Billboard Mastery Podcast: Episode 11

Ground Leases

The document that gives you the right to build and operate a billboard on a piece of property is called the “ground lease” – and what it contains can make the difference between success and trouble. In this Billboard Mastery podcast we’re going to discuss what the key items of a proper ground lease include and why they are so important. Since your entire investment hangs in the balance, it’s essential that you know how a ground lease should be structured.

Episode 11: Ground Leases Transcript

How could a few sheets of paper have so much power over a giant Billboard? This is Frank Rolfe with the Billboard Mastery podcast. We're going to be talking about Billboard ground leases. What you need to have in them, what you need to not have in them, and why. What is a ground lease? A ground lease is basically a document, it's a contract between you and the property owner that governs the construction and the operation of the Billboard. Pretty simple idea, but the agreement itself is kind of complicated.

Let's start off with the things that have to be in a Billboard ground lease. The date that it begins. How long the term is, and terms on Billboard ground leases are very, very long. It's not uncommon to have a 15 year with a 15 year option, that's 30 years, or a 10 year with a 10 year option, that's 20 years. You rarely see them ever shorter than a five year with a five year option, which is 10 years. It's a pretty lengthy term. You'll also want to have when the payments start on the ground lease. You don't want to have the payments start until after the sign has been built. That way, if you can't get a permit on it, there's no question that there was no rent due. You also want to have the payments in there as to how much you're going to pay. Now, typically, Billboard ground leases, you pay either a flat amount or you pay a percentage of revenue, or you pay the higher of the two. You have lease percentages, you have fixed mounts, and you have a percentage versus a fixed amount. That's pretty standard.

As far as the location of the sign, you want to be somewhat nebulous, because often when you go out to build the sign, you're going to find you have to move your location around a bit. When you go to put the column in, you may drill down, you may hit rock, for example, and have to reposition it. Typically, you don't want to be too descriptive to the very inch that the sign goes. You want to be more generalized, showing where exactly on the property it would go.

Then you also have to put in your lease something that gets you out if in fact you can't see the sign. You at least want it to have a clause in there that if the sign is blocked by another sign or a structure, or maybe the traffic on the highway doesn't have the ability to see the sign because of something the highway does, or there's a reduction in the traffic for whatever reason, you have the right to cancel, typically with 30 or 60 days advance notice. That way, you don't have to keep paying lot rent after your sign is of no more value, you can't rent it to anybody.

Now, also, you're probably going to have to come up with what you want to do concerning the property owner, and if they want to cancel the lease. If they want to cancel the lease, you need to go ahead and have something in there that states what triggers that ability, or leave it out completely. Now, some property owners are going to say, "I'm not going to sign the lease giving you the right to cancel unless I also have the right to cancel." Personally, I would rather give them the right to cancel than for me to be stuck paying ground lease on a sign that I can't rent. As a result, typically what you're going to want to have in there is something that allows you to allow them to cancel, but it's going to have to have something tangible to prove they really are developing the land where the sign is.

You don't want to typically have it where it's just based on the sale of the land to another party they can terminate. Because, what if they just want to get you down and put their own sign up? They might just pretend to sell it to their wife or their son or daughter. You want to have it with actual construction that requires removal of the sign. This gives you more specific right, because, now, it isn't just about sale of the property, it's about them actually coming up with a plan and getting a permit and building the structure. Bear in mind, a lot of times, the sign would end up in the parking lot if they were to develop the land, and that wouldn't really trigger the ability for you to take it down.

Additionally, if you give them the right to take it down, you want to have something in there that gives you the right to put it back up if a sign ever goes up. Typically, that right goes for five years, and it's called the right of first refusal. If they tear down your sign and then try and put another one up, only you can put that sign up, or have the right of first refusal to do so for a period of five years or so. That protects you from them deliberately trying to pretend to develop to remove your signs so they can put their own sign back up.

You also want to have something in there concerning what goes on the sign. It's better off to preemptively strike. Typically, you want to have something that says that you'll put an advertiser on the sign that is not offensive to the landowner within their reasonable judgment. You don't want to have, for example, if they are a Ford dealership, you would never want to put a Chevrolet ad on the sign. This gives them the ability to block that. But, they can't be unreasonable about it. They can't say, "Well, I don't like that advertiser. I don't like that bank. I don't like that home builder." I'd have to be strictly something that's extremely offensive. Otherwise, it could cause you real problems by disallowing almost anything that you want to put on the sign.

You also have something in there which says who owns the structure itself. You want to have something that explains that the structure is always owned by you. It's your property. It is never their property. They cannot take it from you. In the event of removal, you're going to remove it and it all belongs to you. Also, something that states that, if they sign this agreement, they have the full authority to do so, so they don't later say, "Yeah, I signed your lease, but I actually didn't have the right to do it because it's owned by three people, and I'm only one of the three. Really, it's not binding, anyway." Those are pretty much the important components of the ground lease. Obviously, the most important component of everything I said there is the money and the term of the lease.

One more item on the term. When the term ends, you want to have it roll onto a year to year or a month to month. Don't have it where the lease just ends cold. The problem, when you do that, of course, is that, let's say you forgot when it expires or the property owner forgets when it expires. You're talking 10, 20, 30 years in the future. If you don't have that, when the lease ends, you got to tear the sign down. If you have it where it just rolls on, it rolls on forever if they never let you know that they remembered the date. Often, by the time it comes up for expiration, they're long dead and their heirs will never know that date. You want to have it either roll on a month to month or a year to year basis.

Now, let's talk about things you can't put in the lease. You can't put in the lease a really short term of time. It can't be a lease for a week or a month or a year, because when you go to get a bank loan for the sign or you go to sell it later, the real value of your lease is how many years that it runs. A long term lease is valuable. A short term lease is not valuable. A lease under five years is probably not even marketable. It's got to have never a short term on it. You also don't want to have a situation where you have to pay ground rent if the sign is not built. You can't have it that, from the moment you sign the lease, the rent is due. That's not fair. The sign's not even been built yet. Make sure you don't get yourself in a bad position doing that.

Also, you have to specifically have in there, and there can be no verbiage that says that they in any way own the sign at the end of the lease. It can't be that it runs for 30 years, and at the end of 30 years, the sign is theirs. That will not work for you. You've got to have that sign always be yours. That gives you the bargaining potential to renew the lease at the end. If you don't, they're never going to renew your deal. They're going to go ahead and just take the sign from you and rent it out yourself. There's things that you can and cannot have in the lease, and typically most of it is common sense.

When you read your ground lease for your sign, whether it's your contract or if you're buying a sign and inheriting somebody else's, you just want to make sure that you and the property owner can peaceably get along together, where you both are joined together with the same goal, and that's to make some money. They make their money from owning the land. You make the money from owning the sign and renting it out. The amount of the revenue coming in, less the cost, less what you pay in land rent, is your profit. A successful ground lease is one in which both people profit, and don't let them try and back you into a corner where it's unprofitable.

The normal lease percentage in a Billboard in America is a range of 15 to 20% of the gross revenue. It's not 50%. It's sure not 100%. If you cannot reach an agreement on the money which makes sense, do not do the lease. You're not in the business for making them and only them money. You're in the business of making both of you money. You can't make money unless they make money. Right? But, don't let them make it where only they make money, because that isn't fair to you.

Also, if you get a lease like that, where the lease term is far too expensive, you'll never be able to sell the thing, and you'll never be able to get a mortgage on it, and therefore the whole thing is never going to work anyway. The bottom line is be yourself, be friendly, be honest, and be win-win in nature. A successful ground lease is one in which both parties make money, in which both parties are fairly treated, and at the end of the day, both are happy. This is Frank Rolfe with the Billboard Mastery podcast. Hope you enjoyed this. Talk to you again soon.