principles in the United States of America ("GAAP"), and include the accounts of the Company. All significant intercompany transactions and balances have been eliminated.

Unaudited Interim Financial Information

The accompanying interim consolidated balance sheet as of September 30, 2017 , the interim consolidated statements of comprehensive income for the three and nine months ended September 30, 2017 and 2016 , the interim consolidated statement of members' equity and of cash flows for the nine months ended September 30, 2017 , and the consolidated financial data disclosed in these notes as of September 30, 2017 and for the three and nine months ended September 30, 2017 and 2016 are unaudited. The unaudited interim consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of these interim consolidated financial statements. The consolidated results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 , or for any other future annual or interim period. These interim consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and related notes for the year ended December 31, 2016 included in the Prospectus.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to the allowance for doubtful accounts, collectability of notes receivable, useful lives of property and equipment, equity-based compensation, deferred revenue, fair value of leased property at inception of lease term, fair value of deliverables under multiple element arrangements, probability assessments of exercising renewal options on leases and other than temporary impairments on investments. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable.

Cash

The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. The Company did not have any cash equivalents as of September 30, 2017 and December 31, 2016 .

Investments

The Company's investments in entities where it holds at least a  20%  ownership interest and has the ability to exercise significant influence, but not control, over the investee are accounted for using the equity method of accounting. The Company's share of the investee's results of operations is included in equity in (losses) net earnings of investments and foreign currency translation adjustments, as applicable, are included in other comprehensive income with a corresponding adjustment to its investment. The Company discontinues applying the equity method of accounting when the investment is reduced to zero. If the investee subsequently reports net income or other comprehensive income, the Company resumes applying the equity method of accounting only after its share of unrecognized net income and other comprehensive income, respectively, equals the share of losses not recognized during the period the equity method of accounting was suspended. The Company gives precedence to other comprehensive income and losses when determining whether to resume applying the equity method of accounting. Investments in entities where the Company holds less than a  20%  ownership interest are generally accounted for using the cost method of accounting.

In addition, the Company reviews its relationships with other entities to identify whether they are variable interest entities and to assess whether the Company is the primary beneficiary of such entity. If the determination is made that the Company is the primary beneficiary, then the entity is consolidated.

Fair Value Measurements

Financial assets and liabilities are recorded at fair value. The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The accounting guidance establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

Derivative Financial Instruments

A derivative is a financial instrument whose value changes in response to an underlying variable, requires little or no initial net investment and is settled at a future date. Derivatives are initially recognized at fair value on the date on which the derivatives are entered into and subsequently re-measured at fair value.

Embedded derivatives included in hybrid instruments are treated and disclosed as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract, the terms of the embedded derivative are the same as those of a stand-alone derivative and the combined contract is not measured at fair value through earnings. The financial host contracts are accounted for and measured using the applicable GAAP of the relevant financial instrument category.

The method of recognizing fair value gains and losses depends on whether the derivatives are designated as hedging instruments, and if so, the nature of the hedge relationship. All gains and losses from changes in the fair values of derivatives that do not qualify for hedge accounting are recognized immediately in earnings. As of September 30, 2017 and December 31, 2016 , the Company's identified embedded derivative does not qualify for hedge accounting (Note 5).

During the nine months ended September 30, 2017 , the Company entered into an agreement for the purchase of electricity (Note 9). The accounting guidance for derivative instruments provides a scope exception for commodity contracts that meet the normal purchase and sales criteria specified in the standard. The normal purchases and normal sales exception requires, among other things, physical delivery in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that are designated as normal purchases and normal sales are not recorded on the consolidated balance sheets at fair value.

Concentration of Credit and Other Risks

Although the Company operates primarily in Nevada, realization of its customer accounts receivable and its future operations and cash flows could be affected by adverse economic conditions, both regionally and elsewhere in the United States. During the three months ended September 30, 2017 and 2016 , the Company's largest customer and its affiliates comprised 12% and 13% , respectively, of the Company's revenue. During the nine months ended September 30, 2017 and 2016 , the Company's largest customer and its affiliates comprised 10% and 14% , respectively, of the Company's revenue. No single customer accounted for 10% or more of accounts receivable as of September 30, 2017 or December 31, 2016 .

The Company generally carries cash on deposit with financial institutions in excess of federally insured limits.

Through May 31, 2017, the Company was also exposed to a limited extent, to a risk of unfavorable price increases from its principal provider of power, Nevada Power Company dba NV Energy ("NV Energy"), whose rates are set by and services are regulated by the Public Utilities Commission of Nevada ("PUCN"). On June 1, 2017, the Company became an unbundled purchaser of energy in Nevada.

Accounts Receivable

Customer receivables are non-interest bearing and the Company generally does not request collateral from its customers, however, it usually obtains a lien or other security interest in certain customers' equipment placed in the Company's data center, and/or obtains a deposit. In the event collection is not reasonably assured at inception of a contract, recognition of related revenue is deferred generally until receipt of cash payment. The Company maintains an allowance for doubtful accounts for estimated losses up to the full amount of invoices based on the age of the invoices. If the financial condition of the Company's customers were to deteriorate or if they became insolvent, resulting in an impairment of their ability to make payments, greater

allowances for doubtful accounts may be required. Management specifically analyzes accounts receivable and current economic news and trends, historical bad debt, customer concentrations, customer credit-worthiness and changes in customer payment terms when evaluating revenue recognition and the adequacy of the Company's reserves. Delinquent account balances are written-off after management has determined the likelihood of collection is not probable. The Company recorded bad debt expense (recovery) of $167,000 and $(223,000) for the three months ended September 30, 2017 and 2016 , respectively, and $172,000 and $37,000 for the nine months ended September 30, 2017 and 2016 , respectively.

Notes Receivable

Notes receivable are recorded at amortized cost using the interest method. The Company evaluates the collectability of both principal and interest based on an assessment of any significant changes in the amount and timing of the expected future cash flows. As of December 31, 2016 , the Company fully impaired the carrying value of its notes receivable (Note 5).

Internal Use Software

The Company capitalizes certain costs incurred in connection with developing or obtaining internal use software. Capitalized software costs placed into service are included in computer equipment, furniture and fixtures within property and equipment, net on the consolidated balance sheets and are amortized on a straight-line basis over a three -year period. Software costs that do not meet capitalization criteria are expensed immediately. The Company capitalized internal use software costs of $70,000 and $473,000 , respectively, during the three months ended September 30, 2017 and 2016 , and $1.2 million and $670,000 during the nine months ended September 30, 2017 and 2016 , respectively.

Property and Equipment

Property and equipment is stated at cost. Depreciation and amortization of property and equipment is computed using the straight-line method over the estimated useful lives of the respective assets. The cost and accumulated depreciation of property and equipment retired or otherwise disposed of are eliminated from the respective accounts and any resulting gain or loss is included in operations. Costs of repairs and maintenance are expensed as incurred. For assets held under capital leases, the estimated useful lives are limited to the shorter of the useful life of the asset or the term of the lease, including renewal option periods if exercise is intended (Note 7). Amortization of assets that are recorded under capital leases is included in depreciation expense. For assets used in data center operations, the related depreciation and amortization are included in cost of revenue.

The Company's estimated useful lives of its property and equipment are as follows (in years):

In addition, the Company has capitalized interest costs during the construction phase of data centers. Once a data center or expansion project becomes operational, these costs are allocated to certain property and equipment categories and are depreciated over the estimated useful life of the underlying assets.

Impairment of Long‑Lived Assets

The Company's long‑lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset group exceeds the fair value of the asset group.

Portfolio Energy Credits

The Company recognizes portfolio energy credits ("PECs") at their cost when purchased as an intangible asset, subject to impairment testing. PECs are not considered outputs by the Company. Amortization of PECs is recorded within cost of revenue on the consolidated statements of comprehensive income when PECs are utilized in operations.

Deferred Debt Issuance Costs

Costs incurred in obtaining certain debt financing are deferred and amortized over the terms of the related debt instruments using the interest method for term debt and the straight-line method for revolving debt.

Deferred Offering Costs

The Company capitalizes certain legal, accounting, and other third-party fees that are directly associated with in-process equity financings until such financings are consummated. After consummation of the equity financing, these costs are recorded in stockholders' equity as a reduction of additional paid-in capital generated as a result of the offering. As of September 30, 2017 , the Company recorded $4.1 million of deferred offering costs within other assets in the accompanying consolidated balance sheets in contemplation of the IPO. Upon the successful consummation of the IPO in October 2017, the deferred offering costs were recorded immediately in Switch, Inc.s' stockholders' equity as a reduction of additional paid-in capital generated as a result of the IPO. The Company did not record any deferred offering costs as of December 31, 2016 .

Foreign Currency Translation

SUPERNAP International, S.A. ("SUPERNAP International"), an equity method investment of the Company, has investments in foreign subsidiaries. Gains or losses from translation of foreign operations where the local currency is the functional currency are included in other comprehensive income.

Revenue Recognition

During the nine months ended September 30, 2017, the Company derived more than 95% of its revenue from recurring revenue streams, consisting primarily of (1) colocation, which includes the licensing of cabinet space and power; and (2) connectivity services, which includes cross-connects, broadband services, and external connectivity. The remainder of the Company's revenue is from non-recurring revenue streams, which primarily include installation and contract settlements. Recurring revenue is generally billed monthly and recognized ratably over the period to which the service relates. The Company's contracts with its customers generally have terms of three to five years. Non-recurring installation fees, although generally paid in a lump sum upon installation, are deferred and recognized ratably over the expected life of the installation, which was 73 months as of September 30, 2017 and December 31, 2016 . The expected life of the installation is determined based on (i) the weighted-average term of new contracts entered into during the period with customers, plus (ii) the average term of contract renewals entered into during the period with existing customers. Revenue from connectivity services is generally recognized on a gross basis in accordance with the accounting standard related to reporting revenue gross as a principal versus net as an agent, primarily because the Company acts as the principal in the transactions, takes title to services and bears credit risk. Revenue from contract settlements, which result when a customer wishes to terminate their contract early, is generally recognized when no remaining performance obligations exist, to the extent that the revenue has not previously been recognized.

The Company guarantees certain service levels, such as uptime, as outlined in individual customer contracts. If these service levels are not achieved, the Company reduces revenue for any credits given to the customer as a result. There were no service level credits issued during the three and nine months ended September 30, 2017 and 2016 .

Revenue is recognized only when the service has been provided and when there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection of the receivable is reasonably assured. It is the Company's customary business practice to obtain a signed colocation facility agreement and service order prior to recognizing revenue in an arrangement. The Company assesses collectability based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. The Company generally does not request collateral from its customers except it usually obtains a lien and/or other security interest in a customer's equipment placed in the Company's data centers or obtains a deposit. If the Company determines that collection of a fee is not reasonably assured, the fee is deferred and revenue is recognized at the time collection becomes reasonably assured, which is generally upon receipt of cash.

Multiple Element Arrangements

The Company enters into multiple element revenue arrangements in which a customer may purchase a combination of the right to use network capacity (e.g., conduit and fiber optic cables), maintenance services, and colocation services. Terms of performance, cancellation, termination, or refunds in these arrangements are similar to those for individual stand-alone deliverables. To the extent these revenue arrangements involve the use of property and equipment, they are evaluated under lease accounting guidance to determine whether the arrangement meets the definition of a lease. None of the multiple element arrangements entered into by the Company during any of the periods presented have met the definition of a lease.

The services offered under these revenue arrangements qualify as separate units of accounting. Multiple deliverables within revenue arrangements are allocated to separate units of accounting if the deliverables meet both of the following criteria:

At the inception of a multiple element arrangement, the Company: (1) determines whether and when each unit of accounting has been delivered or performed; (2) determines the fair value of each unit of accounting using the selling price hierarchy of vendor-specific evidence of fair value ("VSOE") if available, third-party evidence ("TPE") if VSOE is not available, and management's best estimate of the selling price ("BESP") if neither VSOE nor TPE is available; and (3) allocates the total price among the various units of accounting using the relative selling price method. Once the total price has been allocated among the various units of accounting, revenue is recognized when the relevant revenue recognition criteria are met for each element, which is upon acceptance or use of the services by the customer. VSOE generally exists when the deliverable is sold separately; however, in certain instances VSOE cannot be established if the deliverable cannot be priced within a narrow range or has a limited sales history. TPE is determined based on competitor prices for similar deliverables when sold separately. The Company determines BESP for a product or service by considering multiple factors including, but not limited to, pricing practices, market conditions, competitive landscape, type of customer, geographies, internal costs, and gross margin objectives. Revenue is allocated to rights to use network capacity and related colocation services and maintenance services under these arrangements based on TPE. Revenue allocated to other colocation services provided under these arrangements is based on VSOE.

Income Taxes

Since limited liability companies are "pass-through" entities under the U.S. Internal Revenue Code, the members of the Company are taxed directly on their respective ownership interests in consolidated income, and, therefore, no provision or liability for federal income tax has been included in the accompanying consolidated financial statements.

Based on management's evaluations, since there are no conditions or uncertainties that present any material risk of loss of the pass-through status of the Company or other identified uncertain tax positions to be taken or taken in previously filed federal or state income tax returns that remain subject to examination by relevant tax authorities (presently consisting of those for tax years 2014 through 2016), the related provisions of GAAP relative to uncertain tax positions have had no effect on the Company's consolidated financial statements. The Company's policy is to record estimated probable penalties and interest to be assessed to the Company, if any, related to income tax matters as selling, general and administrative expense.

Advertising Costs

Advertising costs are expensed when incurred and are included in selling, general and administrative expense in the accompanying consolidated statements of comprehensive income. Advertising expense was $351,000 and $597,000 for the three months ended September 30, 2017 and 2016 , respectively, and $1.3 million and $1.5 million for the nine months ended September 30, 2017 and 2016 , respectively.

Equity-Based Compensation

Equity-based compensation cost is measured at the grant date for all equity-based awards made to employees and members based on the fair value of the awards and is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.

The Company grants equity awards to its employees and members and these equity awards generally have only a service condition. The Company's equity awards vest up to five years. The Company uses the Black-Scholes option-pricing model to determine the fair value of its equity awards. The determination of the fair value of equity awards is affected by assumptions regarding a number of complex and subjective variables including the fair value of the Company's member equity units, the expected price volatility of the member equity units over the term of the awards and actual and projected employee unit option exercise or purchase behaviors. The Company's member equity units' fair value per unit is estimated using a weighted average approach of a combination of the following three methods: (1) publicly traded data center company multiples; (2) data center precedent transaction multiples; and (3) the discounted cash flow method based on the Company's five-year forecast. The weighting of these three methods varied over time. The Company estimates the expected volatility by analyzing the volatility of companies in the same industry and selecting volatility within the range. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term of the equity awards. The expected dividend rate is determined at the grant date for each equity award. The expected term of the equity award is calculated by analyzing the historical exercise data and obtaining the weighted average of the holding period for the equity awards.

Net Income per Unit

Basic net income per unit is computed by dividing net income by the weighted-average number of units outstanding during the period. Diluted net income per unit is computed giving effect to all potential weighted average dilutive units including options, and incentive units. The dilutive effect of outstanding awards, if any, is reflected in diluted earnings per unit by application of the treasury stock method. Refer to Note 13 for further information on net income per unit.

Recent Accounting Pronouncements

ASU 2014-09 Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). The ASU replaces much of the current guidance regarding revenue recognition including most industry-specific guidance. The core principle of the ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity will be required to identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligation in the contract, and recognize revenue when (or as) the entity satisfies a performance obligation. In addition to the new revenue recognition requirements, entities will be required to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Entities may choose between two retrospective transition methods when applying the ASU. In July 2015, the FASB voted to defer the effective date by one year (ASU 2015-14) to December 15, 2018 for annual reporting periods beginning after that date, and interim periods within annual periods beginning after December 15, 2019, and permitted early adoption of the standard, but not before the original effective date of December 15, 2017. Companies may use either a full retrospective or a modified-retrospective approach to adopt the standard.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers - Principal versus Agent Considerations Reporting ("ASU 2016-08"). The core principle of the guidance in Revenue from Contracts with Customers in ASU 2014-09 is not changed by the amendments in ASU 2016-08. The amendments clarify the implementation guidance on principal versus agent considerations. Per ASU 2016-08, when another party is involved in providing goods or services to a customer, an entity is required to determine whether the nature of its promise is to provide the specified good or service itself (principal) or to arrange for that good or service to be provided by the other party (agent). When an entity that is a principal satisfies a performance obligation, the entity recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred to the customer. When an entity that is an agent satisfies a performance obligation, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled. The effective date and transition requirements for ASU 2016-08 are the same as the effective date and transition requirements for ASU 2014-09.

In April 2016 and May 2016, the FASB issued guidance which amends certain other aspects of ASU 2014-09. The amendments include the identification of performance obligations and the licensing implementation guidance (ASU 2016-10) and the collectability of revenue, presentation of sales tax and other similar taxes collected from customers, contracts containing noncash considerations, and contract modifications and completed contracts at transition (ASU 2016-12). In December 2016, the FASB amended ASU 2014-09 to make minor corrections and minor improvements to the guidance that are not expected to have a significant effect on current accounting practice or create a significant administrative cost. The effective date and transition provisions in these amendments are aligned with the requirements of ASU 2014-09.

The Company is in the process of selecting a transition method and determining the effect of this guidance on its consolidated financial statements.

ASU 2014-15 Presentation of Financial Statements - Going Concern

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern ("ASU 2014-15"), which provides guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The adoption of ASU 2014-15 during the year ended December 31, 2016 did not impact the Company's consolidated financial statements.

ASU 2015-02 Consolidation (Topic 810): Amendments to the Consolidation Analysis

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis ("ASU 2015-02"). This standard modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities.  The adoption of ASU 2015-02 in the first quarter of 2017 did not impact the Company's consolidated financial statements.

ASU 2016-02 Leases (Topic 842)

On February 25, 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"). The principle of ASU 2016-02 is that a lessee should recognize the assets and liabilities that arise from leases. Lessees will need to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability. For income statement purposes, ASU 2016-02 requires leases to be classified as either operating or finance. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. ASU 2016-02 is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. The new standard must be adopted using a modified-retrospective transition, and

provides for certain practical expedients. The Company is evaluating the potential effects of the adoption of this ASU on its consolidated financial statements. The Company has not decided if early adoption will be considered.

ASU 2016-09 Stock Compensation - Improvements to Employee Share-Based Payment Accounting

In March 2016, the FASB issued ASU 2016-09, Stock Compensation - Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 was issued to simplify accounting guidance by identifying, evaluating, and improving areas for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The areas affected by ASU 2016-09 include accounting for income taxes, classification of excess tax benefits on the statement of cash flows, minimum statutory tax withholding requirements, and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. In addition, under this guidance, an entity can make an accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. Upon adoption of this guidance during the first quarter of 2017, the Company changed its policy to account for forfeitures as they occur. The adoption of this guidance during the first quarter of 2017 did not materially impact the Company's consolidated financial statements.

ASU 2016-13 Financial Statements - Credit Losses

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses ("ASU 2016-13"). Under this guidance, a company will be required to use a new forward-looking "expected loss" model for trade and other receivables that generally will result in the earlier recognition of allowances for losses. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021, and requires a modified-retrospective approach to adoption. Early adoption is permitted in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is evaluating the potential effects the adoption of this standard will have on its consolidated financial statements. The Company has not decided if early adoption will be considered.

ASU 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). The areas affected by ASU 2016-15 are debt prepayment and debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies), distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. Specifically, under this guidance, cash payments for debt prepayment or debt extinguishment costs will be classified as cash outflows for financing activities. The amendments in ASU 2016-15 are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in ASU 2016-15 will be applied using a retrospective transition method to each period presented. The adoption of ASU 2016-15 is not expected to materially impact the Company's consolidated financial statements. The Company has not decided if early adoption will be considered.

ASU 2017-09 Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting ("ASU 2017-09"). This update provides clarify and reduces both diversity in practice and cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. For all entities, the amendments in ASU 2017-09 are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The adoption of ASU 2017-09 is not expected to materially impact the Company's consolidated financial statements. The Company has not decided if early adoption will be considered.

3. Property and Equipment, Net

Property and equipment, net, consists of the following as of:

During the three months ended September 30, 2017 and 2016 , depreciation and amortization expense was $22.9 million and $16.5 million , respectively. During the nine months ended September 30, 2017 and 2016 , depreciation and amortization expense was $64.7 million and $47.6 million , respectively. Accumulated amortization for the capitalized leased assets totaled $7.9 million and $6.6 million as of September 30, 2017 and December 31, 2016 , respectively.

During the nine months ended September 30, 2017 and 2016 , capitalized interest was $2.1 million and $1.9 million , respectively.

4. Long-Term Deposit

On March 10, 2015, NV Energy and the Company entered into a Substation Agreement and related land purchase agreement for land owned by a wholly-owned subsidiary of Switch. Pursuant to the Substation Agreement, NV Energy will design, construct, maintain, and own a substation and related feeders in connection with service to Switch's development of three of its data center facilities in Las Vegas. The substation was placed into service in April 2016. Switch has paid the associated costs and associated tax gross-up related to the development of the substation and related feeders as defined in the Substation Agreement. These costs are subject to reimbursement based upon Switch's future power usage. Costs incurred as of December 31, 2016 totaled $6.2 million , of which $4.4 million are classified as long-term deposits and $1.8 million as property and equipment on the consolidated balance sheets. On October 30, 2017, a reimbursement of $1.4 million was received related to the substation, of which $178,000 was classified as long-term deposits and $1.2 million as property and equipment. This reimbursement was given retroactive effect in the consolidated balance sheets and costs incurred as of September 30, 2017 totaled $4.8 million , of which $4.3 million is classified as long-term deposits and $544,000 as property and equipment.

5. Equity Method Investments

The Company currently holds two investments, SUPERNAP International and Planet3, Inc. ("Planet3"). As of September 30, 2017 and December 31, 2016 , the Company determined that it continued to have a variable interest in both SUPERNAP International and Planet3, as the entities do not have sufficient equity at risk. However, the Company concluded that it is not the primary beneficiary of SUPERNAP International or of Planet3 as it does not have deemed control of either entity. As a result, it does not consolidate either entity into its consolidated financial statements.

As of September 30, 2017 and December 31, 2016, the investment in SUPERNAP International was accounted for under the equity method of accounting. SUPERNAP International is an investment of which the Company holds a 50% ownership interest. As of September 30, 2017 and December 31, 2016 , the Company had invested $1.3 million in SUPERNAP International. As of September 30, 2017 , the Company's carrying value of its investment in SUPERNAP International was reduced to zero as a result of recording its share of the investee's losses. Accordingly, as the Company does not have any guaranteed obligations and is not otherwise committed to provide further financial support to SUPERNAP International, the

Company discontinued the equity method of accounting for its investment in SUPERNAP International as of September 30, 2017 and will not provide for additional losses until its share of future net income or comprehensive income, if any, equals the share of net losses not recognized during the period the equity method was suspended. The Company's share of net loss recorded for the three months ended September 30, 2017 and 2016 amounted to $221,000 and $390,000 , respectively. The Company's share of net loss recorded for the nine months ended September 30, 2017 and 2016 amounted to $1.0 million and $1.3 million , respectively. As of September 30, 2017 and December 31, 2016 , the Company had recorded amounts consisting of reimbursable expenses due from SUPERNAP International of $760,000 and $1.4 million , respectively, within accounts receivable on the consolidated balance sheets.

Planet3 is an investment of which the Company holds a 45% ownership interest. As of September 30, 2017 and December 31, 2016 , the Company had invested $10.0 million in Planet3. The Company's share of net loss recorded for the three and nine months ended September 30, 2016 amounted to $868,000 and $2.5 million , respectively. As of December 31, 2016 , as the Company does not have any guaranteed obligations and is not otherwise committed to provide further financial support to Planet3, the Company discontinued the equity method of accounting for its investment in Planet3 and will not provide for additional losses until its share of future net income, if any, equals the share of net losses not recognized during the period the equity method was suspended.

On May 13, 2016, Switch entered into an agreement with Planet3 (the "Note Purchase Agreement") pursuant to which Planet3 agreed to issue to Switch secured convertible promissory notes with an aggregate principal amount not to exceed $3.0 million . Interest accrues on the unpaid principal balance of the notes at 5% per annum. The notes, together with any then unpaid and accrued interest, matured on September 1, 2017. On the maturity date, the outstanding principal balance and accrued interest, if any, can be converted at the Company's option into ownership interests of Planet3. On September 6, 2017, the Company delivered to Planet3 a Notice of Default. As of September 30, 2017, the Company has not exercised its option. As of December 31, 2016 , the Company had purchased notes having an aggregate principal amount of $3.0 million . If a qualified financing, as defined in the notes, occurs on or prior to the maturity date, then, upon the closing of the qualified financing, the outstanding principal amount of the notes and all accrued and unpaid interest shall automatically convert into shares of the preferred stock issued by Planet3 at a discount. The Company had identified and separately accounted for an embedded derivative related to the automatic conversion feature of the secured convertible promissory notes. The estimated fair value of the embedded derivative was based on Level 3 inputs, such as the value of the preferred stock upon conversion, using a present value of future cash flow valuation technique that relies on management assumptions of the probability of occurrence, term, and the risk-free discount rate. The estimated fair value of the embedded derivative was immaterial as of September 30, 2017 and December 31, 2016 .

As of December 31, 2016 , the Company determined an other than temporary loss in value of its investment in Planet3 had occurred due to Planet3's continued operating losses and the release of a beta product that did not generate the projected sales activity. The Company fully impaired the carrying values of its investment in Planet3 of $4.4 million , notes receivable of $2.4 million , net of a $629,000 discount, interest receivable of $55,000 , and related embedded derivative of $896,000 for a total write-down of $7.7 million . The estimated fair value of the Company's investment in Planet3 was based on Level 3 inputs, using a present value of future cash flow valuation technique that relies on management assumptions to derive an enterprise value.

6. Long-Term Debt

2015 Credit Agreement

On May 5, 2015, the Company entered into a credit agreement ("2015 Credit Agreement") with Wells Fargo Bank, National Association, as administrative agent, and certain other lenders, which replaced the Company's previous $250.0 million credit agreement. The 2015 Credit Agreement consisted of a $200.0 million term loan facility (the "2015 Term Loan Facility") and a $400.0 million revolving credit facility (the "2015 Revolving Credit Facility," and, together with the 2015 Term Loan Facility, the "2015 Facilities"), each with a term of five years.

Upon satisfying certain conditions, the 2015 Credit Agreement provided that the Company could increase the amount available for borrowing under the 2015 Facilities no more than five times (up to an additional $125.0 million in total) during the term of the 2015 Credit Agreement. On May 2, 2016, the Company amended the 2015 Credit Agreement to increase the aggregate amount available for borrowing under the 2015 Facilities by an additional $125.0 million and to modify certain other terms and conditions. On the closing date of the amendment, the Company recorded additional deferred debt issuance costs of $1.0 million , of which $860,000 related to the 2015 Revolving Credit Facility and $145,000 related to the 2015 Term Loan Facility. Total deferred debt issuance costs as of December 31, 2016 totaled $3.4 million , net of accumulated amortization of $1.4 million . Net debt issuance costs related to the 2015 Term Loan Facility are presented together with long-term debt and were $2.2 million as of December 31, 2016 . Net debt issuance costs associated with the 2015 Revolving Credit Facility are included within other assets and were $1.1 million as of December 31, 2016 .

The 2015 Facilities were collateralized by substantially all of the Company's tangible and intangible personal property and guaranteed by certain of the Company's wholly-owned subsidiaries. Interest on the 2015 Facilities was calculated based on a base rate plus the applicable margin or a LIBOR rate plus the applicable margin, at the Company's election. Interest calculations were based on 365/366 days for a base rate loan and 360 days for a LIBOR loan. Base rate interest payments were due and payable in arrears on the last day of each calendar quarter, beginning December 31, 2015 . LIBOR rate interest payments were due and payable on the last day of each selected interest period (not to extend beyond three-month intervals).

The 2015 Facilities had, among other things, financial and other covenants. Beginning with the fiscal quarter ended September 30, 2015 , the 2015 Credit Agreement required compliance with the consolidated total leverage and consolidated fixed charge coverage ratios (as defined in the 2015 Credit Agreement). As of December 31, 2016 , the maximum consolidated total leverage ratio was 4.25 to 1.00 and the minimum consolidated fixed charge coverage ratio was 1.50 to 1.00 . The maximum consolidated total leverage ratio was subject to change periodically for future fiscal quarters. The Company was in compliance with these covenants as of December 31, 2016 .

The terms of the 2015 Facilities limited the Company's ability, among other things, to return capital to equity interest holders, grant liens on its assets, and incur additional debt. The Company's net assets were subject to restrictions, including the ability to pay distributions. As of December 31, 2016 , none of the Company's net assets were deemed restricted under the 2015 Facilities.

2017 Credit Agreement

On June 27, 2017, the Company entered into an amended and restated credit agreement ("2017 Credit Agreement") with Wells Fargo Bank, National Association, as administrative agent, and certain other lenders, consisting of a $600.0 million term loan facility (the "2017 Term Loan Facility"), maturing on June 27, 2024, and a $500.0 million revolving credit facility (the "2017 Revolving Credit Facility," and, together with the 2017 Term Loan Facility, the "2017 Facilities"), maturing on June 27, 2022, which replaced the Company's 2015 Credit Agreement, as defined above. The 2017 Term Loan Facility is subject to principal amortization of $1.5 million per calendar quarter commencing on September 30, 2017. In addition, the 2017 Term Loan Facility has a prepayment premium of 1.0% of the aggregate principal outstanding in the event that, prior to the six-month anniversary of the closing date, the Company enters into a repricing transaction.

Upon satisfying certain conditions, the 2017 Credit Agreement provides that the Company can increase the amount available for borrowing under the 2017 Facilities no more than five times (up to an additional $75.0 million in total, plus an additional amount subject to certain leverage restrictions) during the term of the 2017 Credit Agreement.

The Company recorded debt issuance costs of $8.8 million on the closing date related to the 2017 Credit Agreement, of which $5.6 million related to the 2017 Term Loan Facility and $3.2 million related to the 2017 Revolving Credit Facility. In connection with the 2017 Credit Agreement, $811,000 of the unamortized debt issuance costs on the 2015 Revolving Credit Facility continued to be deferred as a result of modification accounting. Unamortized debt issuance costs as of September 30, 2017 totaled $9.3 million . Unamortized debt issuance costs related to the 2017 Term Loan Facility are presented together with long-term debt and were $5.4 million as of September 30, 2017 . As of September 30, 2017 , unamortized debt issuance costs are included within other assets and were comprised of $3.1 million related to the 2017 Revolving Credit Facility and $771,000 associated with the modification accounting on the 2015 Revolving Credit Facility.

The 2017 Facilities are collateralized by substantially all of the Company's tangible and intangible personal property and guaranteed by certain of the Company's wholly-owned subsidiaries. Interest on the 2017 Facilities is calculated based on the base rate plus the applicable margin or a LIBOR rate plus the applicable margin, at the Company's election. Interest calculations are based on 365/366 days for a base rate loan and 360 days for a LIBOR loan. Base rate interest payments are due and payable in arrears on the last day of each calendar quarter, beginning September 30, 2017. LIBOR rate interest payments are due and payable on the last day of each selected interest period (not to extend beyond three-month intervals). In addition, the 2017 Revolving Credit Facility incurs a fee on unused lender commitments based on the applicable margin and payments are due and payable in arrears on the last day of each calendar quarter, beginning September 30, 2017.

The 2017 Facilities have, among other things, financial and other covenants. Beginning with the fiscal quarter ended June 30, 2017, the 2017 Credit Agreement required compliance with the consolidated total leverage ratio (as defined in the 2017 Credit Agreement). As of September 30, 2017 , the maximum consolidated total leverage ratio was 6.00 to 1.00 . The maximum consolidated total leverage ratio is subject to change periodically for future fiscal quarters. The Company was in compliance with this covenant as of September 30, 2017 .

The terms of the 2017 Facilities limit the Company's ability, among other things, to incur additional debt, incur additional liens, encumbrances or contingent liabilities, and pay distributions or make certain other restricted payments (with certain exceptions and baskets, including a restricted payment basket of $15.0 million per fiscal year).

As of September 30, 2017 , long-term debt maturities are as follows (in thousands):

The Company leases the land and building for one of its data centers from an entity in which a member of Switch, Inc.'s Board of Directors has a beneficial ownership interest, under which the building portion of the lease has been capitalized. Pursuant to GAAP, the lease attributable to the land is accounted for as an operating lease. The lease expires in 2033 with two subsequent 10 -year and one five -year renewal option periods.

As of September 30, 2017 , minimum payment obligations for this capital lease are as follows:

* Until 2023, capital lease payments are applied only to accrued interest, thus, there is no current portion.

In February 2016, a wholly-owned subsidiary of Switch acquired rights and interests to manage, construct and use the Nevada Broadband Telemedicine Initiative ("NBTI") fiber network. The right to use the NBTI fiber network is accounted for as a capital lease. As of September 30, 2017 and December 31, 2016 , capital lease assets related to the NBTI fiber network were $16.1 million and $15.9 million , respectively, and related future minimum payment obligations are $3.5 million during the year ending December 31, 2017 . The capital lease will expire 25 years from the date the network is accepted by the Nevada Hospital Association, the entity that holds title to the network, and has a 25 -year renewal option. Acceptance occurred in September 2017.

The Company is the sole consumer of output from four feeders related to a substation owned by NV Energy (Note 4). The Company accounts for this arrangement as a capital lease. As of September 30, 2017 and December 31, 2016 , capital lease assets related to the feeders were $259,000 and $930,000 , respectively. There are no future minimum payment obligations related to this capital lease. The capital lease will expire 39 years from the date the substation was placed into service, which was April 2016.

Operating Lease Commitments

The Company leases land, warehouse storage space and data center buildings under operating leases (including the land portion of the capitalized building lease) that have non-cancellable terms expiring through 2066 with entities in which a member of Switch, Inc.'s Board of Directors has a beneficial ownership interest.

In addition, the Company leases warehouse storage space, storage yards for fiber and construction materials and equipment under operating leases in Nevada that have non-cancellable terms expiring through 2055.

As of September 30, 2017 , future minimum lease payments for all operating leases with remaining terms in excess of one year are as follows:

During the three months ended September 30, 2017 and 2016 , rent expense related to operating leases was approximately $1.8 million and $2.2 million , respectively. During the nine months ended September 30, 2017 and 2016 , rent expense related to operating leases was approximately $5.4 million and $6.4 million , respectively. Related party rent included in these amounts was approximately $1.3 million and $1.1 million for the three months ended September 30, 2017 and 2016 , respectively. Related party rent included in these amounts was approximately $3.6 million and $3.1 million for the nine months ended September 30, 2017 and 2016 , respectively.

8. Retirement Benefit Plans

The Company has a defined contribution retirement plan that covers its eligible employees (the "Plan"). The Plan is qualified in accordance with section 401(k) of the Internal Revenue Code. Eligible employees can participate in the Company's pre-tax 401(k) plan or after-tax Roth 401(k) plan. As of February 2016, the Company makes matching contributions equal to 100% of the first 3% of compensation deferred by a participant. The Company may make a discretionary additional matching contribution. The Company recognized expense related to its contributions to the Plan of $283,000 and $232,000 for the three months ended September 30, 2017 and 2016 , respectively, and $880,000 and $589,000 for the nine months ended September 30, 2017 and 2016 , respectively. 

9. Commitments and Contingencies

Purchase Commitments

In August 2017, a wholly-owned subsidiary of Switch assumed agreements from an entity in which a member of Switch, Inc.'s Board of Directors has a beneficial ownership interest for the purchase of three parcels of land in southern Nevada for an aggregate purchase price of $7.6 million , which was deposited in escrow as of September 30, 2017 and recorded within other current assets on the consolidated balance sheets. These transactions closed in October 2017.

On March 8, 2017, the Company entered into a firm Power Purchase & Sale Agreement of electricity with Morgan Stanley Capital Group Inc. to purchase a minimum of 40 megawatts per energy hour for a term of 36 months, or a minimum purchase commitment of $33.4 million during the term, starting June 1, 2017. The remaining minimum purchase commitment is $32.5 million as of September 30, 2017 .

In December 2016, the Company notified the landlord for its data center building and land in Michigan of its intent to exercise the purchase option pursuant to the lease agreement. The purchase price of $25.0 million , less 65% of all rent payments made to the landlord, will be payable upon closing of the sale by January 1, 2018. The Company has recorded the present value of the adjusted purchase price within accrued Michigan building and land purchase on the consolidated balance sheet as of September 30, 2017 and December 31, 2016 .

In September 2016, the Company entered into a take-or-pay contract with a lit fiber transport services vendor whereby the Company will be required to purchase a minimum of $75,000 in eligible services on a monthly basis for a term equal to or greater than 24 months beginning 12 months after the eligible services are made available. The eligible services were made available in September 2017.

In June 2015, the Company entered into an agreement for the purchase of three parcels of land in northern Nevada. The first closing on two of the land parcels was completed in August 2015 in accordance with the agreement. The second closing on the third land parcel with a purchase price of $5.4 million will occur on or before 36 months after the date of the first closing, or by August 1, 2018.

PEC Purchase Commitments

In November 2015, the Company entered into a five -year contract beginning January 1, 2016 with the Southern Nevada Water Authority ("SNWA") to purchase an estimated 82 million in PECs, or a minimum remaining purchase commitment of $574,000 during the term, from the 14 megawatt solar photovoltaic generating plant constructed at SNWA's River Mountains Water Treatment Facility to meet its anticipated requirements under the State of Nevada's Renewal Portfolio Standard Statute.

In November 2015, the Company entered into a renewable energy agreement with NV Energy to purchase all PECs realized from Switch Station 2, a 79 megawatt photovoltaic solar generation facility currently under construction, for a minimum purchase commitment of $13.2 million during the term. The term of the renewable energy agreement is 20 years from the commercial operation date of Switch Station 2, which achieved commercial operation on October 11, 2017.

In June 2015, the Company entered into a renewable energy agreement with NV Energy to purchase all PECs realized from Switch Station 1, a 100 megawatt photovoltaic solar generation facility currently under construction, not to exceed the Company's total electric load from its data center facilities, for a minimum purchase commitment of $21.6 million during the term. The term of the renewable energy agreement is 20 years from the commercial operation date of Switch Station 1, which was July 21, 2017.

As of September 30, 2017 , future minimum PEC purchase commitments are as follows (in thousands):

Impact Fee Expense

On September 30, 2016, Switch filed its application with the PUCN to become an unbundled purchaser of energy, capacity, and/or ancillary services in Nevada from a new provider of electric resources. The application was approved on December 28, 2016 and Switch elected to pay the impact fee to NV Energy, the Company's energy provider in Nevada through May 31, 2017, of $27.0 million in a lump sum by the earlier of August 1, 2017 or the date by which Switch is able to secure all necessary rights and contracts, including its Network Integration Transmission Service agreements with NV Energy and other compliance items. As there is no future economic benefit to the Company from the impact fee, it was recognized as an expense within impact fee expense during the year ended December 31, 2016 in the consolidated statements of comprehensive income. The Company paid the accrued impact fee of $27.0 million on May 31, 2017 and became an unbundled purchaser of energy in Nevada on June 1, 2017.

Self-Insurance Reserves

Effective January 1, 2017, the Company is self-insured for various levels of employee health coverage. Insurance reserves include accruals for estimated settlements for known claims, as well as accruals for estimates of incurred but not reported claims. As of September 30, 2017 , the estimated liabilities for unpaid and incurred but not reported claims totaled $280,000 , which is included within accrued expenses on the consolidated balance sheets.

Energy Litigation

In July 2016, Switch filed a lawsuit in the U.S. District Court for the District of Nevada against, among other parties, the PUCN and the former Commissioners of the PUCN, NV Energy, and the former General Counsel to the PUCN Commissioners. The lawsuit alleged, among other things, that the defendants violated state and federal law to conspire and defraud Switch so that NV Energy could unlawfully retain Switch as a customer of NV Energy and impair renewable energy development in the state of Nevada. Switch sought damages, attorneys' fees, costs and preliminary injunctive relief. On December 21, 2016, Switch and NV Energy agreed to settle the lawsuit on confidential terms which do not create any material financial liability to Switch. On January 4, 2017, Switch filed a voluntary dismissal of the energy litigation lawsuit with the U.S. District Court for the District of Nevada.

Patent Litigation

On August 7, 2017, Switch filed a lawsuit in the U.S. District Court for the Eastern District of Texas against Aligned Data Centers LLC ("Aligned"), and MTechnology Inc. The lawsuit alleges, among other things, that Aligned has used and promoted technology at its data centers to attract clients to its facility, directly and indirectly infringing at least three of Switch's patents and using Switch's patented technology to attempt to unlawfully compete with Switch. The complaint also alleges that Aligned hired a consultant to design their data centers; that this consultant had toured Switch under non-disclosure agreement; and that this consultant breached his confidentiality agreements with Switch by using Switch's designs to design the Aligned data centers. Switch is seeking an injunction to prevent the defendants in the lawsuit from infringing Switch's patents, as well as other remedies. On August 16, 2017, Aligned filed an answer to the complaint and a motion to dismiss the lawsuit. Among other things, Aligned alleges in its answer that Switch's patents in question should be declared invalid, and countersued for declaratory judgment of the non-infringement of certain of Switch's patents, injunctive relief, and damages for alleged anti-competition practices involving Aligned's trademarks in violation of the Lanham Act, tortious interference with Aligned's business, and disparagement of Aligned's business. Switch has retained outside counsel to represent it and is vigorously defending its rights and interests. Given certain jurisdictional issues, Switch filed a separate complaint in the Eighth Judicial District of Nevada against the consultant, Stephen Fairfax and his business MTechnology, on September 12, 2017. Among other claims, Switch has raised allegations of breach of contract and misappropriation of trade secrets.

Cobalt Litigation

On September 7, 2017, Switch and Switch, Inc. (collectively, the "Defendants"), were named in a lawsuit filed in the U.S. District Court for the District of Nevada by V5 Technologies d/b/a Cobalt Data Centers. The Defendants were served on September 13, 2017. The lawsuit alleges, among other things, that the Defendants have monopolized the Las Vegas Metropolitan area of Southern Nevada's data center colocation market and have engaged in unfair business practices leading to

the failure of Cobalt Data Centers in 2015. The Defendants have retained outside counsel and are vigorously pursuing their rights and interests. The outcome of the Defendants' legal proceedings is inherently unpredictable, subject to significant uncertainties, and could be material to the Company's financial condition, results of operations, and cash flows for a particular period. For the pending matter described above, it is not possible to estimate the reasonably possible loss or range of loss.

10. Members' Equity

Switch, Ltd. Member Distributions

During the nine months ended September 30, 2017 , the Company's Board of Managers approved distributions of $180.4 million , comprised of $107.0 million to its members in accordance with their percentage interests and $73.4 million to certain members with unreturned capital contributions in accordance with the Company's operating agreement. As of September 30, 2017 , of the distributions declared during the nine months ended September 30, 2017 , the Company made distributions of $174.2 million and retained the distribution of $6.2 million , which represents the unvested portion of members' percentage interest as of September 30, 2017 that will be distributed upon vesting.

11. Equity-Based Compensation

2005 Common Membership Unit Plan

In 2005, the Company established the 2005 Common Membership Unit Plan (the "Unit Option Plan") for the purpose of attracting and retaining the best available personnel for positions of substantial responsibility, to provide additional incentive to employees and consultants of the Company and to promote the success of the Company's business.

All options granted under the Unit Option Plan are intended to be treated as non-statutory unit options under the Internal Revenue Code of 1986, as amended. The term of each option shall be the term stated in the option agreement; provided, however, that the term shall be no more than 10 years from the date of grant.

Options exercised under the plan provide the purchaser with full rights equivalent to those of existing members and holders as of the date of exercise. Since the inception of the Unit Option Plan through September 30, 2017 , members have exercised or exchanged 21,440,000 unit awards.

The unit option activity under the Unit Option Plan is summarized as follows (number of units in thousands) as of:

⁽¹⁾ The intrinsic value is calculated as the difference between the fair value of the unit on September 30, 2017 and December 31, 2016 and the exercise price of the option.

There were no nonvested unit options outstanding as of September 30, 2017 .

2012 Incentive Unit Awards

In 2012, the Company began issuing incentive unit awards ("Incentive Units"). The Incentive Units contained a hurdle amount (similar to an exercise price) where employees benefited from any appreciation in the value of their incentive awards above the hurdle amount. The hurdle amount was $11.69 per Incentive Unit issued for the three and nine -month periods ended September 30, 2017 . In September 2017, the Company granted 7,500,000 Incentive Units to the Chief Executive Officer of the Company (the "CEO Award"). The Company also granted 1,511,572 Incentive Units to the President of the Company with a hurdle amount of $11.69 per Incentive Unit (the "President Award"). The CEO Award contained a provision that caused the Incentive Units underlying the CEO Award to convert into Common Units on a one-to-one basis in connection with the closing of the IPO. Each of the CEO Award and President Award vested as to 40% of the award on the closing of the IPO and will subsequently vest as to 2.5% of the award on each of the eight quarterly anniversaries of the closing of the IPO and 5% of the award each quarterly anniversary thereafter, subject to continued service. No compensation expense was recorded related to these awards until the performance condition became probable of occurring upon closing of the IPO. Pursuant to the terms of the CEO Award, since the total number of Common Units granted pursuant to the CEO Award equals less than 3% of all outstanding shares of Switch, Inc. following the closing of the IPO, including the exercise of the underwriters' option to

purchase additional shares (the "threshold"), Switch expects to negotiate with the Chief Executive Officer to provide for an additional award, such that the CEO Award and any new awards held by the Chief Executive Officer represent a number of shares of common stock of Switch, Inc. equal to the threshold.

The Incentive Unit activity is summarized below (number of units in thousands):

⁽¹⁾ The intrinsic value is calculated as the difference between the fair value of the unit on September 30, 2017 and December 31, 2016 and the hurdle amount of the Incentive Unit.

The weighted average hurdle amounts for Incentive Units granted and vested, and the weighted average remaining time to vest for Incentive Units outstanding were as follows (number of units in thousands) as of: