How does Surestay Hotel By Best Western account for rent escalations in its leases?
Surestay_Hotel_By_Best_Western Franchise · 2025 FDDAnswer from 2025 FDD Document
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. Certain leases require the Company to pay taxes, insurance, maintenance and other operating expenses associated with the leased asset. Such amounts are not included in the measurement of the ROU assets and lease liabilities to the extent they are variable in nature. These variable lease costs are recognized as a variable lease expense when incurred.
Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As a practical expedient, lease agreements with lease and non-lease components are accounted for as a single lease component for all asset classes. The Company estimates contingent lease incentives when it is probable that the Company is entitled to the incentive at lease commencement. The Company elected the short-term lease recognition exemption for all leases. Therefore, leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet; instead, lease payments are recognized as lease expense on a straight-line basis over the lease term. The depreciable life of the ROU assets are limited by the expected lease term unless the Company is reasonably certain of a transfer of title or purchase option.
Source: Item 23 — Receipts (FDD pages 88–286)
What This Means (2025 FDD)
According to Surestay Hotel By Best Western's 2025 Franchise Disclosure Document, the company addresses rent escalations in its leases by recognizing the expense on a straight-line basis over the lease term. This means that even if the rent increases over time, Surestay Hotel By Best Western spreads the total cost evenly across the entire duration of the lease for accounting purposes.
Additionally, if Surestay Hotel By Best Western is required to pay for taxes, insurance, maintenance, and other operating expenses related to the leased asset, these variable costs are not included in the initial measurement of the right-of-use (ROU) assets and lease liabilities. Instead, these variable lease costs are recognized as an expense when they are incurred.
Furthermore, the FDD states that Surestay Hotel By Best Western's lease agreements do not contain any material residual value guarantees or material restrictive covenants. As a practical approach, lease agreements that contain both lease and non-lease components are accounted for as a single lease component across all asset classes. For leases with an initial term of 12 months or less, Surestay Hotel By Best Western applies a short-term lease recognition exemption, meaning these leases are not recorded on the consolidated balance sheet; instead, the lease payments are recognized as lease expense on a straight-line basis over the lease term.