McDonald's: Real Estate
The company owns 57% of the land under McDonald's restaurants and 80% of all McDonald's restaurant buildings.
Former McDonald’s CFO Harry J. Sonneborn once said: “We are not technically in the food business. We are in the real estate business. The only reason we sell fifteen-cent hamburgers is because they are the greatest producer of revenue, from which our tenants can pay us our rent.”
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.
Rather than relying solely on royalties and selling supplies to franchisees, McDonald’s makes almost 40% of its revenue from leasing its properties to restaurant operators. Collecting rent protects the company from fluctuations in restaurant sales to a degree. The company’s lease agreements with franchisees provide for minimum rent payments and variable ones. Variable rent payments are based on a percentage of restaurant sales. So even when it comes to collecting rent, McDonald’s does share some of the risk associated with sales fluctuations. Tying a portion of lease payments to sales helps franchisees manage expenses during downturns and aligns the incentives between franchisee and franchisor.
When dealing with property developers, management structures its contracts to protect its control over prime retail locations.
For example, in 2018 McDonald’s sold one of its restaurant properties in Washington, D.C., to commercial developer JBG Smith for about $31 million. Almost six years later, in December of 2023, McDonald’s reacquired the property from JBG for just $11.5 million. Reportedly, the 2018 sales contract required JBG to re-develop the location and lease the ground floor unit to the fast-food chain at a rate below market rent. Apparently, the contract also gave McDonald’s the right to buy back the location for $11.5 million if JBG failed to redevelop the site by a certain date.
Today, McDonald’s owns 57% of the land under its restaurants and 80% of all McDonald’s restaurant buildings. Franchisees operate almost 95% of McDonald’s restaurants. The value of McDonald’s land and buildings accounts for about 60% of the company’s assets (before depreciation and amortization). And rental income from franchisees accounts for 64% of franchisee revenue (not to be confused with total revenue, of which, as previously mentioned, rental income accounts for 40%).
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