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Note 6 - Leases

12 Months Ended

Sep. 26, 2023

Leases

The Company’s office space and the land and buildings related to the Drive Thru and Bad Daddy’s restaurant facilities are classified as operating leases and expire at various dates over the next 16 years. Some leases contain escalation clauses over the lives of the leases. Most of the leases contain one to three five-year renewal options at the end of the initial term. Certain leases include provisions for additional contingent rent payments if sales volumes exceed specified levels. For the fiscal year ended September 26, 2023, the Company had income of $23,000 related to contingent rent adjustments. The Company paid $136,000 in contingent rentals for the fiscal year ended September 27, 2022.

The Company determines if a contract contains a lease at inception. The Company's material long-term operating lease agreements are for the land and buildings for our restaurants as well as our corporate office. The initial lease terms for our restaurants range from 10 years to 20 years, most of which at lease inception included renewal options of 10 to 15 years. The lease term is generally the minimum of the noncancelable period or the lease term including renewal options which are reasonably certain of being exercised up to a term of approximately 20 years.

Some of the leases provide for base rent, plus additional rent based on gross sales, as defined in each lease agreement. The Company is also generally obligated to pay certain real estate taxes, insurance and common area maintenance charges, and various other expenses related to properties, which are expensed as incurred.

Components of operating lease costs in the consolidated statements of operations for the fiscal years ended September 26, 2023 and September 27, 2022 are as follows (in thousands):

	Classification	Fiscal 2023			Fiscal 2022
Operating lease cost	Occupancy, Other restaurant operating costs, preopening costs and General and administrative expenses, net	$	7,302		$	7,328
Variable lease cost	Occupancy		(23	)		136
Sublease income	Occupancy		(546	)		(536	)
Total lease expense		$	6,733		$	6,928

Components of lease assets and liabilities on the consolidated balance sheets as of September 26, 2023 and September 27, 2022 are as follows (in thousands):

	Classification	September 26, 2023		September 27, 2022
Right-of-use assets	Operating lease assets	$	39,935	$	42,463

Current lease liabilities	Operating lease liability	$	5,787	$	5,430
Non-current lease liabilities	Operating lease liability, less current portion		42,332		45,544
Total lease liabilities		$	48,119	$	50,974

Supplemental cash flow disclosures for the fiscal years ended September 26, 2023 and September 27, 2022 (in thousands):

	Fiscal 2023		Fiscal 2022
Cash paid for operating lease liabilities	$	7,431	$	7,235

Non-cash operating lease assets obtained in exchange for operating lease liabilities	$	443	$	571

Weighted average lease term and discount rate are as follows:

	September 26, 2023			September 27, 2022
Weighted average remaining lease term (in years)		7.94			8.6

Weighted average discount rate		5.0	%		5.0	%

Future minimum rent payments for our operating leases for each of the next five years as of September 26, 2023 are as follows (in thousands):

Fiscal year ending:	Total

2024		8,025
2025		8,138
2026		7,722
2027		7,425
2028		6,664
Thereafter		20,801
Total minimum lease payments		58,775
Less: imputed interest		(10,656	)
Present value of lease liabilities	$	48,119

The above future minimum rental amounts exclude the amortization of deferred lease incentives, renewal options that are not reasonably assured of renewal, and contingent rent. The Company generally has escalating rents over the term of the leases and records rent expense on a straight-line basis.