There are two ways to get into the billboard business: 1) build a sign or 2) buy an existing sign. There are significant differences in these two options. In this Billboard Mastery podcast we’re going to discuss the key things to know about buying an existing sign and how to mitigate your risk when doing so. With so much time and money at stake it’s important that you don’t mess up the process.
Episode 21: Rules of Thumb When Buying An Existing Sign Transcript
Rules of thumb is a slang term for the guidelines that help you make good decisions. This is Frank Rolfe, the Billboard Mastery Podcast. We're going to talk about the rules of thumb when buying a billboard. Now, buying billboards comes in many different shapes and sizes. There are abandoned signs you can buy and there's signs that are fully occupied. But they all share similar traits, similar things that you must come away with from closing, and let's go over what those might be.
The first thing you have to come away with is a ground lease. That is a right for the sign to exist. Without a ground lease, you have literally nothing. The ground lease establishes a relationship between the sign company and the land owner. Typically, it also establishes how much money they get paid for the sign to be there. It could either be a percentage of rent or it could be a flat fee, or it could be both. It also highlights such issues as how long the sign can remain without risk of termination. Some leases give an ability for the property owner to cancel within so many days notice. Others, they have no right at all to do so. The big deal on the ground lease when you're buying a sign is you've got to make sure that the ground lease lasts long enough for you to get your money back.
If you hope to have a 10 year note on a billboard, you'll never get one from a bank if the ground lease is only five years in duration. It's a pretty safe bet you've got to have a ground lease which is at least as lengthy as the amortization on your note. If you're paying cash and you're not using debt, nevertheless you still want to make sure that you are guaranteed getting your money back if that sign lasts for a long, long period of time. That's what has made buying billboards on railroad leases so very difficult for many, many decades. Railroad leases traditionally only 24 hours in duration and the railroad would say yeah, but we have cancelled that sign in 20 years. But yet they have the right. The problem is things can go bad on you. You can't put yourself in positions where the lease might be called and you're left hanging with many, many years left to go on the note to pay off the sign.
The next item you have to have is you have to have a permit, and that permit has to be properly transferred. In many states, a permit can be invalidated if it’s not transferred from one license holder to another license holder. It may well be before you buy the sign you have to go out and get your outdoor advertising license in that state such that the permit can be legally transferred to you. Never buy a sign that has no permit. Now, if you're buying a sign for next to nothing, it's an old abandoned sign, you might be willing to stick your neck out to some degree. But if you're buying an existing sign from an existing sign company, you would never want to buy one unless they can give you a permit. Then you need to verify that the permit is in fact valid. With no permit, there's no right for the sign to be there at all.
You'll also need an assignment of any ad leases. If there are ad leases up on the sign and you buy the sign and they don't assign the lease to you, there might be some question as to whether or not the advertiser has to pay you. On top of that, you need to see how much they are paying and how long their lease is.
Those are the basic documentation items you need to have. So what else do you need to know? What are some other guidelines you need to know when buying the sign? Well, once thing you want to see is engineer drawings if you can to make sure that it was built correctly. Now, if you're buying an existing sign, an old existing sign, those engineer drawings might be long gone. But if you're buying one that is newly built they should have those engineer drawings. Typically if they don't, either the city or the state is going to have them on file. All you want to make sure is that they meet all the requirements of the state, that they're built within the wind load requirements of the state in question. Most states require you to have a sign that can withstand a 100 MPH wind. So you just want to make sure that you're buying something that was legally built. You might want to have someone go out and look at the safety equipment on the sign because thanks to OSHA these days, for many years now, you have to be concerned about the safety of those who work on the signs. They have to have certain ladders, platforms, safety lines, all these various items to make that legal to that degree. Once again, you've got to have safety equipment so you want to have that looked at.
Then comes the location itself. How clean is the read on that sign? How far can you go and still see it? Typically for a sign to be a valuable sign you have to have a clear read of at least 500 feet. You have to have, when you clear all obstructions, 500 feet where you can still read the copy on the sign, which is typically one click of your odometer. It's not hard to go out and drive the sign and see whether you meet that rule or not.
Also, if the sign has lights on it you want to make sure they're in good working order. You also want to make sure that you have all the rights and easements that you need to have power to go to it. You wouldn't want to buy a sign with lights on it only to find that your sign can't have any lights anymore. That would not work for you.
So those are some of the tangible guidelines you need on the sign itself, but let's talk about an intangible thing which is equally or more important and that is money, cash, moolah, the whole reason you're buying the sign to begin with. So what do I need to know about the money on the sign? Well, I need to know that I can get that sign paid off and make money with it. Now, one rule of thumb you can do when looking at a sign is you can look at that sign based on what's a CAP rate of 20%. So what does that mean? If you take the net income from the sign, and imagine a fraction, so that's on the top of the fraction, and the total cost you're paying for the billboard on the bottom part of the fraction and divide the two, what does that come out to? If the sign makes $10,000 a year and you pay $50,000 for it, well then you've got a 20% CAP rate. What that means is theoretically you're going to pay that sign off over five years. Now you won't, because you'll have interest on it, but it means more than likely you can pay it off over seven years at least.
Well, what you don't want to do is pay so much money that you can't ever pay the thing off. If you were to buy a billboard, for example, in certain cases based on how much it earns at a very low CAP rate, let's just say a 10% CAP rate, that means not assuming interest it would take you 10 years to pay it off. When you add interest on far, far longer than that. That might even exceed the length of the ground lease on the sign. At some point you question why am I even doing this, because when do I make any money with it? You have to make sure that all the numbers are aligned so that at the end of the movie you're the one making the money. The sign is nothing more than a matchmaker between two willing participants, the ground owner and the advertiser. You need to get compensated for your efforts. You're not in this to make no money at all.
A lot of times today, many people who buy billboards have gotten too comfortable with paying prices that are far too high, and they rationalize it by saying well I'll just raise the rents over time. That's a big if. You don’t' know if you can really raise the rent over time, and you don't know really if you can raise the rents, can you do so and remain competitive. Don't let the seller say to you, "Well, but I know the rents right now aren't impressive but golly jeepers I know you can do a better job of renting it than I can." Well, is that really true? Do you really know that? Are you willing to risk your capital on that? I would say not. If the rents could have been higher, then they should have been higher. Someone could have called up the phone number of the sign. Someone could have gone to the sign owner and offered them much more money than they're getting, but yet they didn't. So just make sure that you give yourself plenty of fluff in your numbers when buying the sign.
Always think through this formula. Best case, worst case, realistic case. Think of it what the worst case would be on the sign. Let's say you are unable to rent one side of it for half of every year. Can you still make the payment and the ground lease, and the other costs? Can you still break even with it? On the best case scenario if I can go in there and buy the sign, and then bring the rents up substantially how much money would I then make? How attractive is that to me? Then look at the realistic case, pretty much how the sign is now, maybe with slight improvements and occupancy or rent. Is that attractive to you? If the answer is you can survive the worst case, if you're excited about the best case, and you'd be happy with the realistic case, then and only then it means the numbers are really enough in alignment that you should go forward. As long as you always focus on the money it's hard to go wrong. When people start to lose focus on the money and instead start thinking as far as their own ego, or perhaps just the desire to start building that additional side hustle of income, that's where they really get into trouble. Because nothing is fun unless it is making money. That's the bottom line.
I've owned some pretty prestigious signs. I once owned a sign on Wilshire Boulevard that's been in many movies. It's always in the background of some movies. The problem with the sign was it just didn't make a whole lot of money, so despite the fact that it was glamorous, I could say, "Oh, look at that movie." It was in the movie Falling Down, for example, it was right in the background. But the problem was it just didn't make much money, and therefore it really wasn't enjoyable and I don't miss that sign at all. So the key is focus on the money. Focus on all of the downside. Make sure you've got all your bases covered, all your risks mitigated. Every sign you buy should have a happy ending, that's the key. Make sure that you remove those risks to your success. This is Frank Rolfe with the Billboard Mastery Podcast. Hope you enjoyed this. Talk to you again soon.