How does Remax account for variable lease payments in its operating lease agreements?
Remax Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company determines if an arrangement is a lease at inception. The Company's operating lease agreements are primarily for corporate office space and are included within "Operating lease right of use assets", "Operating lease liabilities" and "Operating lease liabilities, net of current portion' on the Consolidated Balance Sheets.
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. Variable lease payments consist of non-lease services related to the lease. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. As most of the Company's leases 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. Many of the Company's lessee agreements include options to extend the lease, which is not included in the minimum lease terms unless they are reasonably certain to be exercised. Lease cost expense for lease payments related to operating leases (which is substantially all of the Company's leases) is recognized on a straight-line basis over the lease term and is recorded to "Selling, operating and administrative expenses' in the Consolidated Statements of Income (Loss).
The Company has made an accounting policy election not to recognize ROU assets and lease liabilities that arise from any of its short-term leases. All leases with a term of 12 months or less at commencement, for which the Company is not reasonably certain to exercise available renewal options that would extend the lease term past 12 months, are recognized on a straight-line basis over the lease term.
Source: Item 1 — Business and Organization (FDD pages 334–464)
What This Means (2025 FDD)
According to Remax's 2025 Franchise Disclosure Document, the company's accounting treatment of variable lease payments depends on the nature of those payments. Remax excludes variable lease payments from the right of use (ROU) assets and lease liabilities if they consist of payments for non-lease services related to the lease. Instead, Remax recognizes these variable lease payments in the period in which the obligation for those payments is incurred.
For a Remax franchisee, this means that if your lease includes variable payments for services like maintenance or utilities, those payments won't be factored into the initial calculation of your lease liability. Instead, they will be expensed as they are incurred. This can affect the timing of expense recognition and may provide a more accurate reflection of the actual costs incurred each period.
Remax's accounting policy also states that it does not recognize ROU assets and lease liabilities for short-term leases with a term of 12 months or less, including any renewal options the company is not reasonably certain to exercise. These short-term leases are recognized on a straight-line basis over the lease term. This accounting treatment simplifies the accounting for short-term leases, as it avoids the need to calculate the present value of lease payments and recognize ROU assets and lease liabilities on the balance sheet.
Prospective franchisees should carefully review their lease agreements to understand the nature of any variable lease payments and how they will be accounted for. Understanding these accounting policies can help franchisees better manage their financial reporting and make informed decisions about lease terms and conditions.