On December 6, 2019, certain subsidiaries of the Company (collectively, the “Tenant”) and certain subsidiaries of VICI PropCo (collectively, the “Landlord”) entered into the sale and leaseback transaction for the Acquired Casino properties. The Master Lease does not transfer control of the Acquired Casino properties to VICI Propco subsidiaries. The Company accounts for the transaction as a failed sale-leaseback financing obligation.

When cash proceeds are exchanged, a failed sale-leaseback financing obligation is equal to the proceeds received for the assets that are sold and then leased back. The value of the failed sale-leaseback financing obligations recognized in this transaction was determined to be the fair value of the leased real estate assets. In subsequent periods, a portion of the periodic payment under the Master Lease will be recognized as interest expense with the remainder of the payment reducing the failed sale-leaseback financing obligation using the effective interest method. The failed sale-leaseback obligations will not be reduced to less than the net book value of the leased real estate assets as of the end of the lease term, which is estimated to be $28.5 million.

The fair values of the real estate assets and the related failed sale-leaseback financing obligation were estimated based on the present value of the estimated future payments over the term plus renewal options of 35 years, using an imputed discount rate of approximately 10.6%. The value of the failed sale-leaseback financing obligation is dependent upon assumptions regarding the amount of the payments and the estimated discount rate of the payments required by a market participant.

The Master Lease provides for the lease of land, buildings, structures and other improvements on the land (including barges and riverboats), easements and similar appurtenances to the land and improvements relating to the operations of the leased properties. The Master Lease has an initial term of 15 years with no purchase option. At the Company’s option, the Master Lease may be extended for up to four five year renewal terms beyond the initial 15 year term. The renewal terms are effective as to all, but not less than all, of the property then subject to the Master Lease. The Company does not have the ability to terminate its obligations under the Master Lease prior to its expiration without the Landlord’s consent.

The Master Lease has a triple-net structure, which requires the Tenant to pay substantially all costs associated with the Acquired Casino properties, including real estate taxes, insurance, utilities, maintenance and operational costs. The Master Lease contains certain covenants, including minimum capital improvement expenditures. The covenants under the Master Lease began on January 1, 2020; however, as a result of the casino closures in connection with the COVID-19 pandemic, the Landlord and the Tenant entered into an amendment to the Master Lease in May 2020 that, among other things, waived the Tenant’s capital improvement expenditure requirements for 2020 and deferred to not later than December 31, 2021 certain other expenditures contemplated in the underwriting of the Acquired Casino properties. The Company has provided a guarantee of the Tenant’s obligations under the Master Lease.

The rent payable under the Master Lease is comprised of “Base Rent” and “Variable Rent”. Base rent is:

An initial annual rent (the “Rent”) of approximately $25.0 million.

The Rent will escalate at a rate of 1% for the 2^nd and 3^rd years and the greater of either 1.25% (the “Base Rent Escalator”) or the increase in the Consumer Price Index (“CPI”) for each year starting in the 4^th year and ending the 7^th year.

The Base Rent Escalator is subject to adjustment from and after the 6^th year if the Minimum Rent Coverage Ratio (as defined in the Master Lease) is not satisfied.

Beginning in the 8^th year of the lease term, Rent will be calculated as (i) 80% of the Rent for the 7^th lease year (“Base Rent”), subject to an annual Base Rent Escalator of the greater of 1.25% or CPI subject to adjustment if the Minimum Rent Coverage Ratio is not satisfied, plus (ii) variable rent (“Variable Rent”) equal to 20% of the Rent for the 7^th lease year, plus or minus 4% of the change in average net revenue of the Acquired Casinos calculated as set forth in the Master Lease.

For the 11^th year and thereafter of the initial lease term, the Base Rent will escalate annually as set forth above and the Variable Rent will be recalculated as set forth in the Master Lease.

The estimated future payments include the payments and adjustments to reflect estimated payments as described in the Master Lease, including an annual escalator of up to 1.25% and estimates based on contingent rental payments.

Total payments and interest expense related to the Master Lease for the three and nine months ended September 30, 2020 were as follows.


	For the three months ended		For the nine months ended
	September 30,		September 30,
Amounts in thousands	2020		2020
Payments made	$	6,250	$	16,667
Interest expense on financing obligation	$	7,051	$	21,286

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The future payments related to the Master Lease financing obligation with the Landlord at September 30, 2020 are as follows.


Amounts in thousands
2020	$	6,250
2021		25,250
2022		25,502
2023		25,821
2024		26,144
Thereafter		1,061,061
Total payments		1,170,028
Less imputed interest		(920,597)
Residual Value		28,492
Total	$	277,923