Flipping Leases


#1

I am very new to the concept of the billboard business, but am interested in the flipping of leases and permits. I live in the San Antonio area and have a few questions.

  1. Is the San Antonio and South Texas advertising market strong enough to support lease flipping?
  2. Would you recommend going outside the city limits at first, since there are a lot of billboards on rural roads in the area?
  3. How much land is needed to lease for the billboards?
  4. I researched some other billboard companies in the area that I am targeting and they are renting space for around $800/month. In this scenario, what would be a good sale price for the lease and permit?

I am planning on getting your home course, but was just trying to get an upfront vision of the possibilities before I spent the $350.

Any feedback you can give would be great. Thanks.


#2

Damond,

San Antonio is certainly a strong market. South Texas is a pretty big geographic area – you’d have to be in an area with decent-sized population and traffic counts, not in the middle of nowhere. Traffic counts should be at least 20,000 to 30,000 cars per day.

If you take a compass and draw a circle about 4 hours out from the city you’re in – that’s your target market. In that circle will be probably 100 to 300 cities and towns with highway frontage. You will need to get the ordinances in all those towns and cities to see where you can build. You should not necessarily focus only on “unzoned” county land, as those often have harder requirements than within a city limit.

You only need about 9 square feet of groundspace for a monopole, however, that should be used only in discussion with the landowner. You should allow yourself a reasonably large area – including the sign’s overhang – in your lease exhibit. If you are building a 14’ x 48’, for example, I’d give yourself a rectangle about 20’ x 60’ on the ground.

If other companies are renting space in that market for $800 per month per side, then the numbers look generally like this: $800 x 2 x 12 x .6 x 10 = $115,200 for a completed sign, based on 0% vacancy and a 10% return to the owner. More realistic numbers would give a value of probably more like $70,000. If you then subtract the cost of the complete sign – say $50,000 – then the value of the lease and permit is about $20,000, which is pretty much the norm for the U.S.


#3

Great info…thanks.

So, if I work with the landowner for a 20’ x 60’ space, what kind of proposal would get the owner to really consider the deal? Also, if I stay within city limits, what permits and licensing would I need?


#4

Damond,

A standard ground lease contact letter and lease form is in the Home Study Course. The land owners are normally turned on by the ability to get rent for effectively nothing on their part. It’s not that hard to get them to listen to your proposal.

You have to find out the permitting and licensing rules in the state your are in. Some states require you to have an Outdoor Advertising License, which is pretty easy and cheap to get (it’s all done through the mail). Some cities issue their own permits, while others require city and state permits. It’s also fully covered in the course. You just have to find out from them which it is.


#5

Frank,

Can you fill in the missing parts?

$800 x 2 x 12 x .6 x 10 = 115,200

(Advertising price of Billboard) X ( two sides ) X ( One Year ) X ( ? ) X ( Capitalization Rate ) = 115,200

Am I close?

I have a possibility in my area on a major interstate 40 miles south of Atlanta. Lamar is asking 1200 to advertise. The cost to build a two sided monopole is 40,000.
I calculated the flip lease asking price .

1000 ( I went with 1000 to be conservative and create appeal) x 2 x 12 x .6 x 10 = 144,000 - 40000 = 104000.
My thoughts would be that I would look at getting close to half that on a flip. 55,000.

If I were to sell the whole thing with the construction completed, I feel like I could get about 100,000. that is with the billboard not rented.
If I were to rent this this billboard I could add. 12,000 for each side that I rent.

How is my though process? Am I way off?

How long do you feel it would take me to find a buyer for the flip or the completed sign?


#6

Your run-down of the numbers is correct. The 60% is the gross profit margin. However, that formula is based on a perfect world, which we are definitely not in. You have to back off both the rate and occupancy %. That’s why I reduced it down about 30%.

If you reduce your numbers down by 30%, you’ll get a more realistic value of $30,000 for the lease and permit. In this current market, you will have trouble having anyone pay top-dollar.

If you have a location and permit locked up, you should hit up the outdoor companies in that market to see what they would give you for the lease and permit and then work backward up through construction. The best risk/reward scenario will be readily apparent.


#7

Would it be fair to offer the landowner their appraised value per sq. ft.? For instance, the county has appraised the land for about $1/sq. ft.

If you were to approach the landowner with an offer of $1,200/year (a 20x60ft. space @ $1 per sq. ft.) with the added bonus of a 10% lease value upon sale to outdoor company for a 3 year term. Would that be attractive to the land owner? Three years would allow the sign company to start generating revenue and would allow the landowner to renegotiate at the lease end to get their percentage. Here is the example I am looking at:

Standard rents for this area = $2,000 per side
Calculation = 2,000 x 2 x 12 x 30% (realistic GPM) x 10 = $144,000 - $50,000 (cost of build) = $94,000
As part of the original agreement with the landowner, I would then give him $9,400 after the sale.


#8

I’ve never heard of anyone pricing ground rent based upon a per square foot basis on outdoor. It is generally a range of 15% to 20% of the gross revenue. Often the ground rent has a minimum monthy base versus a percentage of revenue – whichever is higher.

You numbers are not crazy. But you have priced it at a 10% cap rate (return rate). In this economy, you may be looking more at a 20% cap rate unless the location is spectacular. That would give you a value of $72,000, and a net profit of $22,000 based on an assumption of $50,000 in build cost. Be sure and leave yourself a lot of room for flexibility since we are in the worst economy since the Great Depression.


#9

Thad, I would recommend that you get this deal locked up at reasonable lease rate and start shopping it to the major billboard companies operating in your market. Here in my part of the northeast, pretty much all interstate locations, other than ones with bad visibility, excessive building costs, or those requiring lengthy/expensive zoning fights have already been picked over by the majors.

However, in my market, Lamar has basically put all new-build structures on hold, so that may affect the value you may receive. Not sure if they are putting things on hold nationwide.


#10

Frank,

I am assuming you meant the cap rate should be 5%, not 10%? 20% cap would be a much better return. I agree with conservative numbers.

One last question about the lease to the landowner. If you pay 15% of gross revenue to the landowner for the ground lease, then my scenario above would be for $600/month…correct? If that is the case, that seems very capital intensive for the lessee. You would have to move the lease quickly to keep from absorbing those costs. Or is the lease written in a way to only pay on the lease when a sign is built? That may be a dumb question, but some of this is very foreign to me.


#11

Yes, the lease payment needs to begin when the sign is built. But this is subject to negotiation as the land owner is seldom willing to tie up their property with an open-ended agreement to get paid. Yes, at 15%, in your example, it would be $600 per month. You might also structure a lease that only pays the percent of revenue, and has no guarantee. It’s all based on what you can negotiate.

The cap rate in my response was 10%, not 5% – that’s what your numbers represented. That was your valuation on selling the sign. When you are buying or building a sign, you always want to hit 20%. Only big companies are normally dumb enough to pay a 10% cap or less. With a 10% cap rate. assuming a 10% interest rate, you can never pay down one penny of principal – not the best economic plan for success.

A lot of the structure of billboard lease terms is foreign to most people, but it’s pretty simple and you can master it quickly.