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Finance Receivables
 12 Months Ended
Dec. 31, 2021
Receivables [Abstract]  
Financing Receivables Finance Receivables
 
Assets representing rights to receive money on demand or at fixed or determinable dates are referred to as finance receivables. Our finance receivables portfolio consists of our notes receivable (which are included in Other assets, net in the consolidated financial statements) and our Net investments in direct financing leases (net of allowance for credit losses). Operating leases are not included in finance receivables. See Note 2 and Note 4 for information on ROU operating lease assets recognized on our consolidated balance sheets.
Notes Receivable

As of December 31, 2021, our notes receivable consisted of a $28.0 million mezzanine tranche of 10-year commercial mortgage-backed securities on the Cipriani banquet halls in New York, New York, with a maturity date of July 2024. The mezzanine tranche is subordinated to a $60.0 million senior loan on the properties. Interest-only payments at a rate of 10% per annum are due through its maturity date. As of both December 31, 2021 and 2020, the balance for this note receivable remained $28.0 million. On July 28, 2020, we were notified that the borrower has defaulted on the mortgage loan senior to our mezzanine tranche, and since that date through December 31, 2021, we have received $4.0 million from the borrower, which is recognized as a liability within Accounts payable, accrued expenses and other liabilities in our consolidated balance sheets. We are currently evaluating our rights and options in connection with the senior loan default and therefore have not recognized these amounts within interest income for the year ended December 31, 2021 or the third and fourth quarters of 2020.

On April 9, 2019, we received full repayment totaling $36.0 million on the Mills Fleet Farm Group LLC mezzanine loan.

Interest income recognized from our notes receivable was $1.4 million and $4.1 million for the years ended December 31, 2020 and 2019, respectively, and is included in Other operating and interest income in our consolidated statements of income.

Net Investments in Direct Financing Leases

Net investments in our direct financing lease investments is summarized as follows (in thousands):
December 31,
20212020
Lease payments receivable$5,192 $14,325 
Unguaranteed residual value10,550 15,559 
15,742 29,884 
Less: unearned income(4,293)(12,466)
Less: allowance for credit losses— (485)
$11,449 $16,933 

Interest income from direct financing leases was $1.5 million, $3.2 million, and $3.9 million for the years ended December 31, 2021, 2020, and 2019, respectively, and is included in Lease revenues — net-leased in our consolidated statements of income.

During the year ended December 31, 2021, we sold a property accounted for as a direct financing lease that had an aggregate net carrying value of $3.6 million. In connection with this disposition, we removed the related allowance for credit losses of $0.5 million. During the year ended December 31, 2021, we reclassified a property with a carrying value of $1.8 million from Net investments in direct financing leases to Real estate — Land, buildings and improvements in connection with a change in lease classification due to a lease termination (Note 4).

Upon our adoption of ASU 2016-13 on January 1, 2020, we applied changes in loss reserves through a cumulative-effect adjustment to retained earnings totaling $6.9 million, which is reflected within our consolidated statements of equity (Note 2), as well as an additional allowance for credit loss of $4.9 million, due to changes in expected economic conditions for a net investment in a direct financing lease, which is reflected in Allowance for credit losses in our consolidated statements of income. During the fourth quarter of 2020, the tenant emerged from a pre-packaged bankruptcy, leading to a reversal of $7.8 million of the original reserve for this property, which is included in Allowance for credit losses in our consolidated statements of income. The investment was reclassified as an operating lease in 2020, and is therefore not reflected in the table above. We did not record an additional allowance for credit losses during the year ended December 31, 2021.
Scheduled Future Lease Payments to be Received

Scheduled future lease payments to be received (exclusive of expenses paid by tenants, percentage rents, and future CPI-based adjustments) under non-cancelable direct financing leases as of December 31, 2021 were as follows (in thousands):
Years Ending December 31, Total
2022$835 
2023863 
2024892 
2025921 
2026951 
Thereafter730 
Total$5,192 

See Note 4 for scheduled lease payments to be received under non-cancelable operating leases.

Credit Quality of Finance Receivables
 
We generally invest in facilities that we believe are critical to a tenant’s business and therefore have a lower risk of tenant default. As of both December 31, 2021 and 2020, we had no significant finance receivable balances that were past due; however, we have an allowance for credit losses. Other than the lease termination noted under Net Investments in Direct Financing Leases above, there were no material modifications of finance receivables during the year ended December 31, 2021.

We evaluate the credit quality of our finance receivables utilizing an internal five-point credit rating scale, with one representing the highest credit quality and five representing the lowest. A credit quality of one through three indicates a range of investment grade to stable. A credit quality of four through five indicates inclusion on the watch list to risk of default. The credit quality evaluation of our finance receivables is updated quarterly.

A summary of our finance receivables by internal credit quality rating is as follows (dollars in thousands):
Number of Tenants/Obligors at December 31,Carrying Value at December 31,
Internal Credit Quality Indicator2021202020212020
1 – 313$11,449 $16,933 
41128,000 28,000 
5——— — 
0$39,449 $44,933