Real Estate, Operating Real Estate, and Assets Held for Sale

Real Estate — Land, Buildings and Improvements

Real estate, which consists of land and buildings leased to others, at cost, and which are subject to operating leases, is summarized as follows (in thousands):



	September 30, 2017			December 31, 2016
Land	$	564,268		$	563,050
Buildings and improvements	2,188,256			2,182,374
Real estate under construction	981			—
Less: Accumulated depreciation	(336,331		)	(280,657		)
	$	2,417,174		$	2,464,767

During the nine months ended September 30, 2017, the U.S. dollar weakened against the euro, as the end-of-period rate for the U.S. dollar in relation to the euro increased by 12.0% to $1.1806 from $1.0541. As a result, the carrying value of our real estate increased by $127.5 million from December 31, 2016 to September 30, 2017.

Depreciation expense, including the effect of foreign currency translation, on our real estate was $16.2 million and $15.9 million for the three months ended September 30, 2017 and 2016, respectively, and $48.4 million and $47.9 million for the nine months ended September 30, 2017 and 2016, respectively.

Acquisitions of Real Estate

On February 2, 2017, we acquired an office facility in Buffalo Grove, Illinois, which was deemed to be a real estate asset acquisition, at a total cost of $11.5 million, including land of $2.0 million, building of $7.5 million (including acquisition-related costs of $0.5 million, which were capitalized), and an intangible asset of $2.0 million (Note 7).

On July 19, 2017, we acquired a parcel of land located in Zary, Poland for $0.4 million, which is adjacent to an industrial facility we previously acquired. The land will be used to construct an expansion to the existing facility, which is expected to cost $5.9 million (amounts are based on the exchange rate of the euro on the date of acquisition) and to be completed in 2018.

Operating Real Estate — Land, Buildings and Improvements

Operating real estate, which consists of our wholly owned domestic self-storage operations, at cost, is summarized as follows (in thousands):



	September 30, 2017			December 31, 2016
Land	$	55,645		$	55,645
Buildings and improvements	204,304			203,326
Less: Accumulated depreciation	(23,909		)	(18,876		)
	$	236,040		$	240,095

Depreciation expense on our operating real estate was $1.7 million for both the three months ended September 30, 2017 and 2016, and $5.0 million and $6.1 million for the nine months ended September 30, 2017 and 2016, respectively.

Dispositions and Assets Held for Sale

Below is a summary of our properties held for sale (in thousands):



	September 30, 2017		December 31, 2016
Real estate, net	$	—	$	14,850
Assets held for sale	$	—	$	14,850

At December 31, 2016, we had a property classified as Assets held for sale. On March 13, 2017, we sold this property for $14.1 million, net of closing costs, to a third party. In addition, during the nine months ended September 30, 2017, we sold three net-leased properties, two of which were accounted for as direct financing leases (Note 5, Note 13).

I-drive Property Disposition and I-drive Wheel Restructuring

In 2012, we entered into a contract for the construction of a domestic build-to-suit project with IDL Master Tenant, LLC, a developer, for the construction of an entertainment complex, which we refer to as the I-drive Property, and an observation wheel, which we refer to as the I-drive Wheel, at the I-drive Property. We had accounted for the construction of the I-drive Property as Real estate under construction. The funding of the I-drive Wheel was provided in the form of a $50.0 million loan, which we refer to as the Wheel Loan, pursuant to the guidance of the acquisition, development and construction of real estate, or ADC Arrangement. We accounted for the Wheel Loan under the equity method of accounting as the characteristics of the arrangement with the third-party developer were more similar to a jointly owned investment or partnership rather than a loan (Note 6). During 2015, the construction on both the I-drive Property and the I-drive Wheel were completed and placed into service.

On March 17, 2017, the developer exercised its purchase option and acquired the I-drive Property for a purchase price of $117.5 million (Note 13). The $60.0 million non-recourse mortgage loan encumbering the I-drive Property was repaid at closing by the buyer (Note 10). In connection with the disposition, we provided seller financing in the form of a $34.0 million mezzanine loan (Note 5), which was considered to be a non-cash investing activity, and the sale was accounted for under the cost recovery method. As a result, the $2.1 million gain on sale was deferred and will be recognized upon recovery of the cost of the property. As a result of the sale of the I-drive Property, we no longer consider this entity to be a VIE at September 30, 2017.