What does Checkersrallys do periodically in connection with the sale of Company-operated restaurants?
Checkersrallys Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company periodically subleases land and buildings in connection with the sale of Company-operated restaurants to franchisees. In certain cases, the terms of the sublease provide for rents from sublessees that are less than the rents the Company is obligated to pay under the original lease. Prior to the adoption of ASC 842, Leases, on January 4, 2022, the Company accounted for these refranchising transactions on an undiscounted basis in accordance with the provisions of ASC 840, which required the recognition of a reserve in the amount of the exposure under the sublease and recognition of the loss in the period the sublease was executed.
As part of the adoption of ASC 842, Leases, on January 4, 2022, reserves for restaurant retirement costs and sublease subsidies for lease agreements where the Company is the lessee are captured as an adjustment to the right-of-use assets at the time of transition.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkersrallys's 2025 Franchise Disclosure Document, the company periodically subleases land and buildings when it sells Company-operated restaurants to franchisees. These subleases often have terms that run for 10 to 15 years and do not include an option for the sublessee to purchase the property. Checkersrallys continues to be responsible for the original rent payments to the lessors. These subleases are evaluated to determine if they should be classified as operating, direct financing, or sales-type leases. Checkersrallys accounts for lease and non-lease components as a single unit.
The sublessee is generally obligated to cover costs related to property taxes, insurance, and maintenance, which are considered variable costs. For the fiscal year ended December 30, 2024, and the periods from June 17, 2023, through January 1, 2024, and from January 3, 2023, through June 16, 2023, variable sublease rental income was $0.1 million, $0.1 million, and $0.1 million, respectively.
Checkersrallys records revenue from these subleases under "franchise fees and other income" in its consolidated statements of operations. Sublease rental income recorded for the fiscal year ended December 30, 2024, and the periods from June 17, 2023, through January 1, 2024, and from January 3, 2023, through June 16, 2023, was $2.0 million, $1.9 million, and $1.0 million, respectively. This arrangement allows Checkersrallys to transition company-operated locations to franchisees while maintaining some control and revenue streams related to the real estate.