McDonald's Net Lease: Corporate-Owned vs Franchisee-Operated, and Why It Matters

TL;DR

McDonald's Corporation has a real estate strategy that's unique among major QSR brands. The company owns or master-leases the land at most franchised locations, and re-leases to the franchisee on what is effectively a sub-lease. This means a "McDonald's net lease deal" can mean very different things:

• Corporate-owned ground lease (rare, top of the credit spectrum): land owner leases to McDonald's Corp, who builds, operates, or sub-leases. Tenant is McDonald's Corp directly. S&P BBB+ credit, investment grade, very tight cap rates.
• Corporate sub-lease to franchisee: tenant is the franchisee, but McDonald's Corp guarantees performance. Lease structure varies. Strong credit, slightly wider cap rates than direct corporate.
• Franchisee-direct lease (no corporate involvement): rare but exists, particularly for older locations. Tenant is the franchisee only, with no corporate guarantee. Franchisee credit only, much wider cap rates.

Most OMs marketing McDonald's net lease deals don't make this distinction clearly. Reading the lease document and understanding the contractual chain is the difference between a 4.5% cap and a 7%+ cap on the same brand.

How McDonald's Real Estate Works

McDonald's Corporation operates one of the most unusual business models in food service. Per their 10-K disclosures and franchise documents:

1. McDonald's Corp owns or master-leases the real estate at the majority of franchised restaurants. The percentage varies by region but is meaningful.

1. Franchisees operate the restaurants under a 20-year franchise agreement, which is paired with a 20-year sub-lease of the real estate from McDonald's Corp.

1. Rent paid by the franchisee to McDonald's Corp is typically a percentage of the restaurant's gross sales (often 8-12% per the FDD), in addition to a royalty on sales for the brand license.

1. Most of McDonald's Corp's revenue from franchised stores comes from the rent, not the royalty. This is why McDonald's is sometimes described as "primarily a real estate company that licenses the McDonald's brand."

For a net lease investor, this structure creates three distinct types of "McDonald's deal":

The Three Deal Types

Type 1: Corporate-Owned, Direct McDonald's Corp Tenant

The investor buys a property where McDonald's Corp is the named tenant on the lease. This is the cleanest structure:

• Tenant: McDonald's Corporation (the publicly-traded parent, S&P BBB+ rated)
• Lease term: typically 20-year initial with multiple 10-year renewal options (often 4-6)
• Rent structure: usually fixed bumps (CPI or scheduled escalators)
• Cap rate: tightest in the QSR space — often in the 4.0-5.0% range for prime locations

These deals are uncommon in the resale market because McDonald's Corp typically holds them long-term. When they do trade, they command institutional pricing because the credit is essentially equivalent to investment-grade corporate debt.

Type 2: Corporate Sub-Lease to Franchisee

This is the most common structure. The mechanics:

• McDonald's Corp owns or master-leases the land
• McDonald's Corp sub-leases to the franchisee for a 20-year term aligned with the franchise agreement
• The investor's relationship is with McDonald's Corp (as ground lessor or sub-lessor), not the franchisee directly

For the investor:

• Tenant counterparty: McDonald's Corp (top of credit spectrum)
• Underlying operator: the franchisee
• Effective credit: McDonald's Corp credit, since they're contractually obligated to pay regardless of the franchisee's performance
• Cap rate: similar to Type 1, slightly wider for ambiguity (typically 4.5-5.5%)

The key contractual question to verify: is the lease to the investor signed by McDonald's Corp (or a wholly-owned subsidiary), or by the franchisee with a corporate guarantee from McDonald's Corp?

A lease signed by McDonald's Corp directly is the cleanest. A lease signed by the franchisee with a corporate guarantee is structurally similar but slightly weaker — guarantee enforcement requires the landlord to pursue McDonald's Corp under the guarantee terms, which can have notice periods, cure rights, and other procedural requirements.

Type 3: Franchisee-Direct Lease (No Corporate Involvement)

In some older deals, the franchisee owns the real estate or holds the lease directly with no McDonald's Corp involvement. The investor's tenant is the franchisee only.

For the investor:

• Tenant counterparty: the franchisee LLC or partnership
• Effective credit: franchisee's balance sheet — varies widely
• Cap rate: meaningfully wider, often in the 6.5-8.0% range depending on franchisee size and location
• Risk: franchisee bankruptcy, franchise agreement non-renewal, single-location concentration

Some sophisticated franchisees (operators with 50+ McDonald's units) have strong financials and command tighter cap rates than single-unit operators. But there's no public credit rating, and underwriting requires direct review of franchisee financials.

How to Identify Which Type You're Looking At

The OM headline often says "McDonald's net lease" without specifying which structure. To identify:

Step 1: Read the Lease Counter-Party

Open the lease document. Who is named as the tenant?

• "McDonald's Corporation" or "McDonald's USA, LLC": Type 1 (corporate-owned) or Type 2 (corporate sub-lease)
• A franchisee LLC name (e.g., "Smith Restaurants of Ohio LLC"): Type 3 (franchisee-direct), unless there's a separate corporate guarantee
• A franchisee LLC + corporate guarantee from McDonald's Corp: hybrid Type 2 / Type 3 — credit is McDonald's Corp via guarantee

Step 2: Check the Lease Structure

• Type 1 / 2 leases: typically follow McDonald's Corp's standard form, with 20-year terms, multiple renewal options, fixed escalators, and a recognizable McDonald's lease structure
• Type 3 leases: variable structures, often older, may have shorter remaining terms or non-standard provisions

Step 3: Verify the Guarantee (if applicable)

If the lease is to a franchisee with a corporate guarantee, request the guarantee document itself. Confirm:

• The guarantor is McDonald's Corp (the publicly-traded parent), not a smaller subsidiary
• The guarantee is continuing (not limited to a specific event)
• The guarantee covers rent + all other lease obligations, not just rent
• The guarantee survives any default by the franchisee

A guarantee from "McDonald's USA, LLC" is essentially equivalent to McDonald's Corp because USA LLC is a wholly-owned subsidiary. A guarantee from "Acme Holdings LLC" (a franchisee parent entity) is a different and weaker instrument.

What This Means for Cap Rate Analysis

The cap rate spread between the three types is meaningful — often 200+ bps between Type 1 and Type 3 for the same physical asset. Why most OMs don't make the distinction clearly:

1. Type 3 deals trade at wider cap rates by structure, but sellers prefer to anchor the conversation to the McDonald's brand and the comparable Type 1/2 cap rates. Buyers who don't read the structure pay tighter cap rates than the credit warrants.

1. The "McDonald's Corp guarantee" can be ambiguous if the guarantor is a subsidiary or if the guarantee has carve-outs. The presence of the word "guarantee" doesn't automatically mean Type 1/2 pricing.

1. Brokers want comparable comps to be tight so the deal looks attractive. A franchisee-direct deal at a 6.5% cap doesn't sell as well as a "McDonald's net lease at a 4.5% cap" — even when the underlying credit warrants 6.5%.

Practical Underwriting Workflow

For any McDonald's deal you're presented:

1. Confirm the lease counter-party in the lease document, not just the OM
2. If the lease is to a franchisee, confirm the corporate guarantee: who is the guarantor, what does it cover, is it ongoing
3. Compare the cap rate to the structural credit:

- Direct McDonald's Corp tenant: 4.0-5.0% cap rate range is typical

- McDonald's Corp guarantee on franchisee: 4.5-5.5%

- Franchisee-direct, no corporate guarantee: 6.5-8.0%, with adjustments for franchisee scale and lease term

1. For franchisee-direct deals, request franchisee financials (P&L, balance sheet, store-level sales data if available)
2. For sub-lease structures, verify the underlying ground lease term — your investment horizon can't exceed the ground lease remaining term

A Note on Franchisee Concentration

Some McDonald's franchisees operate large fleets (50-300+ units). The financials of these operators can be stronger than the median franchisee because of scale. But concentration matters:

• A franchisee with 200 units in California is exposed to California-specific risk (Prop 13 reset, labor law changes, drought-related agricultural disruption affecting consumer spending)
• A franchisee with 200 units across 12 states is more diversified

For franchisee-direct McDonald's deals, the franchisee's portfolio composition and financial scale are direct underwriting factors.

Quick Reference: Cap Rate Expectations by Type

These are typical ranges as of recent market activity; current rates fluctuate with Treasuries and tenant credit conditions. Verify against current Boulder Group / RCA / Real Capital Analytics data for any specific transaction.

A Broader Lesson

McDonald's is the clearest example of a structural pattern that applies to many large franchise QSR brands: the lease counter-party determines the credit, not the brand on the building. A "Burger King" deal where the tenant is Carrols (now owned by Restaurant Brands International) is one credit story. A "Burger King" deal where the tenant is a 5-unit independent franchisee is a different story entirely. Same brand, very different cap rates warranted.

For brokers and underwriters, the discipline is the same across all major QSR brands: read the lease, identify the actual contractual tenant, verify guarantees, and price the credit accordingly.