Memo From Frank
Thanksgiving is in only a few weeks away. That’s the right time of year to give thanks to all of our blessings throughout the year. Here at Billboard University and OutdoorBillboard.com , we’d like to extend our thanks to everyone who reads what we write, participates in our forums and weekly calls, and attends our Boot Camp events. We consider all of our clients as members of our extended family, and appreciate all that you do. As always, if you ever see anything we can improve on, or write more about, please let us know. We really appreciate our feedback, as well.
HAVE A HAPPY THANKSGIVING!
The Truth About Lease Lengths
Billboard ground leases are known to be very long term. However, for many leases, looks can be deceiving. There’s a whole lot more to a successful lease than just length alone. Let’s examine the world of lease lengths, from the too short to the just right.
Why do billboard ground leases need to be long?
When you build a billboard, the general assumption is that it will be built of steel (normally a monopole) and will require great expense. As a result, you will get a bank loan that will take years to pay off. So that you have years of profitability after the note is paid off, and to make the entire project worthwhile, the industry norm is a lengthy lease – normally 15 to 30 years. The basic scenario is that it takes you 7 to 10 years to pay off the structure, and the rest of the term is to make money with it.
When is a long ground lease really just short term?
Even the longest ground lease is a short one if it gives the landowner a blanket ability to cancel whenever he feels like it. The worst of these is the 30 day cancellation provision for no reason at all, followed by the cancellation provision if the property is sold. You can’t let the landowner have carte blanche to terminate your lease based solely on this own whims, because, as a result, he has a perpetual right to blackmail you for more rent. The worst leases I’ve ever seen, as far as this goes, are the ones that most railroads utilize, giving them the right to cancel, at any time, with 24 hours advance notice. These type of clauses render the actual term of the lease worthless.
What’s the shortest you can go?
You should never enter into a lease and build a sign in which the term is shorter than the note you are creating at the bank to build the sign. Even if you are O.K. with this game plan, the bank won’t be. Your lease needs to protect you enough that you know you’ll get your money back. So, for example, if the bank note will be 10 years, the lease needs to be at least 10 years. Of course, many times you can’t get that perfect world, in that the landowner demands the right to cancel if the property is developed. In that case, you will have to really be an expert on guessing when development will occur.
What else determines the length of a lease?
To estimate the probability of a property being developed that necessitates the removal of your billboard, there are two factors that you need to be focused on 1) the likelihood that the property is ripe for development and 2) the impact of development on your sign location. Without being a professional real estate speculator, there are some general rules on development that you need to be aware of. The first is the size of the tract of land that most generally is desired by developers. In general, most pad users, such as McDonalds and other fast food outlets, require at least an acre of land. So tiny, irregular parcels are seldom ever developed, unless assembled into larger tracts. The very process of land development takes a lot of time. Before land can be developed it has to often be re-zoned, re-platted, have utilities brought to it, go through engineering and architecture phases, obtain construction financing, and so on. If a landowner tells you that their land might be developed at any moment, they are living in a fantasy world. The average development takes around a year to put together. Where your sign is location also has a huge impact on the risk. If your sign is in a property corner – and most importantly within the building setback requirements – then it is unlikely that your sign will even be in the path of progress. But that does not mean that the property owner won’t consider it an unattractive detriment to the overall project, and cancel the lease, anyway. If your lease can stipulate that the sign has to actually be removed to build the project (where the building will sit) in order for the lease to be cancelled, that will give you the greatest protection.
Ground leases, as long with permits, are the most important asset of any billboard structure. You really need to understand the risk of the ground lease length, and make your best attempts to provide a safe and secure lease for your billboard.
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A Billboard Tip
Whenever you see a giant setback from the edge of the road to the edge of the right-of-way line, that’s a great indication that the road will be significantly widened in the future. Today’s two lane highway may become a 4 lane someday, but particularly if the highway department already owns the right-of-way to expand it. Some people complain when their signs seem so far set back off the edge of the pavement. That’s a short-sighted view. I’d much rather build a billboard based on 2 lane economics and then get 4 or 6 lane traffic down the road.
A Billboard Story
One of the fun parts of the billboard business is getting to hear the story of many different landowners and business owners. One of the strangest stories I ever heard came from a landowner who had at one time owned a grocery store on a piece of land where I built a billboard. Here’s his strange story:
Every day he went to his grocery store, leaving his wife and daughter at home. One day he came home, and his wife was gone. The daughter was there, but the wife had vanished. He called the police. After months, they gave up. Months later, he received a note from the wife saying that she had run off with a travelling salesman and she’d never be seen again, but wanted him to know what happened. So he raised his daughter and she grew up and moved away. One day, he received a call from a nun who told him that his wife was dying at a shelter in New York. The nun wanted him to come pick up the body and take it home for burial. He went to New York on a train, and when he got there his wife was still alive. She told him that she’d run away with the salesman, and then he dumped her, and she was too embarrassed to go home, so she became a street person. He couldn’t stay, and she only had hours to live, so they put her on the train back home. But she didn’t die. So he put her back in her old room at his house, but she still didn’t die. She started to get better. Once she was well, he didn’t know what to do with her, so he rented her a small apartment near his store, and gave her a job as a cashier. Every day for another 10 years, they worked together in the store. Then she finally died. He buried her in the cemetery next to where he would ultimately be buried, with a headstone showing her still as his wife.
I always thought that was one of the strangest life stories I’d ever heard of. But it’s learning the story of so many people and properties that I always felt was one of the greatest perks to the business.
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