Billboard Mastery Podcast: Episode 3

How Billboard Economics Works

Most people have no idea how billboard investing works, and that’s a shame as it’s a very simple business model. In this episode we’re going to review in-depth the standard profit and loss statement of a billboard sign and focus on how to calculate the net income of any sign. If you want to know what profit a billboard can generate – which you should – then this will give you that knowledge.

Episode 3: How Billboard Economics Works Transcript

We're all fascinated on how things work, particularly when there's dollars involved. This is Frank Rolfe with the Outdoor Billboard Mastery Podcast, we're going to be talking about basic billboard economics. Where the money comes from, where the money goes, how much is left at the end of the day that can go in your pocket.

So let's start off with the different parts of the standard profit and loss statement for a billboard. The first one, the big one, the one that makes it worth doing, is the ad rents. Now some billboards only have one advertising face on them, so they would have only one ad rent. Then you have others which have a front and a back, so you have two. Then there's some that are stacked, where you have two billboards on top of each other, so there is four. Then there's something you can put on a standard billboard called Trivision, it's three triangular panels that change every so many seconds. If you have that on two sides of a sign, well now you're up to six. Then at the top of the pyramid you have a thing called digital, also known as LED. An LED sign, you sell the advertising space based on the second, and in the span of an entire day, a sign like that could literally have hundreds of different advertisements on it.

Whatever you have, the first thing you need to know is how much does the ad rent for. So how do you tell what the rent would be on that sign location? Well, what you do is you call up all the other billboards up and down the highway in that area, and you find out what they're renting for, and sometimes you can see that online. A lot of the big companies have all their ad rents right there to be seen right online. Now one caution online is they always ask more than they expect to get because it's human nature in negotiations to go ahead and offer less than what it says. So traditionally what's going to happen is they're going to ask for the moon online. Not the same as when you call them though, so often if you're trying to get the real rates you're better off just calling and finding how much they want for it.

So you got to get the right amount of ad rent and the next question you'd have to have is will it be occupied all the time or do I have to put in a vacancy rate? Many people put in for budgeting purpose a vacancy of say 20%. That means that in a given year, you have a few months where it's not rented because in between advertisers you're out trying to find the advertiser and/or you find the advertiser but it takes a little while before this ad can get printed and installed.

So it's pretty safe typically if you take your ad rent less a vacancy factor or maybe 10 or 20%. That should pretty much get you to the amount of the ad rent. Now another thing you need to know is some people charge ad rent by the month, but others charge ad rent per 30 days because you see there's more than just a straight 12 months in the given year as far as we do it by the week. So also make sure that you are discerning exactly what the revenue is. Is it measured annually, is it measured monthly, is it measured weekly, is it done every four weeks. How does that work? So make sure you have a handle on that.

Now, so you have your ad rent down. We know what that will now be annually, so now let's move on to the expenses on a standard billboard. The first expense that you'll find in almost every billboard is called ground rent, or land rent. Because you're renting ground space from the property owner to build the billboard. Now the typical range for that is about 15 to 20%, but I've seen it less. I've seen it all the way down to 5 and 10%. In some cases, you don't see it at all because the billboard owner also owns the land. So in that case there wouldn't be any ground rent but typically for most every billboard you see in America when you're driving around, it's about 15 to 20% is the ground rent.

The next item you have is electricity. Now if your sign has no lights on it, you don't need electricity so that would not be on your standard P&L. However if your sign is lighted then you have to put on electricity and when you do that there's a couple things you need to know. Number one, are you going to run the lights on that sign all night, or the more common, which is from dusk until midnight. Number two, what are your ad rents, and number three, what kinds of ad renting electrical light fixtures are you going to use? Some are brighter than others and typically those that are brighter use more power. So you can get from an electrician, you can get from a vendor who sells these light fixtures a rough idea of what that will cost per month to light the sign. So that would be your electricity cost.

Now another cost you have to take into account is your ad installation. Now that comes back to what your ad contract itself says. Some ad contracts say that the advertiser will pay the cost of installing that vinyl advertisement on the sign. Other contracts the sign owner has to install those vinyl advertisements so you've got to know what your contract says and you have to adjust accordingly for what the cost would be. Sometimes the ads are changed out every six months. Some signs are changed out every year and there's even some where they're changed out even less than that. So you got to tie that back to what your contract specifies.

Next up to bat is insurance. You've got to have insurance on a billboard. You have liability insurance most commonly. Some people carry both liability and the structural insurance so that if the sign was blown down it would pay to put it back. Now in many cases that may be overkill. Steel monopole signs are designed to handle winds of 100 miles an hour, as are many of the other varieties, [inaudible 00:05:45] and even some wooden telephone pole. It is unlikely you would have a wind over 100 but you could if you had a tornado typically that would exceed that. If you only have insurance for property damage, you've got that covered but if the sign came down you wouldn't have any coverage on that.

Now in my entire career I've only ever had two signs that collapsed, both were wooden telephone pole signs, so I think those are definitely more risky. If I had been carrying the insurance to cover all of those signs year-round in case of collapse, I would have lost a fortune because the two signs that both fell down combined wouldn't have met but just a few years of the premiums. So most people just carry liability insurance on the signs. If you're going to carry liability, make sure you have enough. You're not going to get by on a half a million dollars with a billboard. That thing goes off, bad things can happen. I once had a billboard in Downtown Dallas that blew off in a tornado. It went spinning, flying like a Frisbee and went into the office lobby of a big office building. Blew out the window, blew out the reception desk. Fortunately nobody was in there. It would have been a disaster. So you got to make sure you have plenty of insurance for liability.

Next up to bat you have repair and maintenance. Now repair and maintenance on a sign, that's a very tricky subject because signs don't typically use a lot of repair and maintenance, but be sensible, you will have to do some. For example, the sign will need to be painted periodically. Not every year, not every few years, but probably every five to ten, you're going to want to paint that pole at least so it's looking decent again. Most particularly at the ground level. You don't really want to have any rust on your sign either.

Other things can also pop up on the maintenance side. You'll have to change light bulbs, you may lose the ballasts, which are the things that the electricity flows into before it goes to the light bulbs. You may even have the panels that hold the advertisements on. They may break or warp over time. So talk to your local vendor on what these things cost. What does a set of panels cost? What is the useful life of the panels? What are the light bulbs ... How long will they last? How long will the ballasts last? How much does it cost to paint the sign, and then figure out what you'll have to save each year to replace those things based on the estimated life span. If someone says to you the panels on the sign are $1,000.00 and will last a decade, that means you need to save $100.00 a year. I think you got the picture, so that's how you come up with a really good repair and maintenance budget.

Final item is property tax. Now how does that work? In some cases it doesn't work at all because they don't even tax you. Billboards and property taxes have always had a very dysfunctional relationship. When you build a billboard, traditionally the tax assessor will deem that the value of the land has gone up because it has a new sense of income, but often they don't really tag any tax to the billboard company because they don't even know who to contact or how to do that. If you were to tax the billboard as personal property, it would be based on the value of the sign's personal property. So that's really hard for a tax assessor to guess at. In a lot of more rural areas, they don't even know the sign ever got built nor does anyone even care enough to write it down. So many signs out there would have no property tax, but others might have some. This will depend on a) what they will think your assessed value is and b) what they think your assessed value amount of tax is when you multiply the value times the tax rate.

Now one way to get an idea is to call the tax assessor anonymously, don't say who you are or what you're doing, and just ask them. "Hey, if I built a billboard on my land, how would it be taxed?" and just see what they say. If they say, "Well we wouldn't even tax you, we don't even care," well there's your answer. If they say, "Well let's see, if it's a monopole sign, we'll value that at 30 grand, our tax rate is 1%, so your tax would be $300.00 a year." Okay, needed to know that. I have found typically that property tax is not really a big hurdle for the sign owner, it's more for the landowner.

Now if you take all these expenses I just went over, those typically will be around 30 to 40% of the ad rent, so in a typical billboard you should be netting about $0.60 to $0.70 of every dollar as effectively profit or net income.

Now one final item which is what kind of rate of return are we looking for on the sign in general? We just kind of laid out the roadmap to figure it out what the net income from the sign would be, but what kind of cap rate? What kind of longevity of that cash flow are we looking for in a billboard? I have always found as a general rule you need to always focus on don't do anything that is less than a 20% cap rate which means you would get your money back within five years. That's because most billboard leases are often 10, 15 years in length although I've done many that were 30 years and more. What you want is you want to have lots of years of profitability. Because the whole time you own that sign, in the early years you're just seemingly paying off debt but hey I want some money in my pocket. So in that case, I wouldn't go out there buying or building signs at cap rates greater than or less than 20% because I want to do five year money.

Now there are some people out there who will do it on a 10-year horizon at a 10% cap rate. I personally think that is just not acceptable because that means you would not pay that sign off for theoretically about a decade, and I think I want to get profitability a little faster than a decade. Now if you're looking at building wooden signs, eight sheets, getting abandoned signs, wall scapes, everything but steel monopoles and even in some cases the [inaudible 00:11:16] this won't come into play, because you'll have rates of return that are so high based on the cost of the sign that you'll be well outstripping the numbers I'm talking about.

What I'm talking about when you start building those steel monopole signs or for example digital signs where the ad faces alone could run over $100,000.00. You don't want to throw massive amounts of money out there hoping to get it back at some distant date that's just too far into the future. Things can happen. Property could be redeveloped. The visibility of the sign could be interrupted by the highway department changing the road or putting in a median or landscaping. So play it safe. Keep those amounts short. Get all the money in your pocket, not in the bank's pocket, not in the signed builder's pocket and you should be fine. This is Frank Rolfe with the Outdoor Billboard Mastery Podcast Series. Hope you enjoyed this. Be back again soon.