Why is rent expense omitted from Exhibit 6 regarding 7 Brew franchises?
7_Brew Franchise · 2025 FDDAnswer from 2025 FDD Document
- xii. Post-Royalties, Brand Fund, and Technology Fee EBITDAR—earnings before interest, taxes, depreciation, amortization, and rent —is calculated by subtracting Royalties expense, Brand Fund expense, and the Technology Fee from "Store-Level EBITDAR" (as defined in note viii above). Rent expense is omitted from Exhibit 6 because of the wide variation in rental payment amounts of which we are aware across the Franchised Stores, which is due primarily to the different rental structures under which such Franchised Stores have been leased. The Franchised Stores include (1) real property that is leased on a "ground lease" basis with the tenant (the Store operator) being obligated for all (or the substantial portion of) the development costs relating to the Store, (2) real property that is leased on a "build-to-suit" basis with the landlord being obligated for all (or the substantial portion of) the development costs relating to the Store, (3) real property that is purchased by an affiliate of the tenant (the Store operator) and then leased to the tenant in a non-arms-length manner, and (4) real property that is purchased directly by the Store operator. Regardless of the structure for leasing or acquiring the property upon which the Store will operate, which the franchisee controls based on its business objectives and structure and the market in which it operates, we generally advise that rent expense should be no more than 5% of the Store's Gross Sales.
Source: Item 19 — FINANCIAL PERFORMANCE REPRESENTATIONS (FDD pages 61–73)
What This Means (2025 FDD)
According to 7 Brew's 2025 Franchise Disclosure Document, rent expense is omitted from Exhibit 6 due to the significant variation in rental payment amounts among franchised stores. This variation is primarily attributed to the different rental structures under which these stores operate. These structures include ground leases where the tenant covers development costs, build-to-suit leases where the landlord covers development costs, properties purchased by an affiliate and leased back in a non-arms-length manner, and properties directly purchased by the store operator.
This wide range of rental arrangements makes it difficult to provide a standardized rent expense figure that would be representative for all franchisees. The document indicates that the franchisee has control over the structure for leasing or acquiring the property based on their business objectives, structure, and the market in which they operate.
Despite the omission of rent expense from Exhibit 6, 7 Brew generally advises that rent expense should be no more than 5% of the store's gross sales. This guideline provides a benchmark for franchisees to consider when negotiating lease terms or making property acquisition decisions. Prospective franchisees should carefully consider their local market conditions and business plan when determining the optimal rental structure for their 7 Brew location.