All billboards are built on leased land. Or land owned by the sign company. Well, not quite. In this Billboard Mastery podcast we going to talk about that third option in which the billboard company owns the right to have the sign on someone else’s land and to service it there. This concept has merit in many markets but also has a fair amount of risk both for landowners as well as billboard companies. We’re going to discuss the concept, how it works, when it wins, and how to mitigate the risks.
Episode 7: Permanent Easements From A to Z Transcript
Webster's dictionary defines easement as "A nonpossessory right to use, and/or enter onto, the real property of another without possessing it." Wow, that's pretty complicated isn't it? This is Frank Rolfe, the Billboard Mastery podcast. We're going to be talking all about permanent easements from A to Z. And let's start off with defining, in real person terms, what a permanent easement is. You have a billboard. It's on a piece of property. The billboard pays rent to the landowner, typically monthly. And then one day the sign company says to the property owner, "What if I paid you a lump sum now for the perpetual right to have this billboard here and to operate it? So instead of paying you a thousand dollars a year in ground rent, I'll give you $5,000 cash right now." And let's assume the landowner says, "I'll take it." Well, then draw up some paperwork, and lo and behold, you will have what is called a permanent easement for a billboard.
So it's a situation where the property owner still owns the land and the sign company still owns the sign, but they also own the right for that sign to be there in perpetually. So it's a very, very long-term commitment. Now, why do billboard companies even want to do this? They already have the sign there. They're already paying out for the lot rent every month, if that's the way that it's paid. Why would they want to take the extra step to creating the permanent easement? Well, the first reason is permanence. Particularly if the property is an area that might be developed some day, they're concerned that one day they'll get a call saying, "Hey, it's been a great 10 or 20 years, but you know what? I want to go ahead and tear the billboard down now, so I can build that new Marriott Courtyard Hotel."
And the problem is that's going to happen at the worst possible time, because the billboard company has probably been limping along with the location until the economy grew around it and traffic increased. And now when they're really about to get big rent, the property owner pulls the rug out from under them. The other reason is it can sometime lower the overall cost of the ground rent. In the example I gave, if the billboard company is paying a thousand dollars a year, and instead can swap that for a $5,000 upfront payment, that's a 20% rate of return. That's extremely advantageous to the billboard company. So those are the two key reasons billboard companies engage in permanent easement: permanence and to lower the ground rent.
Now, why does the property owner agree to the permanent easement. What is going on there? Well, there's really only typically one item, money. They need the money or they're concerned that down the road, maybe the billboard gets blocked by some other sign or a tree or something that makes that street no longer attractive to the sign company, so they're trying to capture as much of that money as they can right now.
So what are the dangers from permanent easements? Let's first look from the billboard company's perspective. The biggest issue when you have a permanent easement, the most damaging thing that can happen is the visibility of your sign becomes blocked, or the traffic is some way changes on the road that your sign is read from. I'll give you a classic example. Many years ago in Fort Worth, Texas, they took Interstate 30, which was a highway that had traffic going in both directions, and they made it one way. And then they built another highway on the other side of downtown going the other way. The problem was all those billboards had two sides on them and suddenly one side could no longer be read. The side where the traffic was no longer going that direction, those were then worthless. If you had bought a permanent easement, now you have all that money in that right to be there, and now suddenly, what do you do? You only have half the revenue coming in. See, that's the problem with the permanent easement is you can't renegotiate it, because you are basically the property owner.
Now, typically, if there's a blockage to a sign or change in traffic, the billboard company has the right in the lease to go to the person, try to renegotiate to a lower amount, and/or they could just chop it down and move it. But they can't with a permanent easement. There's nobody you can call. I guess you could call yourself. Unlikely, you're going to agree to any change with yourself. And you sure can't cut the billboard down. You do that, your easement is worth nothing. So that's the key danger to the billboard company.
So what are the dangers then to the property owner? They're getting their money up front. So what risks do they have? Well, they also have a lot of risks, too. Number one, that might destroy your ability to build that Marriott Courtyard Hotel, or whatever you plan a building down the road, because lo and behold, there's now a sign right where your building was supposed to go. And no, you have no right to get it down. You have no rights, typically, in a permanent easement of any type for development. So it theoretically could hold your entire property hostage.
Many property owners don't like this idea. And rightfully so. Now some people will say, "Well, this is just junk land. I bought it at a tax auction. You can't build anything on it. It's not even an acre in size." Well, if that's the case, then all right, then that might work. Although I will tell you, I once bought a sign on a permanent easement under that very, very analysis from a property owner. And it blew up on him, when years later they assembled a number of properties together to build a Walgreens. The problem was they wouldn't buy his property unless he could get my sign off. So lo and behold, they came to me and I made them buy it back from me for five times what I had paid for it, because I knew that I held the Walgreens hostage. And, ultimately, that's what they did. So that's a big problem. It really, really hurts your development.
There's another problem though, that many people never even consider. And that is what happens, as far as down the road, when it ultimately is developed. And you have the billboard there. But let's assume your in the back of the property or somewhere where it won't matter. In a lot of cities, they count the number of total signs you can have on the property. And that billboard takes one point off. Let's assume the property can only have one sign per planted property. Now, whatever business they build down the road, it can't have a sign. That's a real deal killer. Most businesses obviously have to have a sign for their business. So even though it's not a development issue that's harming you, it's still not going to work out for the property owner.
So given those problems, what else can the billboard company do? Well, sometimes the billboard company can go ahead and sell the permanent easement to yet another party. So now we're getting even stranger. So now we have someone who is not the property owner owning the right for the billboard to be there and receiving ground rent from the billboard company. Now it's getting even stranger. I've had that happen to many properties myself. What'll happen is the billboard, over time, grows to such a large monthly income, the person selling the property doesn't want to forego the monthly income. So what they do is they cut out that postage stamped piece of property, and now they have the permanent right for the sign to be there, but I'm still paying the property owner, who's the guy that has a little postage stamp of land, and it doesn't even have to contain the postage stamp. Under some real estate constructions, the sign is conveyed and the right is there only to operate it right where it sits, only utilizing maybe that nine square feet of ground space where the pole sits.
So the bottom line is there's all kinds of different constructions out there with permanent easements, but you have to know how all of them work, because it will come up from time to time in your billboard career. People will either say, "Can you buy me out of my ground rent? Can you create the permanent easement?" Or someone will try to sell you a billboard on a permanent easement. Or someone, a third party, won't want to buy that income stream from your sign in the form of a permanent easement. And when those occur, you have to know what you're doing. You also have to understand how you evaluate these options. Clearly you have to look at the time value of money when making these options.
If I give somebody five times the ground rent today, I therefore lose the opportunity cost on that $4,000 more than the typical 1000 I've paid out. So the numbers are actually a little more complicated than you would think. If you really want to get into permanent easements, you're going to have to do a little study on how to derive the actual rates of return, because they're not as simple to master as they are in the traditional billboard sense of a flat amount or a flat amount versus a percent of revenue. So be very careful when you're doing that.
And also be very careful if you go to ever get involved in those permanent easements. Make sure you've got real lawyers drafting real agreements. A lot of people don't like to spend money on lawyers. They'll write this agreement themselves on Microsoft Word and print out a couple of copies and they'll sign it. Down the road, when someone wants to build that Marriott Courtyard, and they can't because of that permanent easement, you better believe they're going to analyze every word in every sentence to find your fundamental flaws. Because when they find those fundamental flaws, that's going to allow them to break it, to remove the sign and to go forward with that Marriott Courtyard.
So be very, very careful when you do these that you have definitely put in the effort to make sure they're completely legally and correctly done. So that's basically permanent easements from A to Z. Great in some cases, terrible in some cases, risky in some cases, but in some cases it takes the risk off the table. It's all up to you to analyze them. This is Frank Rolfe, the Billboard Mastery podcast. Talk to you again soon.