5. LEASES

We determine if a contract is a lease at the inception of the arrangement. If an operating lease is identified, it is classified as one of three asset classes: building and land, vehicles or equipment. We lease space under non-cancelable operating leases for general office facilities, distribution centers, a training center and a call center. We also have operating leases for vehicles that consist mainly of tractor trailers and box trucks to transport newspapers from printing facilities to distribution centers, as well as office equipment consisting mostly of copiers.

Certain leases have rent holidays or leasehold improvement incentives which account for the difference between the right-of-use (“ROU”) assets and the lease liabilities. Many of our leases include lease components (e.g., fixed rent payments) and non-lease components (e.g., common-area or other maintenance costs, utilities, or other lease costs imposed) which are accounted for as a single lease component, because we have elected the practical expedient to group lease and non-lease components for all leases.

None of our leases contain contingent rent provisions or concessions, residual value guarantees or restrictive covenants. Our leases have remaining terms of less than one year to nine years, except for one parking lot lease with 43 years remaining.

Some of our distribution center, vehicle, and equipment leases have a combination of cancelable month-to-month lease terms and non-cancelable lease terms of less than one year. We have elected the practical expedient to exclude these short-term leases from recognition of our ROU assets and lease liabilities.

Most leases include escalating lease payments, and many include one or more options to renew or terminate the lease. The exercise of lease renewal options is typically at our sole discretion; therefore, the renewals to extend the lease terms are not included in our ROU assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease term.

We have one financing lease (formerly known as a capital lease) for office furniture and fixtures located at one of our office facilities. The total financing lease payments are calculated to be approximately $1.0 million and $1.1 million as of March 29, 2020, and December 29, 2019, respectively. As of March 29, 2020, the payments run over the course of the remaining 6 years and are not material to the future lease payments schedules presented below. The finance lease asset is recorded within the other assets line item of the condensed consolidated balance sheet. The finance lease short-term and long-term obligations are recorded within other accrued liabilities and other long-term liabilities line items of the condensed consolidated balance sheet, respectively.

As our lease contracts do not provide an implicit interest rate, we use our effective yield of our secured debt as the secured incremental borrowing rate for leases with an 8-year tenure. The secured incremental borrowing rate was adjusted using the treasury yield curve at the transition date to determine the present value of each of the future payments.

The cost components of our operating and financing leases were as follows:


	Three Months Ended
	March 29,		March 31,
(in thousands)	2020		2019
Financing lease costs:
Amortization of ROU asset	$	24	$	24
Interest on lease liabilities		18		20
Operating lease costs		3,169		3,464
Short-term lease cost		360		713
Variable lease cost		327		467
Sublease income		(1,491)		(1,461)
Total lease costs	$	2,407	$	3,227

Variable lease costs for our leased facilities consist primarily of taxes and insurance, as well as common area maintenance true-up assessments which are paid based on actual costs incurred by the lessor. We also incur variable mileage costs related to our leased vehicles and variable usage costs related to leased equipment. Variable lease costs also include annual changes in monthly rent costs, mainly based on the consumer price index.

We sublease office space to other companies under non-cancelable agreements. There are no residual value guarantees or restrictions or covenants imposed as part of these sublease arrangements, except that the subtenant may not transfer the assignment of the sublease without prior permission or permit liens against the office space. Some sublease agreements included options to renew or terminate the lease, but only within the term of the master lease arrangement held by us.

As of March 29, 2020, the aggregate future lease payments for operating leases are as follows:


	Operating
(in thousands)	Leases
2020 (remainder)	$	8,696
2021		10,055
2022		10,384
2023		9,535
2024		8,550
2025		7,085
Thereafter		13,864
Total undiscounted cash flows		68,169
Less imputed interest		(15,862)
Total lease liability	$	52,307

The weighted average remaining lease terms and discount rates for all of our operating and financing leases were as follows:


	March 29, 2020				March 31, 2019
	Operating		Financing		Operating		Financing
	Leases		Lease		Leases		Lease
Weighted average remaining lease term (years)	6.48		5.59		7.44		6.58
Weighted average discount rate	9.19	%	10.50	%	9.12	%	10.50	%

Supplemental cash flow information related to our operating and financing leases was as follows:


	Three Months Ended
	March 29,		March 31,
(in thousands)	2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflow from operating leases	$	3,303	$	3,504
Operating cash outflow from financing lease		18		20
Financing cash outflow from financing lease		20		17
ROU assets obtained in exchange for new operating lease liabilities		1,172		263

As of March 29, 2020, we do not have any new financing leases or significant additional operating leases that have not yet commenced.

Rejected Leases

During the quarter ended March 29, 2020, we obtained approval from the Bankruptcy Court to reject five of our operating leases with a total net liability of approximately $1.5 million. As a result, we terminated these leases by writing off the net lease liabilities and recorded gains of $1.5 million on the write-off of these rejected leases during the three months ended March 29, 2020. In addition, ASC 852 requires us to analyze any estimated damages we may be required to pay the lessors as a result of rejecting these leases. Therefore, we recorded an $0.8 million charge related to the estimated damages on these rejected leases during the same period that are included in liabilities subject to compromise. Also see Note 12 for additional discussion related to rejected leases subsequent to March 29, 2020.