. Lease Commitments

Operating Leases

The Company leases retail stores, a bulk food repackaging facility and distribution center and administrative offices under long-term operating leases through

62.

These leases include scheduled increases in minimum rents and renewal provisions at the option of the Company. Deferred rent expense as of

September 30, 2017

and

2016

was approximately

$10.5

million and

$8.8

million, respectively. Tenant improvement allowances received from landlords (leasehold incentives) are recorded as liabilities and recognized evenly as a reduction to rent expense over the lease term. Leasehold incentives at

September 30, 2017

and

2016

were approximately

$9.2

million and

$8.4

million, respectively. Sublease rental income was approximately

$0.3

million for the year ended

September 30, 2017

and less than

$0.1

million for each of the years ended

September 30, 2016

and

2015.

The Company has

five

operating leases with Chalet Properties, LLC (Chalet),

one

operating lease with the Isely Family Land Trust LLC and

one

operating lease with FTVC, LLC, all related parties (see Note

). The terms and rental rates of these related party leases are similar to leases with nonrelated parties and are at market rental rates. The leases began at various times with the earliest occurring in

November 1999,

continue for various terms through

February 2027

and include various options to renew. Currently, annual lease payments range from less than

$0.1

million to approximately

$0.3

million per lease.

Minimum rental

commitments and sublease rental income under the terms of the Company’s operating leases are as follows, dollars in thousands:

Fiscal Year	Third parties		Related parties		Sublease rental income			Total operating leases
2018	$	38,892		1,329		(401	)		39,820
2019		39,063		1,329		(377	)		40,015
2020		38,461		1,333		(341	)		39,453
2021		37,544		1,310		(328	)		38,526
2022		36,696		1,308		(333	)		37,671
Thereafter		303,158		5,287		(872	)		307,573
Total payments	$	493,814		11,896		(2,652	)		503,058

Total rent expense, including common area expenses and warehouse rent

, for the years ended

September 30, 2017,

2016,

and

2015

totaled approximately

$43.8

million,

$34.6

million and

$26.3

million, respectively, which is included in cost of goods sold and occupancy costs and administrative expenses in the consolidated statements of income. In addition, approximately

$1.4

million,

$1.4

million and

$0.8

million is included in pre-opening and relocation expense associated with rent expense for stores prior to their opening date for the years ended

September 30, 2017,

2016

and

2015,

respectively.

Capital and Financing Lease Obligations

Capital and financing lease obligations as of

September 30,

2017

and

2016,

were as follows, dollars in thousands:

	As of September 30,
	2017			2016
Capital lease finance obligations, due in monthly installments through fiscal year 20 32	$	26,930			25,619
Capital lease obligations due in monthly installments through fiscal year 20 41		4,999			5,213
Capital lease finance obligations for assets under construction, due in monthly installments through fiscal year 2033		1,499			1,075
Total capital and financing lease obligations		33,428			31,907
Less current portion		(548	)		(478	)
Total capital and financing lease obligations, net of current portion	$	32,880			31,429

October 7, 2016,

the Company consummated a sale-leaseback transaction with an unrelated

third

party for a store building. Concurrently with the Company

’s sale of the building, the Company entered into an agreement to lease the building back from the purchaser over an initial lease term of

years. The sale resulted in proceeds to the Company of approximately

$2.6

million and a loss to the Company of approximately

$0.5

million. Such loss has been deferred by the Company and will be amortized over the initial lease term. The Company classified the lease as operating and considers the transaction as a normal leaseback with

continuing involvement under the provisions of FASB Accounting Standards Codification Topic

840,

Leases

Capital lease finance obliga

tions

From time to time, the Company enters into lease

s with developers for build-to-suit store locations. Upon lease execution, the Company analyzes its involvement during the construction period

As a result of defined forms of lessee involvement, the Company could be deemed the “owner” for accounting purposes during the construction period, and would be required to capitalize construction costs on its balance sheet. If the project costs were capitalized, the Company performs a sale-leaseback analysis upon completion of the project to determine if the Company should remove the asset from its balance sheet. If the asset should

not

be removed from the balance sheet, the fair market value of the building remains on the balance sheet along with a corresponding capital lease finance obligation equal to the fair market value of the building less any amounts the Company

contributed toward construction. The Company had capital lease finance obligations totaling approximately

$26.9

million and

$25.6

million as of

September 30, 2017

and

2016,

respectively. The leases that created the obligations expire or become subject to renewal clauses at various dates through fiscal year

2032.

The Company does

not

record rent expense for capital lease finance obligations, but rather rent payments per the leases are recognized as a reduction of the related capital lease finance obligation and as interest expense. Depreciation expense for the related capitalized lease assets is included in store expenses in the consolidated statements of income. At the end of the lease term, the offsetting balances of the capitalized assets, net of accumulated depreciation, and capital lease finance obligation will be derecognized.

Capital lease obligations

The Company ha

d capital lease obligations totaling approximately

$5.0

million and

$5.2

million as of

September 30, 2017

and

2016,

respectively. Certain of the Company’s leases for store locations are considered capital leases, and as such, the Company has capitalized the present value of the minimum lease payments under the leases for the stores and recorded related capital lease obligations. The leases that created the obligation expire or become subject to renewal clauses at various dates through fiscal year

2041.

The Company does

not

record rent expense for capital lease obligations, but rather rent payments per the leases are recognized as a reduction of the related capital lease obligation and as interest expense. Depreciation expense for the related capitalized lease assets is included in store expenses in the consolidated statements of income.

Capital lease finance obligation

for assets under construction

he Company had

$1.5

million and

$1.1

million in construction in process related to capital lease finance obligations as of

September 30, 2017

and

2016,

respectively.

rent expense is recorded for these leases, but rather rental payments under the leases will be recognized as a reduction of the capital lease finance obligation and as interest expense. Depreciation expense for the related capitalized lease assets is included in store expenses in the consolidated statements of income. At the end of the lease term, the offsetting balances of the capitalized assets, net of accumulated depreciation, and the capital lease finance obligation will be derecognized.

Future payments for capital

lease finance obligations and capita

lease obligations

Future payments

under the terms of the leases for opened stores included in capital lease finance obligations and capital lease obligations as of

September 30, 2017

are as follows, dollars in thousands:

	Interest expense on capital lease finance obligations		Principal payments on capital lease finance obligations		Interest expense on capital lease obligations		Principal payments on capital lease obligations		Total future payments on capital lease finance and capital lease obligations
2018	$	2,919		316		505		236		3,976
2019		2,887		384		481		261		4,013
2020		2,848		425		453		288		4,014
2021		2,803		501		423		319		4,046
2022		2,750		580		390		352		4,072
Thereafter		13,126		5,361		2,121		3,543		24,151
Non-cash derecognition of capital lease finance obligations at end of lease term		—		19,363		—		—		19,363
Total future payments	$	27,333		26,930		4,373		4,999	63,63 5

Future payments

under the terms of the lease for the store location at which construction was in progress as of

September 30, 2017,

based on the store opening date in the

first

quarter of fiscal year

2017,

are as follows, dollars in thousands:

	Interest expense on ca pital lease finance obligation s for assets under construction		Principal payments on cap ital lease finance obligation s for assets under construction		Total future payments on capital lease finance o bligation s for asset s under construction
201 8	$	214		5		219
201 9		267		7		274
2020		265		9		274
2021		263		11		274
2022		261		13		274
Thereafter		2,362		520		2,882
Non-cash derecognition of capital lease finance obligations at end of lease term		—		934		934
Total future payments	$	3,632		1,499		5,131