How short is too short and how long is too long? That’s a reasonable question for both potential billboard land owners as well as the billboard company itself. In this Billboard Mastery podcast we’re going to drill down on the importance of lease length in every billboard deal.
Episode 53: All About Length of Lease Transcript
How long is too long and how short is too short? That's a very reasonable question for billboard builders and owners, but it's also a very reasonable issue for the landowners themselves. This is Frank Rolfe for the Billboard Mastery Podcast. We're gonna be talking all about length of lease. Now, what is a lease to begin with? Well, every billboard in America, or at least it should be every billboard in America, it would have a ground lease. And the ground lease stipulates how much the property owner gets paid, and the frequency of payment and various issues. But a very important one there is how long that lease lasts. And as long as I was in the business, it was always a big question to people. What is reasonable? What's appropriate? And what's unreasonable and inappropriate? Now, there's several things you have to think about when you ponder the concept of length of lease. The first one is, what kind of sign are you building and how much is it costing? If you're building a wooden telephone pole sign, that is not nearly as important, that lease be super long as it is a big steel monopole. Because before there's any profit, you have to get all your money back. Before there's any profit, you have to get that bank paid off.
So that's issue one, is how much we spend in here. Number two, how long is the amortization on your loan? If it's a wooden telephone pole sign on a three-year note, then as long as your ground lease goes at least three years, you're gonna get the bank paid off before it ends. But if it's a steel monopole, it may take 10, 20 years to pay that thing off. So you've gotta have a plenty lengthy lease to make that all possible. Another question is, how much money are you trying to make? I wouldn't wanna do a four-year lease if it takes me three years to pay off the debt because I only have one year of profitability. That doesn't sound good to me at all. Same on the steel monopole. If it takes me 15 years to pay it off, I wanna have at least 15 years of profitability. You're not trying to do this for nothing, you're trying to make money with it. So the long and the short of it is, typically billboard leases are very long-term in nature. Now, there's different reasons for why they are so long-term in nature. The first reason is simply that the billboard company has to be protected. So it wants to make sure that its note will be covered, that it... Lease does not end before the note ends, which makes complete common sense.
But the other issue is, all billboard companies, everyone in the billboard industry always has some degree of risk. Your sign can be wiped out in a tornado, it could be blocked by a tree, market could go bad, they could change the highway direction to the other direction. You don't have any control over those items. As a result, you wanna have a lot of billboards floating around out there debt-free to make sense of it all, to give you a little more portfolio diversity. So I would never do a short-term lease. If someone says to you, "Hey, I'll do a short-term lease." I'd say, "Well, I don't think I wanna do that deal then." I'll walk the deal, I'm not gonna do it. I've gotta have some length. Now, for most people, that minimum benchmark length is 10 years. If you have a sign that you buy, for example, that's already standing and all you have is a capital cost to put an ad on it, then 10 years would be a pretty profitable enterprise. If you're building a wooden telephone pole sign, then you have to have a note on that for three or four years. 10 years, again, isn't too bad.
If you have a steel monopole sign, though, not gonna be good enough. So I would say 10 would be my benchmark minimum length I really would be willing to go. On the monopole side, I'm gonna wanna go to 30 years. I wanna have plenty of time to pay that sign off and have many, many, many years of profitability after that. Now, when you have these long lease lengths, if your goal would be to get from 10 to 30 years in length, how you present that length to the property owner is very, very important. You wouldn't wanna put in your lease, "Hey, it's a 30-year lease." No, instead you'd say it's a 15-year lease with a 15-year option. Now, since the option's at your option, you know you're gonna go the extra 15 years. It's the same as a 30-year lease. But the optics of what that looks like is much more satisfactory to the seller. So you gotta have a long-term lease. Now, what about from the property owner's perspective? What's their danger? What's their risk in the long-term lease? Well, it's not too much based on what your lease says. If they have provisions in their lease, for example, they allow for development, well, the number one argument they'll make is, "Well, if you build that sign, you may wanna build something else on the property some day."
Well, if there's an escape clause for them in the event of development, you have to remove the sign, well that argument really isn't logical or tangible. Another argument they'll make is, "Well, that's way too long. A 30-year lease with inflation right now running 10% a year, the money you're paying me won't be worth anything 30 years from now." And you say, "Well, that's true. So I'll adjust the lease based on inflation annually or every few years." That's the way to get over that argument. Bottom line is, there really is no argument they can make on the longevity of your lease that makes any sense, except for one, they want to only renegotiate it. Now, why do they wanna renegotiate it? Well, they wanna renegotiate it because they're afraid they could have gotten more from another sign company or even from you five or 10 years from now. And we all know that markets change, they get enhanced, they grow and things like that. And they don't wanna be stuck with a location that's really, really hot 10 years from now, that wasn't too hot when they started at a low ground lease.
A way to get around that is give them a lease that is a percentage of rent versus a set minimum. That means if the rents go up exponentially, they still get their percent. But if they don't go up at all, they still get their benchmark base. It's a very, very safe construction. Adding that one feature to a lease can often buy you a whole lot of extra length. And on the topic of extra length, let's never forget that you typically are gonna go a lot longer than what it says on the lease. Here's how it typically works. Let's say you have a 15-year lease with a 15-year option, and then it runs year to year at the expiration, and make sure you put that in any lease. You don't wanna have where it ends on a certain date, just that it changes over to perhaps a year to year lease. Do you really think the person you're signing up will be around 30 years from now? Do you really think they'll even remember it? Who in the world has a day timer that extends 30 years into the future? What normally happens is, no one catches onto it. And they don't catch onto it until sometimes decades after the end of the 30 years.
I've had calls from people before wanting to renegotiate leases, then the lease had already ended literally 30, 40 years earlier. They just never thought about it. They didn't even know they had the option to ever renegotiate it. So make sure you put in your lease the ability for that thing to extend forever. If you had that has a formal ending, you have to then approach them at the end and say, "Hey, it's ending. Do you wanna re-up again?" You don't wanna ever have that moment. You want that sign to basically just disappear into oblivion and just keep on clocking rent for adding
Without any discussion with the person at all on the length. The bottom line to it all is that length is a very, very important tool for you as a sign owner to make plenty of money. Not so important to the property owner. Doesn't really work to their interests necessarily. However, there are a couple of reasons when having that extra length actually is to their benefit. One of them is if they go out there and they want to re-sell that property, then having that extra billboard income might allow them to get a higher sales price. And the other is when they wanna go out and refi their property. Once again, that income from that sign is very important if they can refinance.
If you have a sign paying $500 a month to the person, that's $6000 a year, they have virtually no cost, at a 10% cap rate that gains the value of the property by $60,000 or 5% by $120,000. Don't be afraid or shy to remind the property owner that the length of lease is very important to them too. A short-term lease, let's say they wanna refi a property and put a 30-year mortgage on it, if your short-term lease only has three years to run, they can't do it. They won't count the income. The lender won't count it. It's not long enough in nature. So sometimes having a long lease works out for both parties. Length of lease, very important item. All smart billboard owners, operators are always focused on it. Make sure you are too. This is Frank Rolfe for the Billboard Mastery Podcast. Hope you enjoyed this. Talk to you again soon.