How does Closet Storage Concepts calculate the present value of its finance leases?

According to Closet Storage Concepts' 2025 Franchise Disclosure Document, the company calculates the present value of its finance leases by using the interest rate implicit in the lease agreement. This approach is used for leases classified as finance leases under ASC 842. These finance leases primarily cover equipment and vehicles used by Closet Storage Concepts.

In contrast, Closet Storage Concepts calculates the present value of its operating leases using an estimated incremental borrowing rate. This rate is determined by assessing prevailing market rates for collateralized debt in a similar economic environment, considering payment terms and maturity dates that align with the lease terms. Operating leases are used for corporate offices, warehouse space, and retail showrooms.

For a prospective Closet Storage Concepts franchisee, understanding the distinction between finance and operating leases is crucial, as the method of calculating their present value differs. The interest rate implicit in the lease agreement for finance leases provides a direct calculation, while the estimated incremental borrowing rate for operating leases introduces a degree of judgment and estimation based on market conditions. Franchisees should consult with financial advisors to fully understand the implications of these different lease types and calculation methods.