How does Moes Southwest Grill classify leases at commencement when the company is a lessee?
Moes_Southwest_Grill Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company determines if an arrangement is a lease at contract inception. An agreement contains a lease if the contract conveys the right to control the use of identified property or equipment for a period of time in exchange for consideration. At commencement, the Company classifies each lease as either an operating or finance lease where the Company is a lessee, or as an operating, sales-type, or direct financing lease where the Company is a lessor. When determining the lease term, as both lessee and lessor, the Company includes option periods when it is reasonably certain that those options will be exercised.
Where the Company is a lessee, a lease liability and corresponding right-of-use asset are recognized on the lease commencement date based on the present value of the remaining lease payments over the lease term. Payments are discounted using the Company's incremental borrowing rate, as the rate implicit in the Company's leases is not readily determinable. Lease cost for operating leases is recognized on a straight-line basis. Most of the Company's leases are fixed rent agreements and require the Company to pay related executory costs which include property taxes, maintenance, and insurance. Certain leases for SBRs require the payment of additional contingent rent if SBR sales exceed amounts set forth in the lease agreements. Both the contingent rent and the executory costs are considered variable lease costs and are excluded from the measurement of the lease liability.
Source: Item 23 — Receipts (FDD pages 92–334)
What This Means (2025 FDD)
According to Moe's Southwest Grill's 2025 Franchise Disclosure Document, the company determines if an arrangement is a lease at the contract's inception, classifying each lease as either operating or finance lease when Moe's Southwest Grill is the lessee. This determination is made based on whether the contract conveys the right to control the use of identified property or equipment for a period in exchange for consideration. The lease term includes option periods if it is reasonably certain those options will be exercised.
When Moe's Southwest Grill is the lessee, a lease liability and a corresponding right-of-use asset are recognized on the lease commencement date. This recognition is based on the present value of the remaining lease payments over the lease term, discounted using the company's incremental borrowing rate, as the rate implicit in the leases is not readily determinable. Lease costs for operating leases are recognized on a straight-line basis.
Most of Moe's Southwest Grill's leases are fixed rent agreements that require the company to pay related executory costs, such as property taxes, maintenance, and insurance. Certain leases for SBRs (stores, bakeries, and restaurants) may also require contingent rent payments if SBR sales exceed specified amounts in the lease agreements. These contingent rent and executory costs are considered variable lease costs and are excluded from the measurement of the lease liability.