With rising interest rates, it’s becoming the perfect environment for landowners to start going bankrupt, as it’s harder to carry mortgages on raw land and it’s hard to cover mortgages on developed properties. In addition, it’s hard to sell land for new construction when people factor in the interest cost. So what happens when you have a billboard on a property that goes bankrupt, and what can you do to mitigate that risk? That’s the subject of this Billboard Mastery podcast.
Episode 54: When A Landowner Goes Bankrupt Transcript
America is a crazy place right now, inflation is soaring, interest rates are going up, businesses are closing, and what all this equals, when you add it all together is a very dangerous time for property owners. This is Frank Rolfe, the Billboard Mastery Podcast, we're gonna talk about what happens when the property owner, the person you have your billboard on, that person goes bankrupt. Now, when I got in the billboard business back in the 1980s, I was thrust into one of the biggest depression since the Great Depression, some think that it was bigger. That was the Texas S&L crash, which occurred in about 1987 and 1988, and it was a doozy. Every high rise building in Dallas was posted for foreclosure, everyone knew someone who just leaped out of a building to their death 'cause they couldn't face their economic reality anymore. I saw lots of property owners go bankrupt, so many I couldn't even name them all. And I had yes, billboards on properties of people who declared bankruptcy. So what happens when the property owner goes bankrupt? Well, here's how it works, when someone has debt on a property and they go bankrupt, the lender on the property has the ability to cancel any and all leases.
That's typical state bankruptcy law. However, there's a hook to that, there's a loop hole in that, and that's if the debtor has what's called ratified the lease. Now, everything I'm saying here, check with your state and talk to an attorney, but in many states if the lender acknowledges the lease, if they sign the lease too. Or they sign something saying they've read to and agree to the lease, they can't discharge it in bankruptcy 'cause they were also a party to it. So that's one way to get around the issue of when the person has debt and they go bankrupt. If you have gone the extra mile and gone to the lender and had them ratify the lease, then often you're saved. The classic case was the property I had, that I had a billboard on, on highway 75 in North Dallas, very, very, very valuable location on something called Central Expressway, and the property owner went bankrupt.
And the bank wanted to tear my sign down because they wanted to develop that land, they wanted to go ahead and sell it as developable land on Central Expressway, but they couldn't. Because I had very smartly had them ratified that lease. So their attorney said, "Oh, you can't break the guy's lease, you're stuck with it, you're stuck with the sign being there." They tried every way to get out of it, they threatened to litigate, they threatened they wanted to buy the sign, they tried everything, I wouldn't let them out, I had to keep that sign, it was an important part of my portfolio. Sign is still there today if you drive by, ultimately they built something on the property, they integrated the sign into the lay out of the property and blends in okay, it's kind of awkward because one of the units is now an apartment complex, looks at right in the side of the billboard.
I don't know how that works, I guess that person has a very broadly lit sign that's beaming through their window all night, but nevertheless sign still is there and it's only there because I had the bank ratify the lease. So if there's debt on it, that's your option, now if there's no debt on the person that declares bankruptcy, it's a whole another matter yet again. Because there was no mortgage between you and the ground lease. So if someone says, "Hey, I declared bankruptcy" That doesn't necessarily mean your lease can be terminated, again, talk to an attorney in your state and find out what the rules and regulations are. But if there's no debt on the property, typically what I just described can't occur. Now, another thing that can happen if someone declares bankruptcy is you've signed a ground lease to build the sign, and yet you hadn't built it yet, and they declare bankruptcy, and in that venture, even if they had debt or didn't have debt, if you did not record your lease, they're gonna claim they had no record of there being such a lease, and they're gonna negate it. If you have a sign that's already up, then they have a burden of knowing or searching for the lease because there must be at lease.
There's a sign on the property. But if there's no such thing, if there is no sign to see, then how do they know to search around for the lease, they wouldn't actually have a clue. The bottom line is, you need to know the bankruptcy laws in your state like the back of your hand, you need to find out what happens in the event of bankruptcy, and then what can you do to mitigate that. What are the options of you knowing it might happen on the property, what can you do to try and make that work a little better in your favor. Now, another big part of it when a property owner goes bankrupt is, you should have seen it coming because there's... Property owners come in all different shapes and sizes, and there's ones that are much more potential walking bankruptcy cases than others.
People who own property free and clear, in other words people who have owned property for long periods of time typically have no debt, it's really hard to go bankrupt when you have no debt. So the property that typically you see go bankrupt are very high flying, fast moving, recent purchased properties that typically have big mortgages on them. Another item is raw land, you see a lot more raw land go bankrupt than you would do developed property 'cause there's nothing to pay the bills. If you buy a property and there's a car wash on it, and you wanted to redevelop it later and build a hotel, well until then at least you have the car wash to pay the taxes and the insurance, and some of the other costs. Raw land is the worst though, you have all the costs, you've got the mortgage, you've got insurance, taxes, everything else, you don't have a penny coming in, so raw land is typically much risk here. If you're gonna go in there and build a billboard and it's on raw land, you have to know, it's very, very possible bankruptcy might occur and you have to protect yourself. Now, what are some of the worst things that can happen in that bankruptcy, well what's gonna happen in the bankruptcy is they're gonna potentially say that they want to remove the sign, that's not the end of the movie.
Sometimes you can go to them and say, "Look, you don't wanna lose the sign, the sign is income producing, it makes this much a month." A lot of times when there's a bankruptcy, the lender doesn't really know what's going on, they don't know that the billboard is there and they don't know what it pays. And sometimes educating them can make all the difference. I had cases where people would call me up, property had gone under, and I'd say, "Well, gosh, good news for you that sign is paying 500 a month" They go. "Whoa you pay 500 a month? I didn't know you paid anything. I'd be blown away if you made $100, but 500, that's phenomenal." Another option sometimes is you might buy the property, the property is cheap, your sign is there and everything going good, it's a half acre, acre in size, inexpensive, well you're probably gonna buy it, you're very well might. Another option would be you buy an easement to it, that way they can still develop the property, so the property off but the sign still remains, but you paid money for it up front.
Another great way to mitigate that. The bottom line is that you always have to be thinking through these issues because bankruptcy is a very real thing. And an America like you have today, which is such, such a wild animal with so many different things going on like we've never seen before, it's very hard to predict the future. Well, a thing is for sure though, if you find out what your options are and you mitigate your risk, you'll always feel like a smart person. This is Frank Rolfe, the Billboard Mastery Podcast, hope you enjoyed this, talk to you again soon.