2. LEASES

As of December 31, 2014, we owned 757 properties and leased 106 properties from third-party landlords. Our 863 properties are located in 19 states across the United States and Washington, D.C., with concentrations in the Northeast and Mid-Atlantic regions. Substantially all of our properties are leased on a triple-net basis primarily to petroleum distributors and, to a lesser extent, individual operators. Generally our tenants supply fuel and either operate our properties directly or sublet our properties to operators who operate their gas stations, convenience stores, automotive repair service facilities or other businesses at our properties. Our triple-net tenants are responsible for the payment of all taxes, maintenance, repairs, insurance and other operating expenses relating to our properties, and are also responsible for environmental contamination occurring during the terms of their leases and in certain cases also for environmental contamination that existed before their leases commenced. (See note 5 for additional information regarding environmental obligations.) Substantially all of our tenants’ financial results depend on the sale of refined petroleum products and rental income from their subtenants. As a result, our tenants’ financial results are highly dependent on the performance of the petroleum marketing industry, which is highly competitive and subject to volatility. During the terms of our leases, we monitor the credit quality of our triple-net tenants by reviewing their published credit rating, if available, reviewing publicly available financial statements, or financial or other operating statements which are delivered to us pursuant to applicable lease agreements, monitoring news reports regarding our tenants and their respective businesses, and monitoring the timeliness of lease payments and the performance of other financial covenants under their leases.

Revenues from rental properties included in continuing operations for the years ended December 31, 2014, 2013 and 2012 were $96,722,000, $96,269,000 and $93,204,000, respectively. Rental income contractually due or received from our tenants, including amounts realized under our prior interim fuel supply agreements, included in revenues from rental properties in continuing operations was $77,695,000, $72,964,000 and $77,904,000 for the years ended December 31, 2014, 2013 and 2012, respectively. “Pass-through” real estate taxes and other municipal charges paid by us which were reimbursable by our tenants pursuant to the terms of triple-net lease agreements included in revenues from rental properties and rental property expenses in continuing operations totaled $13,777,000, $15,405,000 and $10,867,000 for the years ended December 31, 2014, 2013 and 2012, respectively. Total revenues for the year ended December 31, 2013 included $3,126,000 of other revenue recorded for the partial recovery of damages stemming from Marketing’s default of its obligations under the Master Lease (as described in more detail below). Revenues from rental properties contractually due or received from Marketing under the Master Lease through its termination on April 30, 2012 (as described in more detail below) were $17,004,000 for the year ended December 31, 2012. Revenues from rental properties included in continuing operations for the year ended December 31, 2013 also include a net loss of $1,374,000 for amounts realized under interim fuel supply agreements through the termination of the agreements, as compared to a net gain of $1,763,000 for the year ended December 31, 2012.

In accordance with GAAP, we recognize rental revenue in amounts which vary from the amount of rent contractually due or received during the periods presented. As a result, revenues from rental properties include non-cash adjustments recorded for deferred rental revenue due to the recognition of rental income on a straight-line (or average) basis over the current lease term, the net amortization of above-market and below-market leases, recognition of rental income recorded under direct financing leases using the effective interest method which produces a constant periodic rate of return on the net investments in the leased properties and the amortization of deferred lease incentives (the “Revenue Recognition Adjustments”). Revenue Recognition Adjustments included in revenues from rental properties in continuing operations were $5,251,000, $7,900,000 and $4,433,000 for the years ended December 2014, 2013 and 2012, respectively. We provide reserves for a portion of the recorded deferred rent receivable if circumstances indicate that a tenant will not make all of its contractual lease payments during the current lease term. Our assessments and assumptions regarding the recoverability of the deferred rent receivable are reviewed on an ongoing basis and such assessments and assumptions are subject to change.

The components of the $95,764,000 net investment in direct financing leases as of December 31, 2014 are minimum lease payments receivable of $191,491,000 plus unguaranteed estimated residual value of $13,979,000 less unearned income of $109,706,000. The components of the $97,147,000 net investment in direct financing leases as of December 31, 2013 were minimum lease payments receivable of $203,438,000 plus unguaranteed estimated residual value of $13,979,000 less unearned income of $120,270,000.

Future contractual minimum annual rentals receivable from our tenants, which have terms in excess of one year as of December 31, 2014, are as follows (in thousands):


YEAR ENDING DECEMBER 31,	OPERATING LEASES		DIRECT FINANCING LEASES		TOTAL(a)
2015	$	70,998	$	12,121	$	83,119
2016		71,045		12,308		83,353
2017		70,538		12,622		83,160
2018		69,609		12,872		82,481
2019		68,642		13,078		81,720
Thereafter		456,466		128,490		584,956

(a)	Includes $74,559,000 of future minimum annual rentals receivable under subleases.

We have obligations to lessors under non-cancelable operating leases which have terms in excess of one year, principally for gasoline stations and convenience stores. The leased properties have a remaining lease term averaging over ten years, including renewal options. Future minimum annual rentals payable under such leases, excluding renewal options, are as follows: 2015 — $6,648,000, 2016 — $5,869,000, 2017 — $4,526,000, 2018 — $3,497,000, 2019 — $2,385,000 and $5,080,000 thereafter.

Rent expense, substantially all of which consists of minimum rentals on non-cancelable operating leases, amounted to $6,088,000, $7,092,000 and $7,903,000 for the years ended December 31, 2014, 2013 and 2012, respectively, and is included in rental property expenses using the straight-line method. Rent received under subleases for the years ended December 31, 2014, 2013 and 2012 was $10,358,000, $10,715,000 and $11,809,000, respectively.

Marketing and the Master Lease

Approximately 490 of the properties we own or lease as of December 31, 2014 were previously leased to Getty Petroleum Marketing Inc. (“Marketing”) pursuant to a master lease (the “Master Lease”). In December 2011, Marketing filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court. The Master Lease was terminated effective April 30, 2012, and in July 2012, the Bankruptcy Court approved Marketing’s Plan of Liquidation and appointed a trustee (the “Liquidating Trustee”) to oversee liquidation of the Marketing estate (the “Marketing Estate”). We incurred significant costs associated with Marketing’s bankruptcy, including legal expenses, of which $772,000, $3,700,000 and $2,600,000, respectively, are included in general and administrative expenses for the years ended December 31, 2014, 2013 and 2012, respectively.

In December 2011, the Marketing Estate filed a lawsuit (the “Lukoil Complaint”) against Marketing’s former parent, Lukoil Americas Corporation, and certain of its affiliates (collectively, “Lukoil”). In October 2012, we entered into an agreement with the Marketing Estate to make loans and otherwise fund up to an aggregate amount of $6,725,000 to prosecute the Lukoil Complaint and for certain other expenses incurred in connection with the wind-down of the Marketing Estate (the “Litigation Funding Agreement”). We ultimately advanced $6,526,000 in the aggregate to the Marketing Estate pursuant to the Litigation Funding Agreement. The Litigation Funding Agreement also provided that we were entitled to be reimbursed for up to $1,300,000 of our legal fees incurred in connection with the Litigation Funding Agreement.

On July 29, 2013, the Bankruptcy Court approved a settlement of the claims made in the Lukoil Complaint (the “Lukoil Settlement”). The terms of the Lukoil Settlement included a collective payment to the Marketing Estate of $93,000,000. In August 2013, the settlement payment was received by the Marketing Estate of which $25,096,000 was distributed to us pursuant to the Litigation Funding Agreement and $6,585,000 was distributed to us in full satisfaction of our post-petition priority claims related to the Master Lease.

Of the $25,096,000 received by us in the third quarter of 2013 pursuant to the Litigation Funding Agreement, $7,976,000 was applied to the advances made to the Marketing Estate plus accrued interest; $13,994,000 was applied to unpaid rent and real estate taxes due from Marketing and the related bad debt reserve was reversed in full; and the remainder of $3,126,000 was recorded as additional income attributed to the partial recovery of damages resulting from Marketing’s default of its obligations under the Master Lease and is reflected in continuing operations in our consolidated statements of operations as other revenue.

In accordance with GAAP, we recognized in revenue from rental properties in our consolidated statements of operations the full contractual rent and real estate obligations due to us by Marketing during the term of the Master Lease and provided bad debt reserves included in allowance for uncollectible accounts and in earnings (loss) from discontinued operations in our consolidated statements of operations for our estimate of uncollectible amounts due from Marketing. During the year ended December 31, 2013, we received $34,251,000 of funds from the Marketing Estate from our post-petition priority claims and the Lukoil Settlement thereby eliminating the previously provided reserves. The reduction in our bad debt reserve for uncollectible amounts due from Marketing for the year ended December 31, 2013 of $22,782,000 is reflected in our consolidated statements of operations by reducing allowance for uncollectible accounts in continuing operations by $16,963,000 and increasing earnings from operating activities included in discontinued operations by $5,819,000.

During the year ended December 31, 2012 we had a net increase in our bad debt reserves related to Marketing and the Master Lease of $13,980,000. The increase was related to $16,428,000 of uncollected rent and real estate taxes due from Marketing offset by $2,448,000 received from the Marketing Estate pursuant to our post-petition priority claims related to the Master Lease. The net increase in our bad debt reserve for uncollectible amounts due from Marketing for the year ended December 31, 2012 of $13,980,000 is reflected in our consolidated statements of operations by increasing allowance for uncollectible accounts in continuing operations by $10,409,000 and decreasing earnings from operating activities included in discontinued operations by $3,571,000.

As part of Marketing’s bankruptcy proceeding, we maintained significant pre-petition and post-petition unsecured claims against Marketing. On March 3, 2015, we entered into a settlement agreement (the “Settlement Agreement”) with the Liquidating Trustee of the Marketing Estate, which resolved the claims we asserted in Marketing’s bankruptcy case in the Bankruptcy Court. The Settlement Agreement is subject to the approval of the Bankruptcy Court at a hearing that is scheduled to be held on April 7, 2015. Pursuant to the terms of the Settlement Agreement, we will receive an interim distribution from the Marketing Estate of approximately $6,000,000 (the “Interim Distribution”) within 15 days of the approval of the Settlement Agreement by the Bankruptcy Court. In addition, if the Settlement Agreement is approved by the Bankruptcy Court, we expect to receive additional distributions from the Marketing Estate during 2015 on account of our claims. The Interim Distribution and any subsequent distributions received by us from the Marketing Estate depend on our percentage of the total amount of allowed general unsecured claims against Marketing. The Liquidating Trustee and the Bankruptcy Court have not yet completed the process of determining the total amount of allowed general unsecured claims against Marketing. We anticipate that the sum of all additional distributions will not materially exceed the amount of the Interim Distribution. We cannot provide any assurance as to whether the Settlement Agreement will be approved, or, if approved, the total amount of the distributions we will receive from the Marketing Estate on account of our claims or timing of such future distributions.

Leasing Activities

As of December 31, 2014, we have entered into long-term triple-net leases with petroleum distributors for 13 separate property portfolios comprising approximately 440 properties in the aggregate that were previously leased to Marketing. We have also entered into month-to-month license agreements with occupants of 26 properties previously leased to Marketing (substantially all of whom were former tenants of Marketing) allowing such occupants to continue to occupy and use these properties as gas stations, convenience stores, automotive repair service facilities or other businesses. These month-to-month license agreements are intended as interim occupancy arrangements until these properties are sold or leased on a triple-net basis. Under our month-to-month license agreements, we receive monthly licensing fees and are responsible for the payment of Property Expenditures, certain environmental compliance costs and costs associated with any environmental remediation.

The long-term triple-net leases with petroleum distributors are unitary triple-net lease agreements generally with an initial term of 15 years, and options for successive renewal terms of up to 20 years. Rent is scheduled to increase at varying intervals of up to five years on the anniversary of the commencement date of the leases. Several of the leases provide for additional rent based on the aggregate volume of fuel sold. In addition, the majority of the leases require the tenants to make capital expenditures at our properties substantially all of which are related to the replacement of USTs that are owned by our tenants. As of December 31, 2014, we have a remaining commitment to co-invest as much as $14,181,000 in the aggregate with our tenants for a portion of such capital expenditures within the next approximately five years. Our commitment provides us with the option to either reimburse our tenants, or to offset rent when these capital expenditures are made. This deferred expense is recognized on a straight-line basis as a reduction of rental revenue in our consolidated statements of operations over the terms of the various leases.

As part of the triple-net leases for properties previously leased to Marketing, we transferred title of the USTs to our tenants, and the obligation to pay for the retirement and decommissioning or removal of USTs at the end of their useful life or earlier if circumstances warranted was fully or partially transferred to our new tenants. We remain contingently liable for this obligation in the event that our tenants do not satisfy their responsibilities. Accordingly, through December 31, 2014, we removed $12,878,000 of asset retirement obligations and $10,538,000 of net asset retirement costs related to USTs from our balance sheet. The cumulative net amount of $2,340,000 is recorded as deferred rental revenue and will be recognized on a straight-line basis as additional revenues from rental properties over the terms of the various leases. We incurred $60,000, $365,000 and $3,147,000 of lease origination costs for the years ended December 31, 2014, 2013 and 2012, respectively, which deferred expense is recognized on a straight-line basis as amortization expense in our consolidated statements of operations over the terms of the various leases.

Chestnut Petroleum Dist. Inc.

As of December 31, 2014, we leased 118 gasoline station and convenience store properties in two separate unitary leases to subsidiaries of Chestnut Petroleum Dist. Inc. We lease 58 properties to CPD NY Energy Corp. (“CPD NY”) and 60 properties to NECG Holdings Corp. (“NECG”). CPD NY and NECG together represented 19%, 21% and 18% of our rental revenues for the years ended December 31, 2014, 2013 and 2012, respectively. Although we have separate, non-cross defaulted leases with each of these subsidiaries, because such subsidiaries are affiliated with one another and under common control, a material adverse impact on one subsidiary, or failure of one subsidiary to perform its rental and other obligations to us, may contribute to a material adverse impact on the other subsidiary and/or failure of the other subsidiary to perform its rental and other obligations to us.

The selected combined audited financial data of CPD NY and NECG, which has been prepared by Chestnut Petroleum Dist. Inc.’s management and audited by a third-party accounting firm, is provided below:

(in thousands)

Operating Data:


	Year ended December 31,
	2014		2013		2012
Total revenue	$	439,392	$	451,145	$	424,519
Gross profit		32,836		28,721		26,616
Net income		2,012		229		1,968

Balance Sheet Data:


	December 31, 2014		December 31, 2013
Current assets	$	13,520	$	10,944
Noncurrent assets		28,995		28,852
Current liabilities		2,531		13,985
Noncurrent liabilities		28,204		16,043

Eviction proceedings against a holdover group of former Marketing subtenants who continued to occupy properties in the State of Connecticut which are subject to our unitary lease with NECG (the “NECG Lease”) had a material adverse impact on NECG’s operations and profitability. In June 2013, the Connecticut Superior Court ruled in our favor with respect to all 24 locations involved in these proceedings. However, in July 2013, a majority of the operators against whom these Superior Court rulings were made appealed the decisions. Following the Superior Court ruling, 16 of the 24 former operators against whom eviction proceedings were brought either reached agreements with NECG to remain at their properties or voluntarily vacated them, and in either case their appeals were withdrawn. Eight of the operators remained in contested occupancy of the subject sites during the pendency of their appeal. On January 27, 2015, the Connecticut Supreme Court, in a written opinion, affirmed the Superior Court rulings in favor of NECG and us. As a result, we anticipate that in the immediate future we will be regaining possession of the eight locations that were still subject to appeal.

In August 2013, we entered into an agreement to modify the NECG Lease and, as part of such agreement, we deferred portions of the scheduled rent payments due from NECG. This lease modification agreement also included provisions under which we can recapture and sever properties from the NECG Lease and, as of December 31, 2014, we have removed 24 of the original 84 properties from the NECG Lease. As a result of the disruption and costs associated with the holdover litigation, NECG was not current in its rent and certain other obligations to us under the NECG Lease. As of December 31, 2014, we have a total accounts receivable bad debt reserve related to the NECG Lease of $1,704,000 for amounts which we do not believe we will collect from NECG.

As a result of the developments with NECG described above, we concluded that it was probable that we would not receive from NECG the entire amount of the contractual lease payments owed to us under the NECG Lease. Accordingly, during the year ended December 31, 2014, we recorded a non-cash allowance for deferred rent receivable related to the NECG Lease of $1,540,000. As of December 31, 2014, we have fully reserved for the outstanding deferred rent receivable balance of $6,315,000. This non-cash allowance reduced our net earnings for the year ended December 31, 2014, but did not impact our cash flow from operating activities.

We continue to be engaged in discussions with NECG about additional modifications to the NECG Lease, which will likely include the removal of additional properties from the NECG Lease. Our discussions with NECG are ongoing and we cannot predict the ultimate outcome of these discussions and their impact on the final size of the portfolio or future rental income associated with the NECG Lease. As of December 31, 2014, and the date of this Annual Report on Form 10-K, NECG is current in its rent payments to us, as amended.

Capitol Petroleum Group

As of December 31, 2014, we leased 97 gasoline station and convenience store properties in four separate unitary leases to subsidiaries of Capitol Petroleum Group, LLC (“Capitol”). We lease 37 properties to White Oak Petroleum, LLC, 24 properties to Hudson Petroleum Realty, LLC, 20 properties to Dogwood Petroleum Realty, LLC and 16 properties to Big Apple Petroleum Realty, LLC. In aggregate, these Capitol affiliates represented 18%, 15% and 7% of our rental revenues for the years ended December 31, 2014, 2013 and 2012, respectively. Although we have separate, non-cross defaulted leases with each of these subsidiaries, because such subsidiaries are affiliated with one another and under common control, a material adverse impact on one subsidiary, or failure of one subsidiary to perform its rental and other obligations to us, may contribute to a material adverse impact on one or more of the other subsidiaries and/or failure of one or more of the other subsidiaries to perform its rental and other obligations to us.

The selected combined audited financial data of White Oak Petroleum, LLC, Hudson Petroleum Realty, LLC, Dogwood Petroleum Realty, LLC and Big Apple Petroleum Realty, LLC, which has been prepared by Capitol’s management and audited by a third-party accounting firm, is provided below:

(in thousands)

Operating Data:


	Year ended December 31,
	2014			2013			2012
Total revenue	$	344,820		$	356,004		$	189,958
Gross profit		9,566			10,500			7,436
Net (loss) income		(3,343	)		(4,011	)		1,115

Balance Sheet Data:


	December 31, 2014		December 31, 2013
Current assets	$	9,288	$	9,165
Noncurrent assets		108,491		112,502
Current liabilities		13,793		10,880
Noncurrent liabilities		134,700		135,210

Hanuman Business, Inc.

As of December 31, 2014, we have a portfolio of 61 operating properties located in Southern New Jersey and Eastern Pennsylvania, which are subject to a unitary triple-net lease (the “Ramoco Lease”) with Hanuman Business, Inc. (d/b/a “Ramoco”). We have entered into a lease modification agreement with Ramoco whereby we have agreed to defer portions of rent due to us under the Ramoco Lease. As a result of the developments with Ramoco, we concluded that it was probable that we would not receive from Ramoco the entire amount of the contractual lease payments owed to us under the Ramoco Lease. Accordingly, during the fourth quarter of 2014, we fully reserved for the outstanding deferred rent receivable balance by recording a non-cash allowance for deferred rent receivable related to the Ramoco Lease of $694,000. This non-cash allowance reduced our net earnings for the year ended December 31, 2014, but did not impact our cash flow from operating activities.

We are engaged in ongoing discussions with Ramoco about additional modifications to the Ramoco Lease, which we anticipate will include the removal of properties from the Ramoco Lease. We cannot predict the ultimate outcome of these discussions and their impact on the final size of the portfolio or future rental income associated with the Ramoco Lease. As of December 31, 2014, and the date of this Annual Report on Form 10-K, Ramoco is current in its rent payments to us, as amended.