Leasing Arrangements

12 Months Ended

Dec. 31, 2021


Franchise Arrangements

Conventional franchise arrangements generally include a lease and a license and provide for payment of initial fees, as well as continuing rent and royalties to the Company based upon a percent of sales with minimum rent payments. Minimum rent payments are based on the Company's underlying investment in owned sites and parallel the Company’s underlying leases and escalations on properties that are leased. Under the franchise arrangement, franchisees are granted the right to operate a restaurant using the McDonald’s System and, in most cases, the use of a restaurant facility, generally for a period of 20 years. At the end of the 20-year franchise arrangement, the Company maintains control of the underlying real estate and building and can either enter into a new 20-year franchise arrangement with the existing franchisee or a different franchisee, or close the restaurant. Franchisees generally pay related occupancy costs including property taxes, insurance and site maintenance.

Developmental licensees and affiliates operating under license agreements pay a royalty to the Company based upon a percent of sales, and generally pay initial fees.

McDonald’s has elected to allocate consideration in the franchise contract among lease and non-lease components in the same manner that it has historically: rental income (lease), royalty income (non-lease) and initial fee income (non-lease). This disaggregation and presentation of revenue is based on the nature, amount, timing and certainty of the revenue and cash flows. The allocation has been determined based on a mix of both observable and estimated standalone selling prices (the price at which an entity would sell a promised good or service separately to a customer).

Revenues from franchised restaurants consisted of:


In millions	2021		2020		2019
Rents	$	8,381.1	$	6,844.7	$	7,500.2
Royalties	4,645.1		3,831.5		4,107.1
Initial fees	59.2		49.9		48.4
Revenues from franchised restaurants	$	13,085.4	$	10,726.1	$	11,655.7

As rent and royalties are based upon a percent of sales, government restrictions as a result of COVID-19 had a negative impact on revenues in 2020. The Company granted the deferrals of cash collection for certain rent and royalties earned from franchisees in substantially all markets primarily in the first half of 2020. In total, the Company deferred collection of approximately $1 billion and has collected substantially all of these deferrals as of December 31, 2021.

Future gross minimum rent payments due to the Company under existing conventional franchise arrangements are:


In millions	Owned sites			Leased sites		Total
2022		$	1,577.0	$	1,485.6	$	3,062.6
2023		1,523.5		1,426.6		2,950.1
2024		1,484.0		1,372.0		2,856.0
2025		1,439.3		1,311.0		2,750.3
2026		1,390.9		1,255.5		2,646.4
Thereafter		10,441.4		9,076.4		19,517.8
Total minimum payments		$	17,856.1	$	15,927.1	$	33,783.2

At December 31, 2021, net property and equipment under franchise arrangements totaled $19.9 billion (including land of $5.8 billion) after deducting accumulated depreciation and amortization of $12.7 billion.

Lessee, Operating Leases


Leasing Arrangements

The Company is the lessee in a significant real estate portfolio, primarily through ground leases (the Company leases the land and generally owns the building) and through improved leases (the Company leases the land and buildings). The Company determines whether an arrangement is a lease at inception. Lease terms for most restaurants, where market conditions allow, are generally for 20 years and, in many cases, provide for rent escalations and renewal options. Renewal options are typically solely at the Company’s discretion. Escalation terms vary by market with examples including fixed-rent escalations, escalations based on an inflation index and fair-value market adjustments. The timing of these escalations generally range from annually to every five years.

The following table provides detail of rent expense:


In millions	2021		2020		2019







Restaurants	$	1,486.3	$	1,399.5	$	1,530.4
Other	74.0		79.8		76.4
Total rent expense	$	1,560.3	$	1,479.3	$	1,606.8

Rent expense included percent rents in excess of minimum rents (in millions) as follows–Company-operated restaurants: 2021–$69.2; 2020–$53.7; 2019–$74.4. Franchised restaurants: 2021–$160.0; 2020–$136.5; 2019–$200.7. These variable rent payments are based on a percent of sales and, as sales decreased in 2020 as a result of COVID-19, the related rent expense also decreased.

The Lease right-of-use asset and Lease liability reflect the present value of the Company's estimated future minimum lease payments over the lease term, which includes options that are reasonably assured of being exercised, discounted using a collateralized incremental borrowing rate. Typically, renewal options are considered reasonably assured of being exercised if the associated asset lives of the building or leasehold improvements exceed that of the initial lease term, and the sales performance of the restaurant remains strong. Therefore, the Lease right-of-use asset and Lease liability include an assumption on renewal options that have not yet been exercised by the Company, and are not currently a future obligation.

The Company's lease portfolio includes both operating and finance leases, however as of December 31, 2021, the vast majority of the portfolio was classified as operating leases.

As the rate implicit in each lease is not readily determinable, the Company uses an incremental borrowing rate to calculate the lease liability that represents an estimate of the interest rate the Company would incur to borrow on a collateralized basis over the term of a lease within a particular currency environment. The weighted average discount rate used for leases was 3.7% as of December 31, 2021 and 3.8% as of December 31, 2020.

As of December 31, 2021, maturities of lease liabilities for the Company's lease portfolio were as follows:


In millions	Total *
2022	$	1,205.7
2023	1,173.5
2024	1,138.5
2025	1,098.9
2026	1,043.7
Thereafter	13,784.7
Total lease payments	19,445.0
Less: imputed interest	(5,718.6)
Present value of lease liability	$	13,726.4

* Total lease payments include option periods that are reasonably assured of being exercised.

The decrease in the present value of the lease liability since December 31, 2020 is approximately $0.3 billion. The lease liability will continue to be impacted by new leases, lease modifications, lease terminations, reevaluation of lease terms, and foreign currency.

As of December 31, 2021 and 2020, the Weighted Average Lease Term remaining that is included in the maturities of lease liabilities was 20 years.