A Subway restaurant in Washington D.C., Chinatown. photo/bmm

Subway chain’s franchisor, Doctor’s Associates Inc,  has an unorthodox approach to leasing property that landlords appreciate.The franchisor leases the property and then sublets it to the franchisee.

… even though all of its restaurants are run by franchisees, real estate decisions are handled at its corporate headquarters. Subway employs so-called field developers in areas where it’s looking for new stores. The field developers scout local markets with prospective franchisees, then contact Subway’s real estate department for site approval. The site is analyzed using Subway’s proprietary demographic mapping system, and if it fits Subway’s criteria, the in-house leasing specialists contact the landlord about signing a new lease.

This is not a typical arrangement for franchise operations. Many times, franchise businesses have individual owners assume most of the responsibility for their real estate, says Jim Thompson, managing director with Regency Centers, a shopping center REIT that currently has 117 Subway restaurants in its 400-center portfolio. For a landlord of Regency’s size, that means having to negotiate leases with hundreds of franchisees in different markets. In Subway’s case, Regency is able to maintain an ongoing relationship with a few key people within Subway’s real estate. Plus, the sublease model allows Subway to bring in a new franchisee if an existing one is failing, limiting the need for restaurant closings, Thomson notes. “Subway is so protective of the brand, we just tend not to lose them,” he says. “The franchisee may go away, but they are pretty quick to replace them. From a landlord’s perspective, it’s like you are dealing with a corporate tenant.”  [Read Retail Traffic associate editor's Elaine Misonzhnik's full story. ]

What's good for the franchisor or the landlord isn't necessarily good for a franchisee. Can you name a few things why the Subway arrangement benefits the franchisee and where it might work against them?