Texas Roadhouse, Inc. and SubsidiariesNotes to Consolidated Financial Statements(Tabular amounts in thousands, except share and per share data)F-11
designated portion of sales, currently 0.3%, to the advertising fund. Advertising contributions related to company
restaurants are recorded as a component of other operating costs. Advertising contributions received from our
franchisees are recorded as a component of franchise royalties and fees in our consolidated statements of income and
comprehensive income.
Other costs related to local restaurant area marketing initiatives are included in other operating costs in our
consolidated statements of income and comprehensive income. These costs and the company-owned restaurant
contribution amounted to approximately $17.1 million, $14.5 million and $13.3 million for the years ended
December 25, 2018, December 26, 2017 and December 27, 2016, respectively.
(p) Leases and Leasehold ImprovementsWe lease land and/or buildings for the majority of our restaurants under non - cancelable lease agreements. Our land
and/or building leases typically have initial terms ranging from 10 to 15 years, and certain renewal options for one or
more five-year periods. We account for leases in accordance with ASC 840, Leases, and other related authoritative
guidance. When determining the lease term, we include option periods for which failure to renew the lease imposes a
penalty on us in such an amount that renewal appears, at the inception of the lease, to be reasonably assured. The
primary penalty to which we are subject is the economic detriment associated with the existence of leasehold
improvements which might become impaired if we choose not to continue the use of the leased property.
Certain of our operating leases contain predetermined fixed escalations of the minimum rent during the original
term of the lease. For these leases, we recognize the related rent expense on a straight - line basis over the lease term and
record the difference between the amounts charged to operations and amounts paid as deferred rent. We may receive rent
concessions or leasehold improvement incentives upon opening a restaurant that is subject to a lease which we consider
when determining straight-line rent expense. We also may receive rent holidays, which would begin on the possession
date and end when the lease commences, during which no cash rent payments are typically due under the terms of the
lease. Rent holidays are included in the lease term when determining straight - line rent expense.
Additionally, certain of our operating leases contain clauses that provide for additional contingent rent based on a
percentage of sales greater than certain specified target amounts. We recognize contingent rent expense prior to the
achievement of the specified target that triggers the contingent rent, provided achievement of the target is considered
probable. This may result in some variability in rent expense as a percentage of sales over the term of the lease in
restaurants where we pay contingent rent.
The judgment regarding the probable term for each restaurant property lease impacts the classification and
accounting for a lease as capital or operating, the rent holiday and/or escalation in payments that are taken into
consideration when calculating straight - line rent and the term over which leasehold improvements for each restaurant are
amortized. The material factor we consider when making this judgment is the total amount invested in the restaurant at
the inception of the lease and whether management believes that renewal appears reasonably assured. While a different
term may produce materially different amounts of depreciation, amortization and rent expense than reported, our
historical lease renewal rates support the judgments made. We have not made any changes to the nature of the
assumptions used to account for leases in any of the fiscal years presented in our consolidated financial statements.
Sale leasebacks are transactions through which assets (such as restaurant properties) are sold and subsequently
leased back. The resulting leases generally qualify and are accounted for as operating leases. Financing leases are
generally the product of a sale leaseback transaction that does not meet the criteria for sale leaseback accounting. The
result of a financing lease is the retention of the "sold" assets within land, building and equipment with a financing lease
obligation equal to the amount of proceeds received recorded as a component of other liabilities on our consolidated
balance sheets.