How does Checkersrallys determine the lease term when calculating the initial lease liability?

According to Checkersrallys's 2025 Franchise Disclosure Document, the company uses judgment to determine the lease term, which directly impacts the incremental borrowing rate (IBR) used to calculate the initial lease liability. Checkersrallys determines the present value of lease liabilities by using the risk-free rate private company practical expedient, allowing them to use the U.S. Treasury rate most applicable to the lease term.

For leases of land and buildings, Checkersrallys generally has agreements with terms of, or renewable to, 10 to 30 years. The company determines the lease term by assuming exercise of renewal options that are reasonably certain to be exercised. These leases are then evaluated to classify them as either operating or finance leases.

This means that when a prospective Checkersrallys franchisee is evaluating a potential location, the assumed lease term will significantly affect the financial calculations. The franchisee should understand how Checkersrallys assesses the likelihood of renewal options being exercised, as this can impact the reported lease liability and related financial metrics. Furthermore, the use of the U.S. Treasury rate provides a standardized approach to discounting lease payments, but franchisees should still assess whether this rate accurately reflects the risk associated with their specific location and lease terms.