McDonald’s: The $30 Billion Real Estate Company

Posted by Amrock

Fast food restaurant giant McDonald’s makes much of its revenue by buying properties and leasing them to franchisees, writes Quartz in a new report. Owning the land under franchise-owned stores also opens up tax break benefits and credit availability, says the article.

Franchisees pay rent for 85 percent of locations

Around 85 percent of McDonald’s locations were reportedly franchisee-run in 2016 – that is, operated by small business people who agree to operate a location via a licensed privilege to the branding. Franchisees get to keep a slice of the profits in return, said to be around $154,000 annually on average for a single store which might clock $2.7 million in sales and $1.7 million in gross profits before expenses.

A more significant portion of those profits goes to McDonald’s corporate coffers, and not just via the sale of burgers and fries. The article notes that rather than collect large royalties or sell equipment to franchise operators at a profit, McDonald’s focuses on leasing their locations to the franchise operators, “often at large markups.”

Real estate valued at $30 billion, with $4.5 billion annual profit

These store leases reportedly account for about 22 percent of a franchise store’s average gross annual profit. With more than 36,000 locations in 100 countries, this adds up quickly. The article reports the company’s financial disclosures show more than $30 billion in real estate assets and annual profits around $4.5 billion. The same disclosures show the fast food giant has expanded its number of franchises and reduced its number of most costly corporate-operated locations over the last decade.

Owning franchise locations has other benefits

The article notes owning restaurant properties may have other benefits. Come tax time, McDonald’s could take advantage of depreciation from taxable rent deductions, Xian Sun, a corporate finance professor at Johns Hopkins University told the news outlet. Additionally, the appreciated value of its real estate assets could allow the company to borrow more cheaply and better weather industry downturns.