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Comment by verganileonardo | Hacker News Reader

That is quite common in retail. Usually the family owns all the stores and just rent them to the retailer. (At least in Brazil)

Although it sounds bad, not sure how it is perceived in real estate

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Same in Lithuania, not a problem, if price for renting is like market price, else, it would be interesting to local authorities.

How is this not a problem? There is a huge conflict of interest in decisions about location, rent negotiations, etc.

Rent should be similar to market price for the region. Regarding location, the family wants the store to the be sucessfull for 2 reasons: (1) the rent period is going to be longer and (2) they own the retailer and want to invest in viable stores!

If rent were the same, then it wouldnt happen as often, because any slightly better deal will make the owner of the property lose out.

Rent on self-owned is definitely higher than market price. It has to be for the transaction to make sense.

As somebody mentioned, if you own a building as a shareholder in new company, and you have more shareholders (not one shareholder), you can buy rent from it as long as price is in market.

Company rents office from other company, you can have as many companies as you want.

You are thinking about tax issues not issues of fiduciary duty. The market value issue is to make sure you’re not illegally funneling money between entities without proper taxation.

You generally couldn’t, for example, transfer significant wealth to a friend without high taxes by selling them something for a dollar When it’s market value is $10 million. This issue here is completely different.

Is conflict of interest illegal?

I said 'problem', not 'illegal'. Other shareholders/boards/investors/employees should care.

Apparently this is McDonald’s modus operandi as well. They’re basically a real estate company who happens to specialize in fast food resturants.

Are you sure? Surely the company itself owns the properties, which is very very different from a controlling family owning the properties.

80% of McDonalds are franchise, so it’s often a similar situation. 2/3rds of locations are owned by McDonald’s and leased by the franchisee, who also pays royalties and purchases from corporate affiliated suppliers.

Ripe for abuse if McDonald’s were too short term focused.

Source: https://www.fool.com/investing/general/2016/04/03/what-perce...

That's a way for McDonalds to make more money for McDonalds shareholders (at the expense of a private franchisee who's well aware who he's leasing from and probably feels more secure leasing the location from someone that isn't going to turf him out for a higher rent offer from KFC). From a MCD investor point of view, them owning the real estate and earning money on that too is a good thing. It's a bit different from a hypothetical scenario in which McDonalds picks locations personally owned by McDonalds' CEO Steve Easterbrook, in a manner which probably tends to benefit him personally far more than McDonalds' shareholders.

I would suggest that MCD corp regularly turfs out established O/O's, just for the opportunity to re-sign lease agreements for better rent %s. ie renegotiating from 90's rates around 5% to 2010's rates at 10% of gross.

IMO, MCD has been administratively leveraging there negotiation position with regards to rental %s as the near sole driver of profit increases for about 18-22 years. They are very very near max sustainable extraction, which is evident by their huge offloads of corporate owned stores in the last 3 years.

Addition: They could also be positioning for a REIT transition.

That's not similar at all. McDonald's (the company) owns properties and leases them to franchisees, which is quite different from a WeWork officer owning properties and leasing them to WeWork (the company).

Tell that to the McDonald family.

I don't know if you're joking, but they were out of the picture even before the company became public in 1965.

And they were leveraged out of the business partly though lease-to-yourself shenanigans on the part of Ray Kroc.

How so?

https://money.howstuffworks.com/mcdonalds2.htm

Not spelled out there is that the real estate portion of the business was advantageous to Kroc. When it became the vast majority of the business he could use his resources to leverage out the McDonalds.

I don't see the relevance for the WeWork discussion.

WeWork shareholders are potentially harmed when the CEO gives money from the company to himself.

If I understand the deal, the McDonald's brothers sold back the royalties they got from McDonald's (the company) for $2.7mn. If McDonald's (the company) got access to the money that the McDonald's brothers demanded by being smart with real estate operations, good for them. Everyone got what they wanted.

https://www.marketplace.org/2017/02/09/business/ray-kroc-mcd...

"The brothers did get a percentage of the profits. The original deal was 1.9 percent of a franchisee's profits. It went to the McDonald's Corporation and 0.5 percent of that went to Dick and Mac McDonald. The falsehood in the movie is that Ray screwed the brothers out of that half a percent. Basically what happened was Ray and the brothers were at odds. He went to them and said, look, what is it going to take to make you go away? They said $2.7 million — we want a million dollars each and $700,000 to pay our taxes. That's how practical they were. And they were happy with that. It was 1961 and the problem was that Ray didn't have anywhere close to $2.7 million. It's important to remember that McDonald's was precipitously close to folding at every step of the game once Ray got involved, because he didn't have the right scheme to make McDonald's grow until he met Harry Sonneborn who came along and told him it's not about hamburgers, it's about real estate. So basically Ray couldn't find $2.7 million to pay the brothers off. Harry found the $2.7 million. And if he hadn't, the situation, the agreement would have continued on the way it was in place with the 0.5 percent going and lining the brothers' pockets in a really lovely, passive income. But Harry saved the day. He was able to convince these men, who they later called in McDonald's lore "The 12 apostles," and those guys came up with the cash that allowed him to buy out the McDonald's brothers and make them go away. The movie says that they got screwed, but they didn't."

No, they don't own the properties outright. McDonalds operates as a franchise

From their annual report:

"The Company owns and leases real estate primarily in connection with its restaurant business. The Company identifies and develops sites that offer convenience to customers and long-term sales and profit potential to the Company. To assess potential, the Company analyzes traffic and walking patterns, census data and other relevant data. The Company’s experience and access to advanced technology aid in evaluating this information. The Company generally owns the land and building or secures long-term leases for conventional franchised and Company-operated restaurant sites, which ensures long-term occupancy rights and helps control related costs."

"The Company owned 45% to 50% of the land and 70% to 75% of the buildings for restaurants in its consolidated markets at year-end 2017 and 2016."

Watch the the founder. Real estate is where they made their money.

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