How does Carls treat closing costs and other fees related to sale-leaseback transactions?

According to Carls's 2024 Franchise Disclosure Document, closing costs and other fees related to sale-leaseback transactions are treated as deferred financing costs. These costs are recorded as a reduction to the liability balance. Subsequently, they are amortized to interest expense over the initial minimum lease term.

This accounting treatment means that instead of expensing the closing costs immediately, Carls spreads the expense over the life of the lease. This can have a positive impact on the company's financial statements in the short term, as it avoids a large one-time expense. However, it also means that the company will have a slightly higher interest expense over the life of the lease.

For a prospective Carls franchisee, understanding this accounting treatment is important because it can affect the perceived profitability of a franchise location. If a franchisee is considering a sale-leaseback transaction, they should be aware of how the closing costs will be treated and how it will impact their financial statements. It's also important to note that Carls has entered into agreements with independent third parties for sale-leaseback transactions involving 126 restaurant properties, with initial minimum lease terms of 20 years, including renewal options.