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I am working on a project regarding the refranchising strategy of McDonald's and came across this piece of data in their 2014 annual report. My understanding of minimum rent is that its a fixed amount to be paid by franchisees to McDonald's as the franchisees are leasing a restaurant location from McDonald's. Hence, I have no idea why its decreasing.

Minimum rent McDonald's

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  • $\begingroup$ If in the documents you study, there exists an explicit description/definition of what "minimum rent" is and for what purpose it is paid, it would help to include this information in your question. $\endgroup$ – Alecos Papadopoulos Apr 26 '18 at 7:33
  • $\begingroup$ It is fixed rent paid from McDonald's franchisees to McDonald's due to a leasing arrangement if the percentage rent (rent based on percentage of sales) is lesser than the fixed rent. Also its quite strange that all the data for minimum rent is set in the future (as its a 2014 report). $\endgroup$ – gerald ek Apr 26 '18 at 15:35
  • $\begingroup$ Is there any indication that the rent values are being discounted (i.e., that these are the net present values)? $\endgroup$ – Ubiquitous Sep 24 '18 at 7:20
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Suppose McDonald's has 2 franchisees. Franchisee A under its current franchise arrangement has to pay \$100 a year of minimum rent until the current arrangement expires in 2025. Franchisee B, on the other hand, has to pay \$75 a year but its arrangement expires in 2019.

The future minimum rent due to McDonald's in 2018 is $\$100 + \$75 = \$175$. This continues until 2020, where the payments then drop to only \$100 a year after Franchisee B's arrangement expires. Although, we would expect a high renewal rate with McDonald's franchisees, the table only shows future cash flows under contracts existing today, or as they say in the annual report

"The following table summarizes...future minimum rent payments due to the Company under existing franchise arrangements as of December 31, 2014."

Note that these values are not discounted. In our simple example, McDonald's is owed \$100 a year from 2021 to 2025 by Franchisee A and then gets $0 a year after 2025 since there are no more arrangements left. \$100 a year from 2021 to 2025 sums to \$500 for the thereafter row.

These tables of contractual obligations and future cash flows are helpful to analyze the future cash needs of a business. Often times companies may have a lot of debt due in a specific year when a bond issue matures. While companies often refinance ("rollover") that debt, it is helpful for investors to know that that debt maturity is coming up since if the company cannot refinance (say it is a lousy retailer or there is a financial crisis) and does not have enough cash on hand, the company could be forced into bankruptcy.

This future minimum rents table provided by McDonald's tells investors how much cash is contractually coming in the door, and also sheds light on the remaining life of McDonald's franchise arrangements.

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The specific table appears to be part of the obligatory disclosures under applicable Accounting Standards, so that users of the company's financial statement have information of future obligations/claims the company may have based on existing long-term contracts. This is why it refers to future years.

Moreover, it is not an estimate or a projection, but it is based solely on existing contracts. This is why contractually guaranteed rent in total gets lower as we move into the future: some of the franchisee contracts expire earlier than others. The fact that there is a probability that they will be renewed-extended, is not taken into account.

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