Billboards have always been based on extremely long ground lease lengths – as long as 30 years or more. While that’s great for the billboard owner, it can sometimes be a challenge to explain to the property owner why they are so lengthy. So what are the explanations?
You don’t really make any money until the debt is paid off
There’s an old saying “before you have a return on principal you have to have a return of principal” – which basically means that you have to repay your cost to build or buy the sign before you show any profit. And that means the first years of the sign’s life are spent paying back debt or capital. Meanwhile, the land owner gets a profit from day one (although a whole lot less than the sign owner). So you have to have a long lease in order to make a decent profit. Simple economics.
The banks require it
To protect their downside, most lenders demand a lengthy ground lease. From their perspective, it will be hard to find a buyer for your sign, if you default on the loan, if it does not come with a lengthy ground lease. How long? Most banks are going to demand at least 10 years or more. If you don’t have a long lease you may be unable to get a loan.
It’s the industry norm
Every industry has its own unique features, and the billboard sector has an expectation of long ground leases. It’s always been that way dating back to the earliest beginnings of the business model back in California in the 1920s. Since everyone expects a long lease, you need to go with that trend.
Butworst case, you actually have a strategic advantage the property owner doesn’t
There’s one thing about billboard leases: they tend to favor the sign owner. That’s because most billboards – after construction – eventually become ‘legal non-conforming” (also known as “grandfathered”). In this manner, they can’t be replaced if they are removed. Since the sign company owns the sign structure, the property owner only can work with one group: the existing sign owner. This gives you a barrier to competition, so if they choose not to agree to a new lease they lose the sign income forever. That’s a powerful tool and allows you to make most signs actually permanent in nature.
Billboard ground leases have been very lengthy from the beginning. Do not deviate from this strategy. A long lease makes for a very profitable arrangement for the sign owner, and making money is job #1.