4. Leases

The Company has significant leases that include most domestic Company-owned restaurant and commissary locations. Other domestic leases include tractor and trailer leases used by our distribution subsidiary as well as commissary equipment. Additionally, the Company leases a significant number of restaurants within the United Kingdom; these restaurants are then subleased to the franchisees. The Company’s leases are classified as operating leases, with terms as follows:


	Average lease term
Domestic Company-owned restaurants	Five years, plus at least one renewal
United Kingdom franchise-owned restaurants	15 years
Domestic commissary locations	10 years, plus at least one renewal
Domestic and international tractors and trailers	Five to seven years
Domestic and international commissary and office equipment	Three to five years

The Company determines if an arrangement is or contains a lease at contract inception and recognizes a right-of-use asset and a lease liability at the lease commencement date. Leases with an initial term of 12 months or less but greater than one month are not recorded on the balance sheet for select asset classes. The lease liability is measured at the present value of future lease payments as of the lease commencement date, or the opening balance sheet date for leases existing at adoption of Topic 842. The right-of-use asset recognized is based on the lease liability adjusted for prepaid and deferred rent and unamortized lease incentives.

Certain leases provide that the lease payments may be increased annually based on the fixed rate terms or adjustable terms such as the Consumer Price Index. Future base rent escalations that are not contractually quantifiable as of the lease commencement date are not included in our lease liability.

The following schedule details the total operating lease assets and liabilities on the Condensed Consolidated Balance Sheet as of March 31, 2019 and the date of adoption on December 31, 2018:


Leases			March 31,		December 31,
(thousands)	Classification		2019		2018
Assets
Operating lease assets, net	Right-of-Use Assets	$	150,216	$	161,027
Operating lease assets, net	Assets Held for Sale		3,900		—
Total lease assets		$	154,116	$	161,027
Liabilities
Current Operating	Current Lease Liabilities		22,546		25,348
Noncurrent Operating	Long-term Lease Liabilities		130,391		137,511
Operating leases held for sale	Accrued Expenses and other current liabilities		4,065		—
Total lease liabilities		$	157,002	$	162,859

Operating lease assets are recorded net of accumulated amortization of $7.5 million as of March 31, 2019.

Lease expense for lease payments is recognized on a straight-line basis over the lease term. Lease expense is comprised of operating lease costs, short-term lease costs, and variable lease costs, which are primarily comprised of common area maintenance, real estate taxes, and insurance for the Company’s real estate leases. Lease costs also include variable rent, which is primarily related to the Company’s supply chain tractor and trailer leases that are based on a rate per mile. Lease expense for the first quarter of 2019 is as follows:


		Three Months Ended
(in thousands)		March 31, 2019
Operating lease cost	$	10,794
Short-term lease cost		791
Variable lease cost		2,646
Total lease costs	$	14,231
Sublease income		(2,339)
Total lease costs, net of sublease income	$	11,892

Future minimum lease payments and sublease income under contractually-obligated leases as of March 31, 2019 are as follows (in thousands):


Fiscal Year	Lease Costs		Expected Sublease Income
Remainder of 2019	$	26,018	$	6,463
2020		35,361		8,259
2021		30,600		7,981
2022		25,042		7,719
2023		19,223		7,463
Thereafter		67,133		44,077
Total future minimum lease payments		203,377		81,962
Less imputed interest		(46,375)		—
Less lease liabilities held for sale (1)		(4,065)		—
Total present value of Lease Liabilities	$	152,937	$	81,962

(1)

Lease liabilities of $4.1 million are separately reported in the Company’s Condensed Consolidated Balance Sheets under the caption “Accrued expenses and other current liabilities”.

Future minimum lease payments and sublease income under contractually-obligated leases as of December 30, 2018 were as follows:


Fiscal Year	Lease Costs		Expected Sublease Income
2019	$	40,834	$	8,079
2020		36,631		8,061
2021		31,159		7,818
2022		25,188		7,462
2023		18,694		7,182
Thereafter		57,304		42,518
Total future minimum lease payments		209,810		81,120

As of March 31, 2019, the Company had operating leases for approximately 65 new tractor trailers, which have not yet commenced and have a collective estimated future rental commitment of approximately $12 million. These leases will have terms up to seven years. Amounts related to these trucks are not included in the future minimum lease payments schedule above.

Lessor Operating Leases

We sublease certain retail space to our franchisees in the United Kingdom which are primarily operating leases. At March 31, 2019, we leased and subleased approximately 350 Papa John’s restaurants to franchisees in the United Kingdom. The initial lease terms on the franchised sites in the United Kingdom are generally 15 years. The Company has the option to negotiate an extension toward the end of the lease term at the landlord’s discretion. Rental income, primarily derived from properties leased and subleased to franchisees in the United Kingdom, is recognized on a straight-line basis over the respective operating lease terms, in accordance with Topic 842, similar to previous guidance.

Lease guarantees

As a result of assigning our interest in obligations under property leases as a condition of the refranchising of certain restaurants, we are contingently liable for payment of approximately 97 domestic leases. These leases have varying terms, the latest of which expires in 2033. As of March 31, 2019, the estimated maximum amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessees was $10.9 million. This contingent liability is not included in the Condensed Consolidated Balance Sheet or future minimum lease obligation. The fair value of the guarantee is not material.

There were no leases recorded between related parties.

Supplemental Cash Flow & Other Information

Supplemental cash flow information related to leases for the periods reported is as follows:


		Three Months Ended
(in thousands, except for weighted-average amounts)		March 31, 2019
Cash paid for operating lease liabilities	$	10,116
Right-of-use assets obtained in exchange for new operating lease liabilities		1,040
Cash received from sublease income		2,061

Weighted-average remaining lease term of operating leases		7.34
Weighted-average discount rate of operating leases		6.91%