Note 15: Property and Equipment, net

Property and equipment, net, as of December 31, 2017 and 2016 are as follows (in thousands):


	2017			2016
Land, buildings, and improvements (including build-to-suit lease)	$	68,404		$	67,841
Equipment and purchased software		93,849			86,665
Furniture and leasehold improvements		20,270			18,713

		182,523			173,219
Less accumulated depreciation and amortization		(83,761	)		(69,745	)

Property and equipment, net	$	98,762		$	103,474

Depreciation expense was $16.8, $14.1, and $12.2 million for the years ended December 31, 2017, 2016, and 2015, respectively.

Fremont, California. We entered into a 15-year lease agreement pursuant to which we leased approximately 59,000 square feet of a building located in Fremont, California. The lease commenced on September 1, 2013. Minimum lease payments are $18.5 million, net of full abatement of rent for the first three years of the lease term. During the initial lease term, we also have certain rights of first refusal to (i) lease the remaining portion of the facility and/or (ii) purchase the facility. This location contains the engineering, marketing, and administrative operations for our Fiery operating segment. We relocated our former corporate headquarters to the adjacent building, which we purchased during the fourth quarter of 2013.

The leased facility was a cold shell requiring additional build-out and tenant improvements. The landlord paid the costs of the build-out up to $4.5 million, including all structural improvements, and we paid the costs of tenant improvements beyond that amount. We paid $5.3 million of tenant improvements, including furniture and equipment and capitalized interest. The landlord is responsible for costs related to force majeure events that result in any damage to the facility. We were responsible for cost over-runs, if any, related to force majeure events including strikes, war, and material availability. Since we were responsible for cost overruns related to certain force majeure events, we were in substance offering an indemnification for events outside of our control. As such, we are deemed to be the accounting owner of the portion of the facility that we occupy. As of December 31, 2017, and 2016, we have capitalized $10.0 and $10.3 million, respectively, in property and equipment based on the estimated replacement cost of the portion of the building that we occupy, including capitalized interest, reduced by accumulated depreciation.

Monthly lease payments are allocated between the land element of the lease, which is accounted for as an operating lease, and the imputed financing obligation. The imputed financing obligation is being amortized in accordance with the effective interest method using the interest rate determined in accordance with the requirements of sale leaseback accounting. The imputed interest cost incurred during the construction period was capitalized as a component of the construction cost. As of December 31, 2017, the imputed financing obligation in connection with the facility was $13.9 million, including accrued interest, which is classified as a noncurrent imputed financing obligation in our Consolidated Balance Sheet. If the requirements of sale leaseback accounting are satisfied, or at the end of the initial lease term, we will reverse the net book value of the building and the corresponding imputed financing obligation.

Eagan, Minnesota. In 2016, management approved a plan to sell approximately 5.6 acres and the office building located at 1340 Corporate Center Curve, Eagan, Minnesota, consisting of 43,682 square feet, and the related improvements were classified as held for sale. On April 13, 2017, we entered into an agreement under which we agreed to sell the office building, improvements, and related land, subject to completion of a 150-day due diligence period, which expired on September 7, 2017 without the transaction closing. Accordingly, assets previously recorded as held for sale of $3.8 million, which consisted of $2.9 million net book value of the facility and $0.9 million of related land as of December 31, 2016, have been classified as assets held for use within property and equipment, net, in our Consolidated Balance Sheet as of December 31, 2017.

Manchester, New Hampshire. On August 26, 2016, we entered into a lease agreement and have accounted for a lease term of 48.5 years, inclusive of two renewal options of 5.0 and 3.5 years, with the City of Manchester to lease 16.9 acres of land adjacent to the Manchester Regional Airport. The land is subleased to BTMU during the term of the lease related to the manufacturing facility that is being constructed on the site, which is described below. Minimum lease payments are $13.3 million during the entire 48.5 year term of the land lease, excluding six months of the land lease that is financed into the manufacturing facility lease.

On August 26, 2016, we entered into a six-year lease with BTMU whereby a 225,000 square foot manufacturing and warehouse facility is under construction related to our super-wide format industrial digital inkjet printer business at a projected cost of $40 million and a construction period of 20 months. Minimum lease payments during the entire initial six-year term are $1.8 million. Upon completion of the initial six-year term, we have the option to renew the lease, purchase the facility, or return the facility to BTMU subject to an 89% residual value guarantee under which we would recognize additional rent expense in the form of a variable rent payment. We have assessed our exposure in relation to the residual value guarantee and believe that there is no deficiency to the guaranteed value with respect to funds expended by BTMU as of December 31, 2017. We are treated as the owner of the facility for federal income tax purposes.

The funds pledged under the lease represent 115% of the total expenditures made by BTMU through December 31, 2017. The funds are invested in $32.5 million of cash and cash equivalents at December 31, 2017; and $5.1 and $1.2 million of U.S. government securities and cash equivalents, respectively at December 31, 2016, with a third party trustee and will be restricted during the construction period. Upon completion of construction, the funds will be released as cash and cash equivalents. The portion of released funds that represents 100% of the total expenditures made by BTMU will be deposited with BTMU and restricted as collateral until the end of the underlying lease period.

The funds pledged as collateral are invested in cash equivalents as of December 31, 2017, and cash equivalents and short-term investments as of December 31, 2016, and are classified as restricted cash equivalents and investments on our Consolidated Balance Sheets.

We have applied the accounting and disclosure requirements set forth in ASC 810-10 for VIEs. We have evaluated the BTMU lease agreement to determine if the arrangement qualifies as a VIE under ASC 810-10. We have determined that the lease agreement does not qualify as a VIE and, as such, we are not required to consolidate the VIE in our consolidated financial statements.

Meredith, New Hampshire. During the fourth quarter of 2017, management approved a plan to sell approximately 31.5 acres of land and two manufacturing buildings located at One Vutek Place and 189 Waukewan Street, Meredith, New Hampshire, consisting of 163,000 total square feet. Assets previously recorded within property and equipment, net, of $5.1 million consisting of $4.5 million net book value of the facility and $0.6 million of related land have been reclassified as assets held for sale in our Consolidated Balance Sheet as of December 31, 2017. Management expects the sale to be completed by December 31, 2018.

The fair value of the Meredith facility, based on expected sales proceeds, less cost to sell, is expected to be less than the carrying amount of the assets. As a result, we incurred an impairment loss of approximately $0.9 million, which has been recognized on our Consolidated Statements of Operations in the year ended December 31, 2017.