For Sonesta Select Sonesta Essential, what is included in the lease term when calculating the lease liability?
Sonesta_Select_Sonesta_Essential Franchise · 2025 FDDAnswer from 2025 FDD Document
At the commencement date of a lease, we recognize a lease liability for contractual fixed lease payments and a corresponding right-of-use asset representing our right to use the underlying asset during the lease term. The lease liability is measured initially as the present value of the contractual fixed lease payments during the lease term. The lease term additionally includes renewal periods only if it is reasonably certain that we will exercise the options. Contractual fixed lease payments are discounted at the rate implicit in the lease when readily determinable. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date. Additionally, we elected not to recognize leases with lease terms of 12 months or less at the commencement date in our consolidated balance sheets. The right-of-use asset is recognized at the amount of the lease liability with certain adjustments, if applicable. These adjustments include lease incentives, prepaid rent, and initial direct costs.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 84)
What This Means (2025 FDD)
According to Sonesta Select Sonesta Essential's 2025 Franchise Disclosure Document, the lease liability is initially measured as the present value of contractual fixed lease payments during the lease term. The lease term also includes renewal periods if it is reasonably certain that the company will exercise those options. These contractual fixed lease payments are discounted at the rate implicit in the lease if readily determinable. If an implicit rate is not available, Sonesta Select Sonesta Essential uses its incremental borrowing rate based on available information at the commencement date.
Sonesta Select Sonesta Essential does not recognize leases with terms of 12 months or less at the commencement date in its consolidated balance sheets. The right-of-use asset is recognized at the amount of the lease liability, with certain adjustments for lease incentives, prepaid rent, and initial direct costs, if applicable.
For prospective franchisees, this means that when evaluating potential locations, they should consider the full lease term, including any likely renewal periods, as this will impact the reported lease liability. Understanding how Sonesta Select Sonesta Essential calculates this liability is crucial for assessing the financial obligations associated with leasing property for the franchise.