How does Noodles & Company recognize expense for leases with rent escalations?
Noodles_Company Franchise · 2025 FDDAnswer from 2025 FDD Document
d in the model included a 4.41% risk-free interest rate; 0.25 years expected life; expected volatility of 77.4%; and a zero percent dividend yield. The weighted average fair value per share at grant date was $0.26. In 2024, the Company recognized $43,000 of compensation expense related to the ESPP.
12. Leases
The Company leases restaurant facilities, office space and certain equipment that expire on various dates through September 2043. Lease terms for restaurants in traditional shopping centers generally include a base term of 10 years, with options to extend these leases for additional periods of five to 15 years.
The Company's leases typically contain rent escalations over the lease term. The Company recognizes expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce the right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term. Total rent expense for operating leases for 2024, 2023 and 2022 was approximately $39.4 million, $39.2 million and $38.5 million, respectively.
Some of the Company's leases include rent escalations based on inflation indexes and fair market value adjustments. Certain leases contain contingent rental provisions that include a fixed base rent plus an additional percentage of the restaurant's sales in excess of stipulated amounts. Lease expense associated with rent escalation and contingent rental provisions is not material and is included within operating lease cost. Operating lease liabilities are calculated using the prevailing index or rate at lease commencement. Subsequent escalations in the index or rate and contingent rental payments are recognized as variable lease expenses. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company elected the practical expedient to accou
Source: Item 22 — CONTRACTS (FDD pages 98–99)
What This Means (2025 FDD)
According to Noodles & Company's 2025 Franchise Disclosure Document, the company recognizes rent expense for leases, which typically include escalating rentals, on a straight-line basis over the lease term. This means that the total rent expense is evenly distributed over the entire lease period, regardless of the actual rent payments in any given year. This accounting method ensures a consistent expense recognition, which can help in financial planning and analysis.
Tenant incentives, such as funds provided by the landlord for leasehold improvements, are recognized when earned. These incentives reduce the right-of-use asset related to the lease and are amortized as reductions of expense over the lease term. This amortization process spreads the benefit of the tenant incentives over the life of the lease, aligning the expense reduction with the period the improvements benefit the restaurant.
Some Noodles & Company leases include rent escalations based on inflation indexes and fair market value adjustments. Certain leases also have contingent rental provisions, which involve a fixed base rent plus a percentage of the restaurant's sales exceeding stipulated amounts. The lease expense associated with these rent escalations and contingent rental provisions is considered immaterial and is included within the operating lease cost. Operating lease liabilities are calculated using the prevailing index or rate at the lease commencement, while subsequent escalations and contingent rental payments are recognized as variable lease expenses.
For most of Noodles & Company's leases that do not provide an implicit rate, the company uses its incremental borrowing rate, based on available information at the commencement date, to determine the present value of lease payments. This approach is used to accurately reflect the cost of the lease obligation on the company's financial statements. In 2024, 2023 and 2022, the total rent expense for operating leases was approximately $39.4 million, $39.2 million, and $38.5 million, respectively.