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    Forget Burgers – McDonald’s Is a Real Estate Company

    Because I’m in the real estate business, I read a lot about the industry. From time to time, I come across some interesting stories and I thought I’d share one of them with you today.

    Most people don’t realize this, but McDonald’s is not a burger-flipping restaurant chain; it is actually one of the world’s largest real estate companies. The franchisees do all the work to run their restaurants and McDonald’s gets paid for owning some of the best commercial real estate all over the world. Although McDonald’s first opened its doors in 1954, it wasn’t until 1956 that investor Ray Kroc implemented an idea to tap into the real estate market.

    Let’s back up a few years to when Kroc and the McDonald brothers were still working together. For some time after his hire, Kroc was struggling to make the business profitable. He wasn’t bringing in enough revenue from his franchised restaurants. Part of his trouble was in getting the funds to pay for the land and the building for the restaurant. In order to maintain control over operations, Kroc needed to franchise one store at a time, rather than a whole slew of stores over a particular geographic area, which is what other food chains did. Although other chains could attract big investors, the franchisees Kroc attracted didn’t have the funds to pay for the land and the building.

    That all changed in 1956 when he hired Harry Sonneborn, who convinced him that the real money was in real estate. Sonneborn’s idea was to have the McDonald’s company lease a plot of land and the building for each restaurant. The company would then sublease to the franchisee who would run the restaurant. Sonneborn further developed the plan to eventually take out mortgages to own both the building and the land. Kroc soon established the Franchise Realty Corp. to find willing landowners.

    This business plan gave Ray Kroc the success and leverage he needed to get the loan to buy out the McDonald brothers in 1961. By 1963, Kroc opened his 500th McDonald’s restaurant and in 1965, the company went public, and Kroc made $3 million. Two years later, he took McDonald’s restaurants outside the U.S. to Canada, and eventually to Europe and Asia. His wealth would amass to $500 million in the following 10 years. Twenty years after it went public, McDonald’s was included in the 30-company Dow Jones Industrial Average.

    As we’ve all heard, the three most important elements of real estate are “location, location, location.” Back in Kroc’s days with the company, he would fly around in a plane or helicopter looking for the best spots to set up McDonald’s restaurants. He specifically looked for land near schools and churches in a community. Today, as most of us can see, McDonald’s restaurants are everywhere. But there’s still a method to the madness. McDonald’s typically looks for locations that are the most convenient for people where they work and live. This strategy continues Kroc’s tradition of getting to the heart of a community through its gathering places.

    Today McDonald’s net worth is estimated at up to $163 billion. The land on which the restaurants are situated is valued at an estimated $16 to $18 billion. Rental payments from franchisees earn a significant portion of the company’s income. Now that’s what I call a great real estate investment!

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