Investment in Direct Financing Leases

The Company’s investment in direct financing leases relates to the Company’s lease of six public charter school properties as of December 31, 2017 and 12 public charter school properties as of December 31, 2016, with affiliates of Imagine Schools, Inc. (Imagine). Investment in direct financing leases, net represents estimated unguaranteed residual values of leased assets and net unpaid rentals, less related deferred income. The following table summarizes the carrying amounts of investment in direct financing leases, net as of December 31, 2017 and 2016 (in thousands):



	2017			2016
Total minimum lease payments receivable	$	112,411		$	215,753
Estimated unguaranteed residual value of leased assets	47,000			85,247
Less deferred income ⁽¹⁾	(101,508		)	(198,302		)
Investment in direct financing leases, net	$	57,903		$	102,698

(1) Deferred income is net of $0.8 million and $1.3 million of initial direct costs at December 31, 2017 and 2016, respectively.

During 2015, the Company completed the sale of one public charter school property located in Pennsylvania and previously leased to Imagine with a carrying value of $4.7 million. There was no gain or loss recognized on this sale. Additionally, during 2015, the Company terminated a portion of its master lease with Imagine related to one public charter school property located in Ohio. The property was subsequently leased to another operator pursuant to a long-term, triple-net lease agreement that is classified as an operating lease. There was no gain or loss recognized on this lease termination.

During 2016, the Company completed the sale of nine public charter school properties previously leased to Imagine as part of a master lease. Seven of these schools were sold to Imagine and two were sold to third parties. These properties are located in Georgia, Indiana, Ohio, Missouri and South Carolina and had a total net carrying value of $91.3 million when sold. The Company received net cash proceeds totaling $21.0 million (a portion of which was funded through the liquidation of the letter of credit and escrow reserve previously provided by Imagine pursuant to the master lease) and a mortgage note receivable from Imagine for $70.3 million. The note is secured by eight public charter schools as of December 31, 2017. See Note 5 for more detail on this mortgage note receivable. There were no gains or losses recognized on these sales. The Company determined that no allowance for losses on the investment in direct financing leases was necessary at December 31, 2016.

During 2017, the Company entered into revised lease terms with Imagine which reduced the rental payments and term on six properties. As a result of the revised lease terms, these six properties were classified as operating leases. Due to lease negotiations during the three months ended June 30, 2017, management evaluated whether it could recover its investment in these leases taking into account the revised lease terms and independent appraisals prepared as of June 30, 2017, and determined the carrying value of the investment in the direct financing leases exceeded the expected lease payments to be received and residual values for these six leases. Accordingly, the Company recorded an impairment charge of $9.6 million during the year ended December 31, 2017, which included an allowance for lease loss of $7.3 million and a charge of $2.3 million related to estimated unguaranteed residual value.

Additionally, during 2017, the Company performed its annual review of the estimated unguaranteed residual value on its other properties leased to Imagine and determined that the residual value on one of these properties was impaired. As such, the Company recorded an impairment charge of the unguaranteed residual value of $0.6 million during the year ended December 31, 2017.

The Company’s direct financing leases have expiration dates ranging from approximately 14 to 16 years. Future minimum rentals receivable on this direct financing lease at December 31, 2017 are as follows (in thousands):



	Amount
Year:
2018	$	6,301
2019	6,490
2020	6,685
2021	6,885
2022	7,092
Thereafter	78,958
Total	$	112,411