4.	PROPERTY AND EQUIPMENT

At December 31, 2014, CCA owned 54 real estate properties, including 52 correctional and detention facilities, three of which CCA leased to other operators, and two corporate office buildings. At December 31, 2014, CCA also managed 12 correctional and detention facilities owned by governmental agencies.

Property and equipment, at cost, consists of the following (in thousands):


	December 31,
	2014			2013
Land and improvements	$	127,221		$	127,246
Buildings and improvements		3,048,836			3,058,748
Equipment and software		326,603			316,696
Office furniture and fixtures		30,884			30,969
Construction in progress		276,508			93,187

		3,810,052			3,626,846
Less: Accumulated depreciation		(1,151,424	)		(1,080,233	)

	$	2,658,628		$	2,546,613

Construction in progress primarily consists of correctional facilities under construction or expansion. Interest is capitalized on construction in progress and amounted to $2.5 million, $0.8 million, and $1.1 million in 2014, 2013, and 2012, respectively.

Depreciation expense was $114.0 million, $112.8 million, and $113.2 million for the years ended December 31, 2014, 2013, and 2012, respectively.

Eleven of the facilities owned by CCA are subject to options that allow various governmental agencies to purchase those facilities. Certain of these options to purchase are based on a depreciated book value while others are based on a fair market value calculation. In addition, two facilities, one of which is also subject to a purchase option, are constructed on land that CCA leases from governmental agencies under ground leases. Under the terms of those ground leases, the facilities become the property of the governmental agencies upon expiration of the ground leases in 2015 and 2017. CCA depreciates these properties over the shorter of the term of the applicable ground lease or the estimated useful life of the property.

CCA leases portions of the land and building of the San Diego Correctional Facility under an operating lease that expires December 2015 pursuant to amended lease terms executed between CCA and the County of San Diego in January 2010. CCA also leases land and building at the Elizabeth Detention Center under operating leases that expire in June 2015. During December 2013, CCA elected to terminate the lease of land and building at the North Georgia Detention Center effective during the first quarter of 2014.

CCA leases the South Texas Family Residential Center and the site upon which it is being constructed from a third-party lessor. CCA’s lease agreement with the lessor is over a base period co-terminus with an amended IGSA with ICE, as further described in Note 5, and includes two one-year renewal periods. However, under terms of the lease agreement, if ICE terminates the amended IGSA for convenience, CCA can terminate the agreement, without penalty, by providing the lessor with a 90-day notice. In the event ICE elects to terminate the amended IGSA due to a non-appropriation of funds, CCA must provide a 60-day notice period to the lessor. If ICE terminates the IGSA due to non-appropriation of funds without notice to CCA, CCA may not be able to provide a timely termination notice to the lessor and could, therefore, be subject to a penalty the equivalent of up to two months of payments due to the lessor, which would currently amount to approximately $13.4 million.

In January 2015, a class action lawsuit was filed in federal district court for the District of Columbia against the Secretary of the Department of Homeland Security (“DHS”) and certain ICE officials. The complaint sought to certify a class of plaintiffs, consisting of Central American mothers and children who (i) have been or will be detained in ICE family detention facilities since June 2014, (ii) have been or will be determined to have a credible fear of persecution in their home country under federal asylum laws and (iii) are eligible for release on bond pursuant to certain federal statutes but have been or will be denied such release after being subject to an ICE custody determination that took deterrence of mass migration into account. In February 2015, the court certified the class and granted the plaintiffs’ motion for a preliminary injunction, enjoining DHS from detaining class members for the purpose of deterring future immigration to the United States and from considering deterrence of such immigration as a factor in such custody determinations until a final determination has been reached on the merits of the action. CCA has not received any instruction from ICE on what action they intend to take in response to the court order, or how and whether it will affect CCA’s contract at the South Texas Family Residential Center. Any adverse decision with regard to this contract could materially affect CCA’s financial condition and results of operations.

CCA’s lease agreement with the third-party lessor required CCA to pay $70.0 million in September 2014, which resulted in CCA being deemed the owner of the constructed assets for accounting purposes, in accordance with ASC 840-40-55, formerly Emerging Issues Task Force No. 97-10, “The Effect of Lessee Involvement in Asset Construction”. Accordingly, CCA is recording an asset representing the estimated costs incurred attributable to the building assets being constructed by the third-party lessor and a related financing liability. CCA will depreciate the asset over the four-year term of the lease and will impute interest for the financing liability. Additionally, CCA determined that the lease with the third-party lessor also includes separate units of account for the land and pre-existing cottages as well as food services provided by the third-party lessor. The amount of consideration allocated to each of these separate deliverables was determined based on the relative selling price of the lessor-financing, the land lease, the lease of pre-existing cottages, and the food services. The operating lease term for the land is equivalent to the four-year term of the lease and is recognized on a straight-line basis over the lease term. The operating lease term for the pre-existing cottages is the four-month period in which CCA expects to use the cottages for housing residents. The food services provided by the third-party lessor are recognized proportionally based on the number of beds available to ICE during the construction period until such time as the facility reaches its capacity of 2,400 beds which is expected to be in the second quarter of 2015. In addition to the lease commitments described above, as of December 31, 2014, CCA has contractually committed $57.6 million for tenant improvements, furniture and equipment, and various other services related to the South Texas Family Residential Center even though many of these agreements provide CCA with the ability to terminate if ICE terminates the amended IGSA.

The rental expense incurred for the leases at these four facilities, inclusive of the expenses recognized for the South Texas lease, as described above, was $9.1 million, $5.9 million, and $4.7 million for the years ended December 31, 2014, 2013, and 2012, respectively. Future minimum lease payments as of December 31, 2014 under these operating leases, inclusive of $287.4 million of payments expected to be made under the cancelable lease at the South Texas facility, are as follows (in thousands):


2015	$	83,427
2016		79,538
2017		73,412
2018		53,733
2019		—
Thereafter		—

In December 2009, CCA entered into an Economic Development Agreement (“EDA”) with the Wheeler County Development Authority (“Wheeler County”) in Wheeler County, Georgia to implement a tax abatement plan related to CCA’s bed expansion project at its Wheeler Correctional Facility. The tax abatement plan provides for 50% abatement of real property taxes for six years. In December 2009, Wheeler County issued bonds in a maximum principal amount of $30.0 million. Also, in December 2009, CCA entered into an EDA with the Douglas-Coffee County Industrial Authority (“Coffee County”) in Coffee County, Georgia to implement a tax abatement plan related to CCA’s bed expansion project at its Coffee Correctional Facility. The tax abatement plan provides for 100% abatement of real property taxes for five years. In December 2009, Coffee County issued bonds in a maximum principal amount of $33.0 million. In June 2013, CCA also entered into an EDA with the Development Authority of Telfair County (“Telfair County”) in Telfair County, Georgia to implement a tax abatement plan related to CCA’s bed expansion project at its McRae Correctional Facility. The tax abatement plan provides for 90% abatement of real property taxes in the first year, decreasing by 10% over the subsequent nine years. In June 2013, Telfair County issued bonds in a maximum principal amount of $15.0 million.

According to each of the EDAs, legal title of CCA’s real property was transferred to the respective county. Pursuant to each EDA, the bonds were issued to CCA, so no cash exchanged hands. In each case, the applicable county authority then leased the real property back to CCA. The lease payments are equal to the amount of the payments on the bonds. At any time, CCA has the option to purchase the real property by paying off the bonds, plus $100. Due to the form of the transactions, CCA has not recorded the bonds or the capital leases associated with sale lease-back transactions. The original cost of CCA’s property and equipment is recorded on the balance sheet and is being depreciated over its estimated useful life.