Wall Street serving up fast-food tie-in for investors
Hold the pickle! Wall Street, which has served up some unusual deals in the past, is now into fast foods.
One of its newest fads this year is combining fast-food chains (or their franchisees) and investors. The two groups hope the mix will be a palatable limited partnership, serving up an increasing amount of partly tax-sheltered cash. Shearson/American Express is offering such fare involving Burger King, and E.F. Hutton has just completed one involving Arby's. Within a week, Hutton expects to serve up others with Hardee's and Kentucky Fried Chicken franchisees.
The menu for investors is quite simple: In return for investing money in a partnership, they buy a pool, or group, of restaurants. These restaurants are leased to the franchisees, and the investor gets back a regular and increasing cash distribution, a portion of which will be ''tax sheltered,'' from the rental income. The investors, who are considered limited partners, also get to share in the restaurants' sales growth. When the restaurants are sold off within 10 years , the partners share in the appreciation of the properties. For the fast-food franchisee, the limited partnerships provide a source of funds at less than the going mortgage rates.
John Lambert, senior vice-president at Burger King, in Miami, notes: ''It's very difficult for a small independent businessman to raise capital in this kind of economic environment. This partnership will develop 30 Burger King restaurant properties in the next 12 months that would not have otherwise been developed.''
John Tommasini, a vice-president of E. F. Hutton, adds that banks are not used to lending to fast-food franchisees, since the cost of buying a parcel of real estate for such a franchise is so high. The location of the outlet is important. It must be in a high traffic area, where real estate prices for a one-acre site can be higher than banks are used to. The total cost of acquiring the land and building a unit can exceed $500,000.
''Banks look at that package and don't want to lend as much money,'' Mr. Tommasini says.
Despite the banks' hesitation, the fast-food industry has shown excellent growth. As the Shearson prospectus notes, total fast-food sales increased from $ 7 billion in 1974 to $27 billion in 1980, a compound growth rate of 25.07 percent a year.
Burger King's sales have increased at a compound growth rate of 26 percent as the chain has introduced new products and developed its marketing expertise.
The enticement for investors to lend the money is that of having an investment with a steady return and the possibility of taking part in some of the industry's growth.
Concerning the Shearson-Burger King deal, Robert Greenwald, a Shearson associate, says the brokerage house is projecting a 121/2 percent return to investors in the first year and a 26 percent return by the tenth year. But ''no return is guaranteed,'' he adds.
A certain amount of the investment will be tax sheltered, since investors will be able to deduct depreciation charges. The minimum investment with the Shearson deal is $5,000 for an individual and $2,000 for an individual retirement account.
The Hutton investment, Tommasini says, is projected to return an investor 10 percent initially. Hutton investors will have a 6 percent participation in gross sales, giving the security of a certain amount of inflation indexation. Because of the deduction for depreciation, roughly two-thirds of the income a Hutton investor receives will be tax sheltered, he says. And, unlike the Shearson deal, Hutton has insured its latest offering to make sure investors receive the rents from the franchisees.
In the Shearson deal, the limited partners will be partly protected by an idemnity account with Burger King. Thus if the franchisee is declared to be in default under his lease, the indemnity account will insure the investment up to certain limits against loss of minimum rent until the property is disposed of, or against loss of the original investment if the property is sold.
Unlike many of Wall Street's deals, these are not strict tax shelters. The limited partnerships will not borrow money. Thus, they are not leveraging themselves -- and the tax shelter aspect of the return is not greater than the initial investment.
There are certain risks involved with the investment. For example, since no public market is likely to develop, holders may not be able to liquidate their holdings at a given time. Therefore, if an investor wants to liquidate his interest, he can't be sure of getting his money back until the termination. The general partner will try to find a buyer if the limited partner wants to sell his interest. There is no guarantee this can be accomplished, however.
There is also the risk that the fast-food industry will not grow as fast as it has in the past, in which case there might be a lot of investors eating hamburgers.
The stock market bounced back last week, ending 14 weeks of sliding. Analysts said the bounce, which sent the Dow Jones industrial average up 12.27 points, to close at 817.92, was mainly ''technical'' in nature - the result of an oversold condition. Larry Wachtel, an analyst with Bache Halsey Stuart Shields Inc., said he expects the market to run out of gas when the Dow hits the 850 level.