The following is a summary of the general structure of the leases in the Property Portfolio, although the specific terms of each lease can vary significantly. Generally, the Property leases provide for initial terms of 10 to 20 years. The Properties are generally leased under net leases, pursuant to which the tenant typically bears responsibility for substantially all property costs and expenses associated with ongoing maintenance, repair, replacement and operation of the property, including utilities, property taxes and property and liability insurance. Certain Properties are subject to leases under which NNN retains responsibility for specific costs and expenses of the Property. NNN's leases provide for annual base rental payments (generally payable in monthly installments), and generally provide for limited increases in rent as a result of (i) increases in the Consumer Price Index ("CPI"), (ii) fixed increases, or, to a lesser extent, (iii) increases in the tenant’s sales volume.

Generally, NNN's leases provide the tenant with one or more multi-year renewal options, subject to generally the same terms and conditions provided under the initial lease term, including rent increases. NNN’s lease term is based on the non-cancellable base term unless economic incentives make it reasonably certain that an option period to extend the lease will be exercised, in which event NNN includes the options. Some of the leases also provide that in the event NNN wishes to sell the Property subject to that lease, NNN first must offer the lessee the right to purchase the Property on the same terms and conditions as any offer which NNN intends to accept for the sale of the Property.



	September 30, 2019			December 31, 2018
Land and improvements⁽¹⁾	$	2,463,934		$	2,368,891
Buildings and improvements	5,752,916			5,461,888
Leasehold interests	355			3,630
	8,217,205			7,834,409
Less accumulated depreciation and amortization	(1,109,285		)	(1,003,519		)
	7,107,920			6,830,890
Work in progress for buildings and improvements	13,236			8,017
	$	7,121,156		$	6,838,907



	Quarter Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Rental income from operating leases	$	163,674	$	150,418	$	482,306	$	449,216
Earned income from direct financing leases	204		242		624		696
Percentage rent	329		284		1,051		1,018
Real estate expense reimbursement from tenants	4,017		3,712		11,865		11,640
	$	168,224	$	154,656	$	495,846	$	462,570

Some leases provide for a free rent term or scheduled rent increases throughout the lease term. Such amounts are recognized on a straight-line basis over the terms of the leases. For the nine months ended September 30, 2019 and 2018, NNN recognized $1,354,000 and $547,000, respectively, of such income, net of reserves, of which $429,000 and ($163,000) of such income, net of reserves, was recorded during the quarters ended September 30, 2019 and 2018, respectively. At September 30, 2019 and December 31, 2018, the balance of accrued rental income was $28,570,000 and $25,387,000, respectively, net of allowance of $1,842,000.

Since lease renewal periods are exercisable at the option of the tenant, the above table only presents undiscounted cash flows due during the current lease terms. In addition, this table does not include amounts for potential variable rent increases that are based on the CPI or future contingent rents which may be received on the leases based on a percentage of the tenant’s sales volume.



	September 30, 2019			December 31, 2018
Minimum lease payments to be received	$	9,860		$	10,899
Estimated unguaranteed residual values	3,632			4,395
Less unearned income	(6,610		)	(7,225		)
Net investment in direct financing leases	$	6,882		$	8,069

The table above does not include future minimum lease payments for renewal periods, potential variable CPI rent increases or contingent rental payments that may become due in future periods (see Real Estate Portfolio – Accounted for Using the Operating Method).

On a quarterly basis, the Company evaluates its Properties for held for sale classification based on specific criteria as outlined in ASC 360, Property, Plant and Equipment, including management’s intent to commit to a plan to sell the asset. NNN anticipates the disposition of Properties classified as held for sale to occur within 12 months. As of September 30, 2019, NNN had five of its Properties categorized as held for sale. NNN's real estate held for sale at December 31, 2018, included eight Properties, three of which were sold in 2019. Real estate held for sale consisted of the following as of (dollars in thousands):



	September 30, 2019			December 31, 2018
Land and improvements	$	5,120		$	13,720
Building and improvements	15,591			41,738
	20,711			55,458
Less accumulated depreciation and amortization	(6,172		)	(12,752		)
Less impairment	(578		)	(14,250		)
	$	13,961		$	28,456



	Quarter Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	# of Sold Properties	Gain		# of Sold Properties	Gain		# of Sold Properties	Gain		# of Sold Properties	Gain
Gain on disposition of real estate	13	$	2,061	18	$	14,348	43	$	25,508	46	$	57,050

NNN has committed to fund construction on 12 Properties. The improvements on such Properties are estimated to be completed within 12 months. These construction commitments, as of September 30, 2019, are outlined in the table below (dollars in thousands):

Management periodically assesses its real estate for possible impairment whenever certain events or changes in circumstances indicate that the carrying amount of the asset, including accrued rental income, may not be recoverable through operations. Events or circumstances that may occur include significant changes in real estate market conditions and the ability of NNN to re-lease or sell properties that are vacant or become vacant in a reasonable period of time. Impairments are measured as the amount by which the current book value of the asset exceeds the estimated fair value of the asset. As a result of the Company's review of long-lived assets, including identifiable intangible assets, NNN recognized real estate impairments, net of recoveries of $21,124,000 and $9,718,000 for the nine months ended September 30, 2019 and 2018, respectively, of which $10,692,000 and $3,635,000 was recorded during the quarters ended September 30, 2019 and 2018, respectively.

The valuation of impaired assets is determined using widely accepted valuation techniques including discounted cash flow analysis, income capitalization, analysis of recent comparable sales transactions, actual sales negotiations and bona fide purchase offers received from third parties, which are Level 3 inputs. NNN may consider a single valuation technique or multiple valuation techniques, as appropriate, when estimating the fair value of its real estate.