2.	LEASES

As of June 30, 2015, we owned 823 properties and leased 104 properties from third-party landlords. Our 927 properties are located in 23 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 reviewing 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 three and six months ended June 30, 2015 were $25,461,000 and $49,381,000, respectively. Revenues from rental properties included in continuing operations for the three and six months ended June 30, 2014 were $24,350,000 and $48,108,000, respectively. Rental income contractually due or received from our tenants included in revenues from rental properties in continuing operations was $21,337,000 and $41,169,000 for the three and six months ended June 30, 2015, respectively, and $19,445,000 and $38,270,000 for the three and six months ended June 30, 2014, 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 $3,345,000 and $6,858,000 for the three and six months ended June 30, 2015, respectively, and $3,395,000 and $6,117,000 for the three and six months ended June 30, 2014, respectively.

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 $779,000 and $1,354,000 for the three and six months ended June 30, 2015, respectively, and $1,542,000 and $3,724,000 for the three and six months ended June 30, 2014, 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 $94,968,000 net investment in direct financing leases as of June 30, 2015 are minimum lease payments receivable of $185,452,000 plus unguaranteed estimated residual value of $13,979,000 less unearned income of $104,463,000. The components of the $95,764,000 net investment in direct financing leases as of December 31, 2014 were minimum lease payments receivable of $191,491,000 plus unguaranteed estimated residual value of $13,979,000 less unearned income of $109,706,000.

Marketing and the Master Lease

Approximately 475 of the properties we own or lease as of June 30, 2015 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”).

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 with the Liquidating Trustee of the Marketing Estate to resolve claims asserted by us in Marketing’s bankruptcy case (the “Settlement Agreement”). The Settlement Agreement was approved by an order of the U.S. Bankruptcy Court, and, on April 22, 2015, we received a distribution from the Marketing Estate of $6,800,000 on account of our general unsecured claims. We expect to receive additional distributions from the Marketing Estate on account of our general unsecured claims, however, we cannot provide any assurance as to the timing or the total amount of such future distributions.

The Settlement Agreement also resolved a dispute relating to the balance of payment due to us pursuant to our agreement to fund the lawsuit that was brought by the Liquidating Trustee against Lukoil Americas Corporation and related entities and individuals for the benefit of Marketing’s creditors. As a result, on April 22, 2015, we also received an additional distribution of $550,000 from the Marketing Estate in full resolution of the funding agreement dispute.

The funds received from the Marketing Estate are included in Other Income on our Consolidated Statements of Operations.

Leasing Activities

As of June 30, 2015, we have entered into long-term triple-net leases with petroleum distributors for 15 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 16 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 operating expenses such as maintenance, repairs and real estate taxes (“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 to 20 years, and options for successive renewal terms of up to 20 years. Rent is scheduled to increase during both the initial and renewal terms of our 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 June 30, 2015, we have a remaining commitment to co-invest as much as $12,945,000 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 June 30, 2015, we removed $13,033,000 of asset retirement obligations and $10,555,000 of net asset retirement costs related to USTs from our balance sheet. The cumulative net amount of $2,478,000 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 $90,000 and $60,000 of lease origination costs for the six months ended June 30, 2015 and 2014, 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.

Major Tenants

As of June 30, 2015, we had three significant tenants by revenue:

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We lease 154 gasoline station and convenience store properties in three separate unitary leases to subsidiaries of Global Partners, LP (NYSE: GLP). In aggregate, subsidiaries of Global Partners represented 22% of our rental revenues for the six months ended June 30, 2015 and 2014, respectively. These rental revenue percentages include the impact of two leases, which were assigned by our former tenants, White Oak Petroleum, LLC and Big Apple Petroleum Realty, LLC (both affiliates of Capitol Petroleum Group) to subsidiaries of Global Partners in June 2015. The foregoing assigned leases and our current lease with subsidiaries of Global Partners are all guaranteed by the parent company.

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We lease 115 gasoline station and convenience store properties in two separate unitary leases to subsidiaries of Chestnut Petroleum Dist. Inc. In aggregate, subsidiaries of Chestnut Petroleum represented 17% and 18% of our rental revenues for the six months ended June 30, 2015 and 2014, respectively. Our leases with Chestnut Petroleum are separate, non-cross defaulted leases with different subsidiaries of Chestnut Petroleum, the 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.

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We lease 77 gasoline station and convenience store properties under three separate, cross-defaulted unitary leases to Apro, LLC (d/b/a “United Oil”). In aggregate, United Oil represented 3% of our rental revenues for the six months ended June 30, 2015. (See below for more information regarding the United Oil Transaction.)

United Oil Transaction

On June 3, 2015, we acquired fee simple interests in 77 convenience store and retail motor fuel stations from affiliates of Pacific Convenience and Fuels LLC and simultaneously leased the properties to Apro, LLC (d/b/a “United Oil”), a leading regional convenience store and gas station operator, under three separate cross-defaulted long-term triple-net unitary leases (the “United Oil Transaction”). The properties are located in Northern California, Southern California, Colorado, Washington, Nevada and Oregon. The acquired properties operate under several well recognized brands including 76, Conoco, Circle K, 7-11 and My Goods Market. The total purchase price for the acquisition was approximately $214,500,000, which was funded with proceeds from the Credit Agreement and Restated Prudential Note Purchase Agreement.

The leases governing the properties are unitary triple-net lease agreements with initial terms of 20 years and options for up to three successive five year renewal options. The unitary leases require United Oil to pay a fixed annual rent plus all amounts pertaining to the properties including environmental expenses, real estate taxes, assessments, license and permit fees, charges for public utilities and all other governmental charges. Rent is contractually scheduled to increase at various intervals over the course of the initial and renewal terms of the leases.

Lease Restructurings

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 or NECG have regained possession of substantially all of the 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 June 30, 2015, we have removed 27 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 June 30, 2015, we have a total accounts receivable bad debt reserve related to the NECG Lease of $1,561,000 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, as of June 30, 2015, we have fully reserved for the outstanding deferred rent receivable balance of $6,190,000. Allowances for deferred rent receivable reduce our net earnings, but do 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 June 30, 2015, and the date of this Quarterly Report on Form 10-Q, NECG is current in its rent payments to us under the NECG Lease, as amended.

As of June 30, 2015, we had a portfolio of 61 operating properties located in Southern New Jersey and Eastern Pennsylvania, which were subject to a unitary triple-net lease (the “Ramoco Lease”) with Hanuman Business, Inc. (d/b/a “Ramoco”). We had entered into a forbearance and modification agreement with Ramoco whereby we agreed to defer a portion of monthly rent due to us under the Ramoco Lease, subject to certain conditions. 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, as of June 30, 2015, we fully reserved for the outstanding deferred rent receivable balance of $814,000. Allowances for deferred rent receivable reduce our net earnings, but do not impact our cash flow from operating activities.

On August 3, 2015, we terminated the Ramoco Lease and sold or repositioned the 61 properties subject thereto, all of which we had previously designated as transitional properties. (See note 1 – General – Subsequent Events for a description of the Ramoco Transaction.)