How To Convince A Landowner To Sign A Long-Term Billboard Ground Lease
Understand your customer’s profitability
When I built up my billboard company in Dallas/Ft. Worth, one reason that it became so valuable in the end was the fact that my ground leases were so long in length. Since they were all about 30 years in length, there was still 15 years left on them when I sold out 15 years after I began. Next to the amount of lease payment, nothing is as valuable as the length of the ground lease. So here’s how to obtain long ground leases.
You can’t get it unless you ask for it
Many billboard companies are afraid to ask for long leases. So they send the landowner a proposed lease that is maybe 10 years or so in length. If you don’t ask for 30 years, you’re not going to get it. Many landowners assume that the provisions of the ground lease are non-negotiable, so if you put 30 years in there, they would just assume that was the norm and sign the lease anyway. There are probably few leases in America that could not be at least 5 to 10 years longer if only the sign company had asked for it.
Have a good explanation for why the lease needs to be long
My argument has always been that it takes me 15 years to pay off the debt, so I need at least 15 years of profitability to make the whole project worthwhile. I also remind the landowner that, unlike him, I do not make positive cash flow day one. While the landowner has no upfront costs in the project, I have to build it and pay off that debt. So for it to be a win/win project, I have to have a long lease. Most landowners will appreciate this logic.
Put the sign in a location that will not harm future use of the property
The landowner’s first concern is the effect the billboard will have on his property’s value. If you propose to put a sign right in the middle of the tract, they will immediately worry that you have destroyed the value if a buyer for the land pops up in the future (and, of course, they’re right). However, if you can locate the sign in a property corner, or next to a permanent fixture that can’t be built on (like a creek), then that fear rapidly evaporates.
Give the landowner an “escape clause”
Many landowners will just be too scared to sign a long-term lease. So give them the guarantee that they want – the ability to cancel the lease in the event of development. The key is to word the removal provision in such a way that it is very difficult (or impossible) to actually exercise it. For example, if you build the sign in the building setback – so that a building can never be built where the sign is – then they can never trigger a development out clause. So you’re basically giving them peace of mind without actually taking any risk of removal.
Offer CPI increases
Sometimes the landowner will not sign a long-term lease due to concerns about inflation. You can fix that by offering to increase the ground rent annually based on the consumer price index (CPI) or some other method that tracks inflation. With inflation running so low, it’s not a big deal, and a very worthwhile concession to get a long-term lease.
If they won’t give you a long-term lease, maybe you should not build there after all
Sometimes the landowner’s inability to give you a long-term lease is actually a signal that the sign location has too much risk. If the owner is not going to develop the property in the long term, then you’re probably safe. But what if the landowner tells you that he only does 3 year deals, and then will renew it after year 3. That’s just not long enough. Maybe the landowner is actually contemplating selling the property in 3 years, and will then cancel your lease. That’s not going to work for you. You can’t seriously put a 10 year bank note on a 3 year sign. Don’t agree to terms that are too risky.
Long term length can increase the value of a ground lease by 100% or more. So don’t just accept short term leases without fighting for a longer term. There are many valid reasons why a long-term lease is important, and is a key driver to win/win profitability for both the land owner and the sign company.
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Memo From Frank
Advertising revenue appears to have hit bottom and be back on the rise. Lamar reported 3rd quarter earnings significantly higher than the same period in 2010, and the 4th quarter is expected to be the same. All over, we are hearing from operators that economic conditions have stabilized and are improving. Some markets, such as Las Vegas, are still pretty weak. But in most of the U.S., things are looking up as far as billboards are concerned. Now is good time to be getting into the industry on the ground floor. Hopefully our information will make that possible for you.
A Billboard Story
One day I got a call from the City of Denton police department, wanting me to come down for questioning. They thought that I had illegally cut down some trees on a neighboring property. I asked the officer why he thought it was me. He said that somebody had asked the tree-chopper what he was doing, and he said “Frank Rolfe told me to chop these trees down”. The only problem was, my sign was 70’ tall and towered over those trees in the first place. The police were only looking at the fact that my sign was next to where the trees were cut down. But they forgot to consider the sign on the other side of the damaged property. That sign was only 50’ tall, and massively blocked by those trees. In the end, it turned out that the other sign company had told the workmen to use my name if they got caught, as it would look like I had done it. They fined the real guy $10,000. The big moral here: don’t go chopping down trees without permission. The only reason I did not freak out when the police called was that I was never stupid enough to chop down trees without permission. If trees are obstructing your sign, go to the neighbor and work out a lease, or a one-time payment, to give you the right to trim or remove them.
Did You Know...
The largest user of outdoor advertising in the U.S. is McDonald’s. They rank in the top three every year for about the last decade. Why are they such heavy users of the medium? Probably because they realize that there is a tie-in between driving and hitting the drive-thru. Probably every McDonald’s unit that has highway access has a billboard coming in each direction, and all new products are often announced in giant billboard blitzes from coast to coast. Is it working? McDonald’s is by far the most successful and profitable fast-food chain in the U.S. - so clearly the strategy has been a real winner.
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