How does Closet Storage Concepts calculate the present value of its operating leases?
Closet_Storage_Concepts Franchise · 2025 FDDAnswer from 2025 FDD Document
Operating lease assets represent the right to use an underlying asset, and operating lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease right‐of‐use assets and operating lease liabilities are recognized based on the present value of future of minimum lease payments at lease commencement. The Company calculates the present value of its operating leases using an estimated incremental borrowing rate, which requires judgement. The Company estimates the incremental borrowing rate for each operating lease based on prevailing market rates for collateralized debt in a similar economic environment with similar payment terms and maturity dates commensurate with the terms of the lease.
Certain leases contain variable payments, which are expensed as incurred and not included in the Company's operating lease right‐of‐use assets and operating lease liabilities. These amounts primarily include payments for maintenance, utilities, taxes and insurance on the Company's corporate and retail facilities and are excluded from the present value of the Company's lease obligations.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 59)
What This Means (2025 FDD)
According to Closet Storage Concepts' 2025 Franchise Disclosure Document, the company recognizes operating lease right-of-use assets and operating lease liabilities based on the present value of future minimum lease payments at the commencement of the lease. To calculate this present value, Closet Storage Concepts uses an estimated incremental borrowing rate, which requires judgment.
Closet Storage Concepts estimates the incremental borrowing rate for each operating lease by considering prevailing market rates for collateralized debt. This estimation takes into account similar economic environments, payment terms, and maturity dates that are commensurate with the terms of the specific lease.
It's important to note that certain lease payments are variable and expensed as incurred. These variable payments, which primarily include costs for maintenance, utilities, taxes, and insurance on Closet Storage Concepts' corporate and retail facilities, are not included in the calculation of the present value of the company's lease obligations. This means that only the minimum, fixed lease payments are considered when determining the present value of the operating leases.