Leases

The Company's material leases consist of restaurant locations and its executive offices with expiration dates through 2044. In general, the leases have remaining terms of 1-20 years, most of which include options to extend the leases for additional five-year periods. The lease term is generally the minimum noncancelable period of the lease. The Company does not include option periods unless the Company determines that it is reasonably certain of exercising the option at inception or when a triggering event occurs.

The Company determines if an arrangement is a lease and whether it is an operating lease or finance lease at inception. The operating right-of-use assets and operating lease liabilities are recognized at the lease commencement date. In determining the Company’s operating right-of-use assets and operating lease liabilities, the Company applies a discount rate to the lease payments within each lease agreement. As most of the Company’s lease agreements do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating right-of-use asset also includes any advanced payments made and is reduced by lease incentives, initial direct costs incurred and impairment of operating lease right-of-use assets and adjusted by favorable lease assets and unfavorable lease liabilities.

Some of the Company's lease agreements contain rent escalation clauses (including adjustments based on changes in indexes), rent holidays, capital improvement funding or other lease concessions. The Company recognizes rental expense on a straight-line basis based on fixed components of a lease arrangement and the Company amortizes this expense over the term of the lease beginning with the date of initial possession. Variable lease components represent amounts that are not fixed in nature and are recognized in expense as incurred.

The Company has subleased certain properties to franchisees and other third parties where the Company remains primarily liable to the landlord for the performance of all obligations in the event that the sub-lessee does not perform its obligations under the lease. As a result of the sublease arrangements, future rental commitments under operating leases will be offset by sublease amounts to be paid by the sub-lessee. In general, the terms of the sublease are similar to the terms of the master lease.

The components of lease cost for the fifty-two weeks ended December 31, 2019 were as follows (in thousands):



	Classification	52 Weeks Ended December 31, 2019
Operating lease cost	Occupancy and other operating expenses, Occupancy and other - franchise subleases and other, Pre-opening costs, Restaurant closure charges, net and General and administrative	$	38,816
Finance lease cost:
Amortization of right of use assets	Depreciation and amortization	451
Interest on lease liabilities	Interest expense	95
Short-term lease cost	Occupancy and other operating expenses	421
Variable lease cost	Occupancy and other operating expenses, Occupancy and other - franchise subleases and other and Restaurant closure charges, net	1,769
Sublease income	Franchise sublease and other income	(4,448		)
Total lease cost		$	37,104

Prior to the adoption of Topic 842, the components of rent expense for all non-cancelable operating leases for the fifty-two weeks ended January 1, 2019 and January 2, 2018 were comprised of the following (in thousands):



	52 Weeks Ended			52 Weeks Ended
	January 1, 2019			January 2, 2018
Minimum rental expense	$	29,134		$	27,372
Favorable and unfavorable lease assets and liabilities amortization, net	(767		)	(809		)
Straight-line rent expense	722			826
Contingent rent expense	715			685
	$	29,804		$	28,074

Supplemental balance sheet information related to the Company's operating and finance leases (noting the financial statement caption each is included with) as of December 31, 2019 and January 1, 2019 was as follows (in thousands):



	December 31, 2019			January 1, 2019
Operating lease assets:
Operating lease right-of-use assets	$	258,278		$	—
Operating lease liabilities:
Current portion of operating lease liabilities	$	17,848		$	—
Operating lease liabilities, excluding current portion	257,361			—
Total operating lease liabilities	$	275,209		$	—

Finance lease assets:
Buildings under finance leases	$	871		$	3,370
Accumulated depreciation	(334		)	(2,193		)
Finance lease asset, net	$	537		$	1,177
Finance lease obligations:
Current portion of finance lease obligations	$	162		$	510
Long-term portion of finance lease obligations	412			757
Total finance lease obligations	$	574		$	1,267

As of January 1, 2019, deferred rent liability was $16.6 million, which included unfavorable lease liabilities of $12.0 million, net of accumulated amortization of $7.2 million. On January 2, 2019, the Company reclassified the deferred rent liability, including the unfavorable lease liabilities, to operating lease right-of-use assets in connection with the adoption of Topic 842.



Weighted Average Remaining Lease Term (in years)		December 31, 2019
Operating leases		12.6
Finance leases		4.0



Weighted Average Discount Rate	December 31, 2019
Operating leases	6.61	%
Finance leases	10.36	%

Supplemental cash flow information related to leases was as follows (in thousands):



	52 Weeks Ended December 31, 2019
Cash paid for amounts in the measurement of lease liabilities:
Operating cash flows used for operating leases	$	33,009
Operating cash flows used for finance leases	$	95
Financing cash flows used for finance leases	$	489

The estimated future lease payments as of December 31, 2019 are as follows (in thousands):



	Finance Lease Liabilities			Operating Lease Liabilities			Operating Subleases			Net Lease Commitments
2020	$	214		$	35,414		$	(5,858	)	$	29,770
2021	200			38,392			(5,784		)	32,808
2022	86			40,077			(6,317		)	33,846
2023	79			34,971			(5,701		)	29,349
2024	73			29,254			(5,085		)	24,242
Thereafter	52			237,350			(54,513		)	182,889
Total lease payments	$	704		$	415,458		$	(83,258	)	$	332,904
Amounts representing interest	(130		)	(140,249		)				(140,379		)
Present value of lease obligations	$	574		$	275,209					$	192,525

The Company has subleased 57 properties to franchisees and other third parties where the Company remains primarily liable to the landlord for the performance of all obligations in the event that the sub-lessee does not perform its obligations under the lease. As a result of the sublease arrangements, future minimum rental commitments under operating leases will be offset by sublease amounts to be paid by the sub-lessee. The total of minimum sublease amounts to be received in the future under non-cancelable subleases is $83.3 million as of December 31, 2019.

As of December 31, 2019, we have legally binding lease payments related to restaurant leases that have not yet commenced of $19.5 million.

Franchise sublease income which includes minimum rent, percentage rent, real estate taxes and common area maintenance is classified separately under franchise sublease and other income on the consolidated statements of comprehensive (loss) income. Franchise sublease expenses which include minimum rent, percentage rent, real estate taxes and common area maintenance are classified separately under occupancy and other – franchise sublease and other on the consolidated statements of comprehensive (loss) income. For the fifty-two weeks ended December 31, 2019, franchise sublease expenses also include $1.4 million associated with the closure or net sublease shortfall of restaurants classified separately under restaurant closure charges, net on the consolidated statements of comprehensive (loss) income. Total franchise sublease income and franchise sublease expense for the Company comprise the following (in thousands):



	52 Weeks Ended		52 Weeks Ended			52 Weeks Ended
	December 31, 2019		January 1, 2019			January 2, 2018
Franchise sublease income	(4,448	)	$	(3,115	)	$	(2,844	)
Franchise sublease expense	5,080		2,855			2,608

One Del Taco franchisee has a direct sublease with a third party, and Del Taco is a guarantor on the sublease which has a remaining term of 12 years, expiring in 2031, and remaining lease payments total approximately $1.6 million. The Company would remain a guarantor of the lease in the event the lease is extended for any established renewal periods. In late 2019, the franchisee defaulted on the lease payments. As such, the Company accrued a liability of approximately $0.1 million as of December 31, 2019, representing the estimated payments that the Company will be liable for until it is able to find a new franchisee or convert the restaurant to a company-operated restaurant.

During Fiscal 2019, the Company entered into three sale-leaseback arrangements with third party private investors, with two arrangements occurring during the first quarter of 2019 and one during the second quarter of 2019. These sale-leaseback transactions do not provide for any continuing involvement by the Company other than normal leases where the Company intends to use the property during the lease term. The leases have been accounted for as operating leases. The net proceeds from the transactions totaled approximately $12.7 million. Under two of the arrangements, the Company sold the land and buildings related to restaurants constructed during 2018 and leased them back for a term of 20 years. Under one of the arrangements, the Company sold the land related to a restaurant constructed during 2018 and leased it back for a term of 20 years. The sale of these properties resulted in a loss of approximately $0.2 million which is included in loss on disposal of assets and adjustments to assets held for sale, net in the consolidated statements of comprehensive (loss) income. The assets sold were included in assets held for sale as of January 1, 2019.

During Fiscal 2017, the Company entered into two sale-leaseback arrangements with third party private investors. These sale-leaseback transactions do not provide for any continuing involvement by the Company other than normal leases where the Company intends to use the property during the lease term. The leases have been accounted for as operating leases. The net proceeds from the transactions totaled approximately $9.9 million. Under one of the arrangements, the Company sold the land and building of an existing restaurant and leased it back for a term of 20 years. Under the other arrangement, the Company sold the land and building of a recently constructed restaurant and leased it back for a term of 20 years. The sale of these properties resulted in a loss of $0.3 million, which is included in loss on disposal of assets and adjustments to assets held for sale, net in the consolidated statements of comprehensive (loss) income.