Note 5 – Leases

Master Lease

On July 7, 2015, subsidiaries of Seritage and subsidiaries of Sears Holdings entered into the Master Lease. The Master Lease generally is a triple net lease with respect to all space which is leased thereunder to Sears Holdings, subject to proportional sharing by Sears Holdings for repair and maintenance charges, real property taxes, insurance and other costs and expenses which are common to both the space leased by Sears Holdings and other space occupied by unrelated third-party tenants in the same or other buildings pursuant to third-party leases, space which is recaptured pursuant to the Company recapture rights described below and all other space which is constructed on the properties. Under the Master Lease, Sears Holdings and/or one or more of its subsidiaries will be required to make all expenditures reasonably necessary to maintain the premises in good appearance, repair and condition for as long as they lease the space.

The Master Lease has an initial term of 10 years and contains three options for five-year renewals of the term and a final option for a four-year renewal. As of December 31, 2017 and December 31, 2016, the annual base rent paid directly by Sears Holdings and its subsidiaries under the Master Lease was approximately $93.3 million and $134.0 million, respectively. In each of the initial and first two renewal terms, annual base rent will be increased by 2.0% per annum for each lease year over the rent for the immediately preceding lease year. For subsequent renewal terms, rent will be set at the commencement of the renewal term at a fair market rent based on a customary third-party appraisal process, taking into account all the terms of the Master Lease and other relevant factors, but in no event will the renewal rent be less than the rent payable in the immediately preceding lease year.

Revenues from the Master Lease for the years ended December 31, 2017 and December 31, 2016, and for the period from July 7, 2015 (Date Operations Commenced) through December 31, 2015 are as follows (in thousands and excluding straight-line rent of $0.8 million, $9.9 million and $5.6 million, respectively):

					July 7, 2015
	Year Ended December 31,				(date operations commenced) to
	2017		2016		December 31, 2015
Rental income	$	112,881	$	133,237	$	64,838
Termination fee income		19,315		—		—
Tenant reimbursements		51,672		55,823		25,204
Total revenue	$	183,868	$	189,060	$	90,042

The Master Lease provides the Company with the right to recapture up to approximately 50% of the space occupied by Sears Holdings at the 224 Wholly Owned Properties initially included in the Master Lease (subject to certain exceptions). While the Company will be permitted to exercise its recapture rights all at once or in stages as to any particular property, it will not be permitted to recapture all or substantially all of the space subject to the recapture right at more than 50 Wholly Owned Properties during any lease year. In addition, Seritage has the right to recapture any automotive care centers which are free-standing or attached as “appendages” to the properties, all outparcels or outlots and certain portions of the parking areas and common areas. Upon exercise of these recapture rights, the Company will generally incur certain costs and expenses for the separation of the recaptured space from the remaining Sears Holdings space and can reconfigure and rent the recaptured space to third-party tenants.

The Company also has the right to recapture 100% of the space occupied by Sears Holdings at each of 21 identified Wholly Owned Properties by making a specified lease termination payment to Sears Holdings, after which the Company can reposition and re-lease those stores. The lease termination payment is calculated as the greater of an amount specified at the time the Company entered into the Master Lease with Sears Holdings and an amount equal to 10 times the adjusted EBITDA attributable to such space within the Sears Holdings main store which is not attributable to the space subject to the separate 50% recapture right discussed above for the 12-month period ending at the end of the fiscal quarter ending immediately prior to recapturing such space.

As of December 31, 2017, the Company had exercised certain recapture rights with respect to 56 properties as follows:

Property	Recapture Type	Notice Date(s)
Anchorage, AK	100%	December 2017
Boca Raton, FL	100%	December 2017
Westminster, CA	100%	December 2017
Hicksville, NY	100%	December 2017
Orland Park, IL	100% (1)	December 2017
Florissant, MO	Out parcel	December 2017
Salem, NH	Out parcel	December 2017
Fairfield, CA	Partial	December 2017
Las Vegas, NV	Partial	December 2017
Plantation, FL	Partial	December 2017
Yorktown Heights	Partial	December 2017
Austin, TX	100% (1)	December 2017 / September2017
North Little Rock, AR	Auto Center	September 2017
Ft. Wayne, IN	Out parcel	September 2017
St. Clair Shores, MI	100%	September 2017
Redmond, WA	Auto Center	September 2017
Temecula, CA	Partial	June 2017
Roseville, CA	Auto center	June 2017
North Riverside, IL	Partial	June 2017
Watchung, NJ	100%	June 2017
Canton, OH	Partial	June 2017
Dayton, OH	Auto center	June 2017
Carson, CA	100% (1)	April 2017 / December 2016
San Diego, CA	100% (1)	April 2017
Aventura, FL	100%	April 2017
Hialeah, FL	100% (1)	April 2017
Anderson, SC	100% (1)	April 2017 / July 2016
Charleston, SC	100% (1)	April 2017 / October 2016
Valley View, TX	100%	April 2017
North Miami, FL	100%	March 2017
Cockeysville, MD	Partial	March 2017
Olean, NY	Partial	March 2017
Santa Cruz, CA	Partial	December 2016
Santa Monica, CA	100%	December 2016
Saugus, MA	Partial	December 2016
Guaynabo, PR	Partial	December 2016
Roseville, MI	Partial	November 2016
Troy, MI	Partial	November 2016
West Hartford, CT	100%	October 2016
Rehoboth Beach, DE	Partial	October 2016
St. Petersburg, FL	100%	October 2016
Warwick, RI	Auto center	October 2016
North Hollywood, CA	Partial	July 2016
Orlando, FL	100%	July 2016
Ft. Wayne, IN	Out parcel	July 2016
West Jordan, UT	Partial + auto center	July 2016
Madison, WI	Partial	July 2016
Bowie, MD	Auto center	May 2016
Hagerstown, MD	Auto center	May 2016
Wayne, NJ (2)	Partial + auto center	May 2016
Albany, NY	Auto center	May 2016
Fairfax, VA	Partial + auto center	May 2016
San Antonio, TX	Auto center	March 2016
Honolulu, HI	100%	December 2015
Memphis, TN	100%	December 2015
Braintree, MA	100%	November 2015

(1)	In 2017, the Company converted partial recapture rights to 100% recapture rights and exercised such recapture rights.

(2)	In 2017, the Company contributed this asset to the GGP II JV and retained a 50% ownership interest.

The Master Lease also provides for certain rights to Sears Holdings to terminate the Master Lease with respect to Wholly Owned Properties that cease to be profitable for operation by Sears Holdings. In order to terminate the Master Lease with respect to a certain property, Sears Holdings must make a payment to the Company of an amount equal to one year of rent (together with taxes and other expenses) with respect to such property. Sears Holdings must provide notice of not less than 90 days of their intent to exercise such termination right and such termination right will be limited so that it will not have the effect of reducing the fixed rent under the Master Lease by more than 20% per annum.

As of December 31, 2017, Sears Holdings had terminated the Master Lease with respect to 56 stores totaling 7.4 million square feet of gross leasable area. The aggregate annual base rent at these stores was approximately $23.6 million. Sears Holdings continued to pay the Company rent until it vacated the stores and also paid aggregate termination fees of approximately $45.1 million, an amount equal to one year of aggregate annual base rent plus one year of estimated real estate taxes and operating expenses.

As of December 31, 2017, the Company had announced redevelopment projects at 18 of the terminated properties and will continue to announce redevelopment activity as new leases are signed to occupy the space formerly occupied by Sears Holdings.

					Announced
Property	Square Feet		Notice	Termination	Redevelopment
Cullman, AL		98,500	September 2016	January 2017	Q2 2017
Sierra Vista, AZ		86,100	September 2016	January 2017
Thornton, CO		190,200	September 2016	January 2017	Q1 2017
Chicago, IL		118,800	September 2016	January 2017
Springfield, IL		84,200	September 2016	January 2017	Q3 2016
Elkhart, IN		86,500	September 2016	January 2017	Q4 2016
Merrillville, IN		108,300	September 2016	January 2017	Q4 2016
Houma, LA		96,700	September 2016	January 2017
New Iberia, LA		91,700	September 2016	January 2017	Q2 2017
Alpena, MI		118,200	September 2016	January 2017
Manistee, MI		87,800	September 2016	January 2017
Sault Sainte Marie, MI		92,700	September 2016	January 2017
Kearney, NE		86,500	September 2016	January 2017	Q3 2016
Deming, NM		96,600	September 2016	January 2017
Harlingen, TX		91,700	September 2016	January 2017
Yakima, WA		97,300	September 2016	January 2017
Riverton, WY		94,800	September 2016	January 2017
Riverside, CA		94,500	January 2017	April 2017
Kissimmee, FL		112,505	January 2017	April 2017
Leavenworth, KS		76,853	January 2017	April 2017
Hopkinsville, KY		70,326	January 2017	April 2017
Paducah, KY		108,244	January 2017	April 2017	Q3 2017
Owensboro, KY		68,334	January 2017	April 2017
Detroit Lakes, MN		79,102	January 2017	April 2017
Jefferson City, MO		92,016	January 2017	April 2017	Q2 2017
Henderson, NV		122,823	January 2017	April 2017	Q1 2017
Concord, NC		137,499	January 2017	April 2017
Chapel Hill, OH		187,179	January 2017	April 2017
Kenton, OH		96,066	January 2017	April 2017
Muskogee, OK		87,500	January 2017	April 2017
Mount Pleasant, PA		83,536	January 2017	April 2017
Sioux Falls, SD		72,511	January 2017	April 2017
El Paso, TX		103,657	January 2017	April 2017
Layton, UT		90,010	January 2017	April 2017
Elkins, WV		94,885	January 2017	April 2017
Platteville, WI		94,841	January 2017	April 2017
Sarasota, FL		204,500	June 2017	October 2017
Chicago, IL		293,700	June 2017	October 2017
Overland Park, KS		215,000	June 2017	October 2017
Lafayette, LA		194,900	June 2017	October 2017
Cockeysville, MD		83,900	June 2017	October 2017	Q1 2017
Hagerstown, MD		107,300	June 2017	October 2017	Q1 2016
Roseville, MI		277,000	June 2017	October 2017	Q3 2016
Burnsville, MN		161,700	June 2017	October 2017
Albany, NY		216,200	June 2017	October 2017	Q1 2016
East Northport, NY		187,000	June 2017	October 2017	Q2 2017
Johnson City, NY		155,100	June 2017	October 2017
Olean, NY		75,100	June 2017	October 2017	Q1 2017
Mentor, OH		208,700	June 2017	October 2017
Middleburg Heights, OH		351,600	June 2017	October 2017
Toledo, OH		209,900	June 2017	October 2017
York, PA		82,000	June 2017	October 2017
Warwick, RI		169,200	June 2017	October 2017	Q3 2016 / Q3 2017
Greendale, WI		238,400	June 2017	October 2017	Q4 2017
Friendswood, TX (1)		166,000	June 2017	November 2017
Westwood, TX (1)		215,000	June 2017	January 2018
Total square feet		7,411,187

(1)	The Company and Sears Holdings agreed to extend occupancy beyond October 2017 under the existing Master Lease terms.

Lessor

The Company generally leases space to tenants under non-cancelable operating leases. The leases typically provide for the payment of fixed base rents, as well as reimbursements of real estate taxes, insurance, maintenance and other costs. Certain leases also provide for the payment by the lessee of additional rents based on a percentage of their sales.

As of December 31, 2017, future base rental revenue under non-cancelable operating leases, excluding extension options and signed leases for which rental payments have not yet commenced, is as follows (in thousands):

Year ending December 31,
2018	$	138,488
2019		141,216
2020		139,516
2021		140,120
2022		140,086
Thereafter		465,736
	$	1,165,162

These future minimum amounts do not include tenant reimbursement income or additional rents based on a percentage of tenants’ sales. For the year ended December 31, 2017, the Company recognized $62.5 million of tenant reimbursement income, as well as approximately $0.5 million of additional rent based on a percentage of tenants’ sales which was included in rental income. For the year ended December 31, 2016, the Company recognized $62.3 million of tenant reimbursement income, as well as approximately $0.1 million of additional rent based on a percentage of tenants’ sales which was included in rental income.

As Lessee

The Company recorded rent expense related to leased corporate office space of $0.7 million, $0.6 million and $0.6 million for the year ended December 31, 2017, the year ended December 31, 2016 and the period from July 7, 2015 (Date Operations Commenced) to December 31, 2015. Such rent expense is classified within general and administrative expenses on the consolidated statements of operations.

In addition, in connection with the Transaction, the Company acquired a ground lease for one property. The Company recorded ground rent expense of approximately $50 thousand, $50 thousand and $25 thousand for the year ended December 31, 2017, the year ended December 31, 2016 and the period from July 7, 2015 (Date Operations Commenced) to December 31, 2015. Such ground rent expense is classified within property operating expenses on the consolidated statements of operations. The ground lease requires the Company to make fixed annual rental payments and expires in 2073 assuming all extension options are exercised.