What is the nature of Face Foundrie's shared operating lease agreement?
Face_Foundrie Franchise · 2025 FDDAnswer from 2025 FDD Document
ngly, there would be no effect on the Company's financial statements.
The Company's income tax returns are subject to examination by taxing authorities for a period of three years from the date they are filed. As of December 31, 2024, the 2023, 2022 and 2021 tax years were subject to examination.
(o) Leases
The Company has adopted ASC 842, Leases, which requires lessees to recognize the assets and liabilities that arise from operating and finance leases on the balance sheets, with a few exceptions. The Company has a shared operating lease agreement with multiple related parties to warehouse and office space from the related parties common owner. The Company has reflected one third of the full lease arrangement in its financial statements to reflect the Company's share of the obligation. Were other related parties unable to meet their obligations, it is likely the Company would bear responsibility for the larger lease obligation.
For lease agreements entered into subsequent to the adoption of ASC 842, the Company determines if an arrangement is a lease at inception. The Company's lease liabilities represent the obligation to make lease payments arising from the leases and right of use ("ROU") assets are recognized as an offset at lease inception. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the Company's leases typically do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. If the Company's leases include options to extend the lease, the renewal options are not included in the minimum lease terms unless they are reasonably certain to be exercised. Rent expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term and is included in general and administrative expenses in the statements of operations.
The Company has made an accounting policy election not to recognize right-of-use assets and lease liabilities that arise from any short-term leases.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 73)
What This Means (2025 FDD)
According to Face Foundrie's 2025 Franchise Disclosure Document, the company has a shared operating lease agreement with multiple related parties for warehouse and office space from the related parties' common owner. Face Foundrie reflects one-third of the full lease arrangement in its financial statements to represent the company's share of the obligation.
The initial lease was entered into on January 1, 2022, for a term of ten years, without options to renew, and is classified as an operating lease. The base monthly rent payments are $4,629 for the first year, escalating 2% each year. The company used an average loan interest rate of 7% as the incremental borrowing rate to extrapolate a rate to calculate the present value of the lease liability and right-of-use asset. This lease ends in December 2031.
The total monthly lease payment that the three entities split in 2022 was $13,888, escalating 2% each year thereafter. The rent is split into thirds, with each entity paying its own share, and there are no reimbursements as of December 31, 2024, 2023, and 2022. The document indicates that if other related parties are unable to meet their obligations, Face Foundrie would likely bear responsibility for the larger lease obligation.
As of December 31, 2024, the current operating lease liability was $58,952, and the non-current operating lease liability was $284,843, totaling $343,795. This arrangement presents a potential risk for Face Foundrie, as the company could be liable for a larger portion of the lease payment if the related parties fail to meet their obligations.