The Riese Organization

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The Riese Organization

162 West 34th Street
New York, New York 10001
U.S.A.
Telephone: (212) 563-7440
Fax: (212) 613-1929
Web site: http://www.rieserestaurants.com

Private Company
Founded: 1953
Employees: 1,500
Sales: $150 million (2000 est.)
NAIC: 53112 Lessors of Nonresidential Buildings; 72211 Full-Service Restaurants; 722211 Limited-Service Restaurants

The Riese Organization is composed of a group of private corporations—perhaps 200 or more—that owns and operates restaurants and real estate, primarily in the New York City area. It includes National Restaurants Management, Inc., the corporation that formerly served as a holding company. The Riese Organization owns and operates about 110 eating places in New York, including franchises of such fast-food chains as Dunkin’ Donuts, Pizza Hut, Kentucky Fried Chicken, and Roy Rogers. Holding leases on many of the busiest sites in Manhattan in terms of pedestrian traffic, its existence is based on the hoary adage that the three most valuable factors in real estate are “location, location, and location.”

From One Luncheonette to Several Restaurant Chains: 1940-80

Irving and Murray Riese were born in Harlem, sons of Russian immigrants who were on welfare during the Depression. Irving went to work in his teens as a dishwasher at a Bronx ice cream parlor, bequeathing his job to Murray when he “graduated” to soda jerk. At the time, Murray recalled in a 1975 New York Times interview, “We had to work about 9 out of 15 hours in a split-shift day at 35 cents an hour.” Some of the staff went on strike to eliminate the split shift, he added, and “I was one of the militants. We finally received about $500 in back pay, which [in 1940] we used to open a luncheonette” in midtown Manhattan. The money was applied to a down payment on the purchase price of about $8,500.

In 1945 the Riese brothers sold the luncheonette for about $38,500. The profit was used to launch a program of buying troubled restaurant properties and then refurbishing and reselling them. “We would buy and sell 20 to 25 restaurants in one month,” Murray Riese recalled to Pamela G. Hollie of the New York Times in 1983. The brothers estimated that they had bought and sold at least 1,000 restaurants, coffee shops, drugstores, and nightclubs. Murray Riese explained to her how they got the money for further investments in these words: “Let’s say you sell apple pies. You buy the pie today and sell it today. You sell the pies for more than they cost and you have 60 days to 90 days to pay. You have a float. It pays to be in business just because of the float.”

This way of doing business ended in 1953, when federal tax authorities ruled that the Riese brothers were really real estate brokers and thus could not claim that their profits from selling restaurants were capital gains entitled to a lower rate of taxation unless these properties were held for three years rather than six months. The brothers then began to develop their own restaurants for the long term, leasing prime Manhattan real estate for the purpose of operating such restaurants or to sublease the sites to other businesses. Murray acted as the dealmaker and money man, while Irving concentrated on restaurant operations and marketing. In 1962 the brothers, through their National Restaurants Management, Inc., purchased Childs, a chain of restaurants operating in the red that had 19 locations and annual sales of about $10 million. National Restaurants, which was operating 30 units—many under the Cobb’s Corner name—paid more than $2 million for the chain. Since they needed $1 million for the purchase and their bank would lend them no more than $500,000, the Riese brothers split the acquisition in two and borrowed $500,000 each. Within six months, they had made enough money by subleasing Childs properties to pay off the mortgage.

In 1967 the Riese brothers purchased a controlling share of Longchamps, Inc., a chain of higher-end city restaurants, including its flagship on the ground floor of the Empire State Building. They soon sold most of their Longchamps stock but in 1971 paid $8 million for an Upper East Side Longchamps; Luchow’s, a landmarked downtown German restaurant; and the Autopub, Riverboat, and Downbeat restaurants. The Rieses were believed to be operating at this time eating places with a total gross of about $45 million a year, including a large number on 42nd Street, concentrated in both the Times Square and Grand Central Terminal areas.

With annual sales of about $80 million in 1972, the organization was said to be the nation’s largest privately owned restaurant entity. It was operating about 150 restaurants at the time, and National Restaurants was the largest privately held restaurant operator in New York. In 1973 The Riese Organization acquired 22 of the 35 Schrafft’s restaurants for an estimated $3 million. Like Childs and Longchamps, Schrafft’s was a chain familiar to New Yorkers, yet all three (plus six Mayflower Donuts shops acquired in 1975) were seen by the Rieses as tired concepts, and they disappeared in favor of new formats at the same sites. “We got the idea of treating restaurant properties as theaters,” Murray Riese told Glenn Fowler of the New York Times in 1990. “When a show closes you don’t tear down the theater. You look for a new attraction.” By 1975 the Riese Organization’s stable included 35 outlets of the Brew Burger chain first developed by the brothers in 1972. In 1979 the organization acquired its first franchise, Beefsteak Charlie’s. (The Rieses had been offered a McDonald’s outlet in the early 1970s but passed on the opportunity.)

Thriving on Franchising in the 1980s

The Riese Organization subleased 15 Chock Full O’Nuts coffee shop sites in 1983 and was operating 20 of these counter-seat eateries as a franchisee by the end of the year. The Riese brothers—and Murray’s son Dennis—were now in charge of about 250 restaurants, about half of them franchised fast-food outlets, serving an estimated 500,000 people a day, with 8,000 employees and annual sales of more than $200 million, of which revenue from restaurants and real estate were roughly equal. Most of these units were serving lunch to Manhattan office workers and shoppers, and many of them were soon to be marshaled into clusters that the organization called “food courts.” In Pennsylvania Station, for example, under a single lease with a single kitchen, the Rieses were running a fast-food outlet, doughnut shop, and bar. After the organization’s $12 million purchase in 1983 of the United Artists Building at Seventh Avenue and West 49th Street, it lined the ground floor with its eating places.

The Riese brothers rode herd over their empire from minimally furnished headquarters in a dreary six-floor building on West 34th Street, so close to many of the units that Murray’s son Dennis—now president and chief operating officer—could visit up to 25 a day. “Inside” man Irving continued to arrive at 5:30 in the morning and work till mid-evening, while “outside” partner Murray also put in long hours. Special telephone lines connected headquarters to each eating place and each one to the others, enabling a quick exchange of supplies or labor. The Rieses rarely contracted for help; staffers priced and printed 50 different menus each day, and when the brothers decided to change formats at a given location, a small team of painters and carpenters was sent out to prepare the site quickly for a new opening.

The Riese brothers are credited with originating the food court concept in 1983, the same year the organization signed franchise agreements to open 30 new Roy Rogers and 25 Godfather’s Pizza outlets by 1988. This format called for units of different franchisers to be adjacently placed—although sometimes on separate floors—at the same location, with a single kitchen preparing food for each operation. Ordinarily, fast-food franchisers forbade, or at least discouraged, franchisees to combine such operations with other ones, especially competing ones. With their control of large pieces of Manhattan real estate—including all four corners of some major intersections and licenses to run 28 franchised operations in New York City, most of them on an exclusive basis—The Riese Organization was in a position to make its own rules. One Riese-operated Broadway site had as many as nine franchised eateries under one roof. The Marriott Corp., which then owned the Roy Rogers chain, sued the Rieses to keep them from combining a Godfather’s Pizza and Haagen-Dazs outlet with a Roy Rogers unit in Times Square but lost the case.

“Mavericks with a reputation for arrogance and renowned in the world of franchising as tough negotiators,” Milford Prewitt of Nation’s Restaurant News wrote in 1996, “the Rieses blatantly bent some of their franchisers’ rules and often balked at certain franchising fees.” Dennis Riese looked at it differently, telling Prewitt that the franchisers “came into Manhattan with the same bias they had in the rest of the country. That is, that they were in control, and like 99 percent of their franchisees my father and uncle were supposed to turn over a check and sign their life away with a handshake. … For most franchisers, this was probably the only place in the country where this little franchisee was rubbing their face in the dirt.”

Franchised Haagen-Dazs, Famous Amos, and David’s Cookies gourmet-snack outlets required little space, making them ideal for Penn and Grand Central locations. Agreements were signed to open franchised units for Church’s Fried Chicken (1984), Nathan’s Famous (1987), and Tad’s Steaks (1988). The Rieses also were promoting their own sit-down restaurants. Three Charley O’s units, aimed at young professionals, were doing large bar business in 1984. Eight J.J. Mulligan’s featured hearty food in a publike ambience. The six Lindy’s featured delicatessen-type dishes. Brew Burger was proving a disappointment, but when the chain was terminated, other company-owned or franchised units usually moved in at the same location.

Company Perspectives:

The Riese Organization will be making a high profile mark on the Manhattan restaurant scene well into the next century. That’s good news not only for New York’s largest independently-owned restaurant employer… it’s good news for all of New York!

In 1989 The Riese Organization controlled about 300 restaurants in Manhattan and on Long Island—about half of them in clusters—and had an estimated $332 million in annual sales. That year an investment group headed by the organization purchased 107 Houlihan’s and Darryl’s restaurants for more than $225 million. The acquisition gave the organization operation of 35 concepts, from dinner-house franchises such as Beefsteak Charlie’s and Houlihan’s to fast-food units franchised from Dunkin’ Donuts, Kentucky Fried Chicken, Pizza Hut, and Nathan’s Famous. The organization was offering advertising space almost anywhere in its outlets, including menus, walls, above the bars, and even on the clothing of the serving staffers.

Decline and Bankruptcy in the 1990s

But The Riese Organization then began to falter, in part because of the death of Irving Riese in 1990 but mainly because of the recession that began that year and lasted into 1992. To finance expansion of its food courts, the Riese brothers had in 1988 borrowed $140 million from the Bank of Tokyo-Mitsubishi Trust Co., using 14 properties as collateral. This debt increasingly hung over the organization’s head, although a five-year restructuring was arranged in 1993. To cut costs, the company reduced the number of its units and leased properties, but in the process they also reduced their revenues, and hence the cash flow needed to pay the debt.

Dennis Riese, who left the organization in 1988 to strike out on his own, returned to his position in 1991. He trimmed the number of units to 250 and began investigating the development of new restaurant concepts. “We have discovered that though franchised brands bring you more revenues, they do not bring you more profits,” he later explained to Prewitt. “The biggest problem [in midtown and downtown Manhattan] with fast food is that it is too dependent on lunch. Breakfast is nonexistent, and there is no such thing as dinner and you need all three dayparts with these rents you have to pay.” In 1994 he formed Riese Capital Corp. to make loans to restaurateurs and to provide management and purchasing experience. This new company also opened Martini’s, an upscale Italian restaurant, and The Java Shop, a coffee bar, in midtown Manhattan. Dennis Riese assumed full command of the reins of The Riese Organization on the death of Murray Riese in 1995.

Dennis Riese once again tweaked the sensibilities of franchisers in 1992, when he started operating food courts under The Riese Organization’s own brand name, Riese Restaurants. T.G.I. Friday’s sued to terminate its franchise at six of ten Riese-operated units for displaying the Riese Restaurants logo in concert with other franchised units assembled into food courts. Once again, however, it was The Riese Organization that prevailed. By 1998 the logo was present on the doors and windows of virtually all of the organization’s eating places, with an accompanying list of every brand in its portfolio. Dennis Riese scored another win in 1995, when Carlson Cos. failed in litigation that claimed he was in violation of a franchise agreement with T.G.I. Friday’s and sought to expel him from the system. When the owners of Rockefeller Center did not renew an expiring Lindy’s lease in 1994, Riese refused to make way for an eatery with a karaoke-style “Television City” concept, staying put on the site for another 16 months. The Riese Organization also was engaged in a bitter dispute with Local 100 of the Hotel Employees and Restaurant Employees International Union in the late 1990s. Riese conceded that he had closed unionized locations and reopened them as new concepts without a bargaining agreement, but denied that this was a union-busting tactic. He reached a three-year agreement with the local in 1999.

To prevent foreclosure of its 14 loan-collateral properties, The Riese Organization paid off $68 million in debt owed to Bank of Tokyo-Mitsubishi Trust in 1997. To do so, it sold four of the properties to Vornado Realty Trust for $26 million, which provided new mortgages for the other ten and bought out the half-ownership in all 14 that was held by Irving Riese’s two daughters. All of these properties were in the area of the West 30s near Herald Square, Madison Square Garden, and Pennsylvania Station.

National Restaurants Management filed for Chapter 11 bankruptcy protection in 1999, listing $8.7 million in assets and about $140.7 million in liabilities, including a $117.8 million loan that the Tokyo bank sold to Natrest Funding Inc. (or ALGM LLC) in 1998 for about 33 cents on the dollar. The Riese Organization subsidiary, which Riese said was unaffiliated legally with the parent organization, emerged from bankruptcy a year later, having paid ALGM only $2 million and meeting all other unsecured claims for about two cents on the dollar. The settlement also included the sale and leaseback of the United Artists Building and a midtown Broadway building. The restructuring also allowed Riese to buy out his two cousins’ stake in National Restaurants Management, which accounted for about two-thirds of the organization’s revenues in fiscal 1999 (the year ended in April 1999). The Riese Organization was running about 110 restaurants in New York City in 2000. Its sales were an estimated $150 million in fiscal 2000.

Principal Subsidiaries

DR One Corp.; National Restaurants Management, Inc.; Riese Capital Corp.

Key Dates:

1940:: Irving and Murray Riese open their first restaurant.
1953:: The Rieses reorganize their business due to a federal tax ruling.
1962:: The brothers, who own 30 eateries, purchase the 19-unit Childs chain.
1972:: With about 150 units, the organization is said to be the nation’s largest privately owned restaurant entity.
1979:: The organization acquires its first franchise operation, Beefsteak Charlie’s.
1989:: The Riese empire of about 300 restaurants includes 28 franchise operations.
1999:: The organization’s chief entity files for bankruptcy operation; it emerges from bankruptcy the following year.