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Leases

12 Months Ended

Jan. 02, 2024

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 2023, 2022 and 2021 was approximately $39.2 million, $38.5 million and $39.1 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 account for lease and non-lease components as a single component for substantially all lease types.

As most of the Company’s leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

Changes in the market trend of the trade area affected certain of our restaurant operating results and the underlying asset values of the restaurant lease. The Company recorded right-of-use asset impairment charges, which reduced the carrying value of operating lease assets to their respective estimated fair value by $1.6 million, $0.2 million, and $0.1 million in 2023, 2022 and 2021 respectively.

Supplemental balance sheet information related to leases is as follows (in thousands):


Classification		2023		2022
Assets
Operating	Operating lease assets, net	$	183,857	$	183,392
Finance	Property and equipment	3,440		5,258
Total leased assets		$	187,297	$	188,650
Liabilities
Current lease liabilities
Operating	Current operating lease liabilities	$	30,104	$	28,581
Finance	Accrued expenses and other current liabilities	2,337		2,210
Long-term lease liabilities
Operating	Long-term operating lease liabilities	186,285		187,320
Finance	Other long-term liabilities	1,469		3,520
Total lease liabilities		$	220,195	$	221,631

The components of lease costs are as follows (in thousands):


		Year Ended		Year Ended		Year Ended
Classification		January 2, 2024		January 3, 2023		December 28, 2021
Operating lease cost	Occupancy, other restaurant operating costs, general and administrative expenses, and pre-opening costs	$	39,192	$	38,514	$	39,075
	Closure costs, loss on disposals and other	2,929		3,071		1,598
Finance lease cost
Amortization of lease assets	Depreciation and amortization	2,270		2,250		2,128
Interest on lease liabilities	Interest expense, net	297		401		487
		44,688		44,236		43,288
Sublease income	Franchising royalties and fees, and other	(3,087)		(3,242)		(1,832)
Total lease cost, net		$	41,601	$	40,994	$	41,456

Future minimum lease payments required under existing leases as of January 2, 2024 are as follows (in thousands):


	Operating Leases		Finance Leases		Total
2024	$	39,683	$	2,494	$	42,177
2025	45,171		1,241		46,412
2026	41,377		139		41,516
2027	36,954		83		37,037
2028	30,995		45		31,040
Thereafter	100,080		46		100,126
Total lease payments	294,260		4,048		298,308
Less: Imputed interest	77,871		242		78,113
Present value of lease liabilities	$	216,389	$	3,806	$	220,195

Operating lease payments include $93.1 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $14.0 million of legally binding minimum lease payments for leases signed but not yet commenced.

Lease term and discount rate are as follows:


	January 2, 2024		January 3, 2023
Weighted average remaining lease term (years):
Operating	8.3		7.9
Finance	2.0		2.6
Weighted average discount rate:
Operating	8.0	%	8.0	%
Finance	6.5	%	6.4	%

Supplemental disclosures of cash flow information related to leases are as follows (in thousands):


Cash paid for lease liabilities:	2023		2022
Operating leases	$	42,731	$	45,158
Finance leases	2,672		2,391
	$	45,403	$	47,549
Right-of-use assets obtained in exchange for new lease liabilities:
Operating leases	$	27,385	$	19,584
Finance leases	462		1,346
	$	27,847	$	20,930

Leases