Has Anyone Copied McDonald's Real Estate Strategy?

18 Replies

Just curious to know if anyone has taken Ray Kroc's Real Estate strategy and did it themselves? How well did it work for you and what would you do differently if you had the chance? 

For those of you who don't know Ray Kroc, he's the reason why McDonalds is around the world. He figured out instead of owning the fast food building, own the land underneath and land contract to franchisees. Franchising played a huge role and many people became proud owners of McDonalds. Obviously, the strategy was a success and McDonalds is a multi-billion dollar company with franchises all over the world. 

Of course, this is the quick explanation of Mr. Kroc but a quick google search and you'll get the idea. 

@Nick Rutkowski I have not personally but know people who have land contracts and lease the land to large corporations to build to suit. This is pretty common. I went to a small Catholic Benedictine College - Belmont Abbey in NC. The monastery there was given large tracts of land in the early 1800s to provide schooling to the rural (at the time) areas of Charlotte. Over the years, large portions of that land has been leased to large companies such as Walmart, Lowe's etc. to build stores. The monastery has also given back some of that land to public works such as the National Whitewater Olympic Training Center and others. The blessing for them is that the income from the land leases helps to keep the college and monastery operational. 

How about renting out a house to someone else with a long term lease.  They furnish it, pay the utilities and rent it out to people staying for a short time.  People on vacation or temporary work assignments.  When the person with the long term lease can't make their monthly payment, you keep their deposit and their furnishings in lieu of the rent payment and kick them out.  Put their furniture and appliances in another house of yours.  Then you find another person to do the long term/short term lease and repeat the process. 

I'm calling this the Paul Sandhu Airbnb Formula.

"Obviously, the strategy was a success and McDonalds is a multi-billion dollar company with franchises all over the world."

I seriously doubt that is why McDonald's is successful.

@Ken Latchers

It isn’t because they have delicious burgers bud. Google Ray Kroc, I’ll bet you’ll find his strategy is the reason why McDonalds is an international brand worth billions...

@Nick Rutkowski

You’ve got it a little backwards. McDonald’s does not own land under building unless they also own the buildings. For 40% of their 36,000 locations, McDonalds owns the land and the building, and leases the property to the franchisee. For another 30% of the locations, McDonalds owns just the building, leases the land from a third party real estate investor, and leases the property to the franchisee. In the remaining 30% both the land and improvements are owned by a third party real estate investor, McDonalds is the master lease tenant, and subleases to the franchisee at a 40% markup.

However, the thing to realize is that all this real estate profit is enabled by the fact that the operating system is so successful. Arguably, McDonalds could have charged much higher franchise fees and ended up in the same place financially. However, this probably wouldn’t have worked because with super high franchise fees the perception of potential franchisees would have been that the fee structure was too uncompetitive, and the result would have been that McDonalds would have had slower growth, and their competitors faster growth.

Two other positive results of the McDonalds real estate strategy was (1) franchisees are more locked in since McDonalds is also their landlord (2) McDonalds was able to bypass legislation aimed at franchisors being able sell product at high prices to franchisees and (3) McDonalds benefits from the long term appreciation of real estate prices and inflation.

All in all a strategy that was nothing short of brilliant. But not necessarily easily to duplicate.

Couldn't have said it better myself. The reasoning above was completely ludicrous. Sears owns a lot of their locations and they're going under. Proves nothing. Not to mention the fact that no strong evidence was provided just a stream of consciousness


Originally posted by @Don Konipol :

@Nick Rutkowski

You’ve got it a little backwards. McDonald’s does not own land under building unless they also own the buildings. For 40% of their 36,000 locations, McDonalds owns the land and the building, and leases the property to the franchisee. For another 30% of the locations, McDonalds owns just the building, leases the land from a third party real estate investor, and leases the property to the franchisee. In the remaining 30% both the land and improvements are owned by a third party real estate investor, McDonalds is the master lease tenant, and subleases to the franchisee at a 40% markup.

However, the thing to realize is that all this real estate profit is enabled by the fact that the operating system is so successful. Arguably, McDonalds could have charged much higher franchise fees and ended up in the same place financially. However, this probably wouldn’t have worked because with super high franchise fees the perception of potential franchisees would have been that the fee structure was too uncompetitive, and the result would have been that McDonalds would have had slower growth, and their competitors faster growth.

Two other positive results of the McDonalds real estate strategy was (1) franchisees are more locked in since McDonalds is also their landlord (2) McDonalds was able to bypass legislation aimed at franchisors being able sell product at high prices to franchisees and (3) McDonalds benefits from the long term appreciation of real estate prices and inflation.

All in all a strategy that was nothing short of brilliant. But not necessarily easily to duplicate.

 

@Nick Rutkowski  

Hey Nick, I saw the movie and I was thinking that's kind of a genius what Ray Kroc did. 

That said, I think we will be hard-pressed to find the everyday Real Estate Investors doing this strategy due to the niche nature of it. 

Many people like Real Estate Investing because of its potential to spit out cash flow on a consistent basis and the McDonald strategy has been super successful because of the super successful products (food) that the company offers. 

Without their "yummy-ish" burgers, there wouldn't be the Real Estate or Franchising bit, which forms a pretty strong foundation. Interesting conversation nonetheless...

@Nick Rutkowski I have done it... albeit small sample size. One of my properties is a mixed-use building with 4 apartment units and a convenience store. I bought the building, land, and business all in one purchase.

After operating the convenience store for a year, I sold the business and kept the building and land. Now the new business owner pays me rent. The property is actually worth much more now than it was when I owned the business because the lease has tremendous value. It’s also now a passive investment.

@Nick Rutkowski

I remember looking at McDonald's balance sheet back in college and they are the largest or one of the largest owners or real estate in the world. I believe their real estate holdings was based on economic value. This was also early 2000's. I can see some large REIT or PE group owning more these days.

Most franchises use this concept in some way. I know companies like Dunkin and Subway charge their franchisees 110% or more of the negotiated lease. This is primarily because the franchisor are able to negotiate lower or below market lease rates due to their guarantees and credit rating.

@Nick Rutkowski a couple people have posted really clear descriptions of what the mcdonalds model actually is, so i wont go over it again. I work in NNN Leasing and McDonalds, at this moment in our market, is ground leasing dirt or having the developer BTS. They make sure to have a first right of refisal in their leases and will later purchase the RE they are bullish on.

Alot of it is simple rent arbitrage. Master Lease and then sublease for more. You could argue that coworking space and airbnb arbitragers have taken on a short term version of this model.

@Nick Rutkowski

Are you asking whether other businesses are doing it? Or are you asking if folks on BP are doing it? 

If the former, many corporations and businesses do it. The idea of using a profitable business to help acquire real estate is being done by many people in many different ways. Now McDonald's arguably did it better than anyone else due to having that perfect combination of factors (e.g. franchise model, desirable product, global economic growth, etc.). But there are many other companies that are building their own real-estate empires in different ways (e.g. Amazon). 

If the latter, the reality is that most people can't do this. It's because they don't have an underlying, profitable business. And even if they did, very few people have a business that is as "perfected" as McDonald's. I'm not saying McDonald's makes the best burgers or that I cannot see any scenario where McDonald's fails. But as a business, it's about as good as it can get. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

The trick is knowing where the land will grow in value before it does so you don't end up paying top dollar for it. Like Robert Kiyosaki's "Rich dad" buying up parts of Waikiki beach before it became a major tourist attraction. On the opposite side of the coin you can buy land for storage units in places where the land can't really be used for anything else (Near RR bridges, highway off ramps, etc..) . You can go in and offer the county practically nothing for it, but it means more tax revenue for them, and no one would ever build a house or outlet store there.