How does Bojangles determine the present value of lease payments when the lease contract does not provide a readily determinable implicit rate?
Bojangles Franchise · 2025 FDDAnswer from 2025 FDD Document
We determine if an arrangement is a lease at inception or modification of a contract and classify each lease as either an operating or finance lease at commencement. Leases that are economically similar to the purchase of assets are generally classified as finance leases; otherwise, the leases are classified as operating leases. The Company only reassesses lease classifications subsequent to commencement upon a change in the expected lease term or modification of the contract. Finance and operating lease assets represent the Company's right to use an underlying asset for the lease term, and lease obligations represent the Company's obligation to make lease payments arising from the lease. These assets and obligations are recognized at the lease commencement date based on the present value of lease payments, net of incentives, over the lease term. The Company's lease terms include option periods to extend the lease when it is reasonably certain that those options will be exercised. Options to extend have varying rates and terms for each lease. Generally, the Company's lease contracts do not provide a readily determinable implicit rate, and therefore, the Company uses an estimated incremental borrowing rate as of the lease commencement date in determining the present value of lease payments. The estimate of the incremental borrowing rate reflects considerations such as market rates for the Company's outstanding collateralized debt, interpolations of rates for leases with terms that differ from the outstanding debt, and market rates for debt of companies with similar credit ratings. The lease asset also reflects any prepaid rent, initial direct costs incurred, and lease incentives received.
Source: Item 22 — CONTRACTS (FDD page 82)
What This Means (2025 FDD)
According to Bojangles's 2025 Franchise Disclosure Document, the company determines if an arrangement is a lease at the start of the contract and classifies each lease as either operating or finance. Leases that are similar to purchasing assets are classified as finance leases, while all others are operating leases. Bojangles only reconsiders lease classifications if there is a change in the expected lease term or a modification to the contract. Finance and operating lease assets show the company's right to use an asset for the lease term, and lease obligations show the company's obligation to make lease payments. These assets and obligations are based on the present value of lease payments, minus incentives, over the lease term. The company's lease terms may include options to extend the lease.
When Bojangles's lease contracts do not provide a readily determinable implicit rate, the company uses an estimated incremental borrowing rate as of the lease commencement date to determine the present value of lease payments. This estimated rate considers market rates for the company's collateralized debt, interpolations of rates for leases with terms that differ from the outstanding debt, and market rates for debt of companies with similar credit ratings. The lease asset also includes any prepaid rent, initial direct costs, and lease incentives received.
For a prospective franchisee, this means that the actual cost of leasing a property for a Bojangles restaurant can be influenced by several financial factors beyond the stated rent. These factors include Bojangles's credit rating, prevailing market interest rates, and any incentives offered. Understanding how these factors are used to calculate the present value of lease payments is crucial for accurately assessing the financial obligations associated with the franchise.