What costs are considered variable lease costs by Carvel and excluded from the measurement of the lease liability?
Carvel Franchise · 2025 FDDAnswer from 2025 FDD Document
leased locations are subleased to franchisees after refranchising transactions. The Company determines if an arrangement is a lease at contract inception. An agreement contains a lease if the contract conveys the right to control the use of identified property or equipment for a period of time in exchange for consideration. At commencement, the Company classifies each lease as either an operating or finance lease where the Company is a lessee, or as an operating, sales-type, or direct financing lease where the Company is a lessor. When determining the lease term, as both lessee and lessor, the Company includes option periods when it is reasonably certain that those options will be exercised.
Where the Company is a lessee, a lease liability and corresponding right-of-use asset are recognized on the lease commencement date based on the present value of the remaining lease payments over the lease term. Payments are discounted using the Company's incremental borrowing rate, as the rate implicit in the Company's leases is not readily determinable. Lease cost for operating leases is recognized on a straight-line basis. Most of the Company's leases are fixed rent agreements and require the Company to pay related executory costs which include property taxes, maintenance, and insurance. Certain leases for SBRs require the payment of additional contingent rent if SBR sales exceed amounts set forth in the lease agreements.
Source: Item 23 — Receipts (FDD pages 100–353)
What This Means (2025 FDD)
According to Carvel's 2025 Franchise Disclosure Document, variable lease costs are excluded from the measurement of the lease liability. For Carvel franchisees, these variable costs primarily consist of common area maintenance, real estate taxes, and contingent rent. Contingent rent is based upon a percentage of SBR (Store, Bakery, and Restaurant) sales.
For Carvel's company-operated SBRs, the company recognizes a lease liability and corresponding right-of-use asset on the lease commencement date. This is based on the present value of the remaining lease payments over the lease term. Payments are discounted using the company's incremental borrowing rate because the rate implicit in the leases is not readily determinable. Lease costs for operating leases are recognized on a straight-line basis.
Most of Carvel's leases are fixed rent agreements. The company is required to pay related executory costs, including property taxes, maintenance, and insurance. However, certain leases for SBRs require the payment of additional contingent rent if SBR sales exceed amounts set forth in the lease agreements. These contingent rent and executory costs are considered variable lease costs and are excluded from the measurement of the lease liability.