Land lease amount


#1

How do you guys determine what to pay a property owner to lease their spot? It is always the same formula?

Thanks

Garrett


#2

Garrett,

Yes, the formula is pretty much a constant. However, all the pieces that make up the formula are in a constant state of flux, as is your appetite to violate the formula to get deals done. The industry is built upon a groundrent range of 15% to 20% of the revenue after agency commission. However, the revenue that you base this on is constantly going up and down, so you have to constantly guess what number to use. In addition, you may bend on the formula if a spot is really great. In Los Angeles, for example, there are locations that command up to 50% of gross or more, because the gross is so high. You also have to look at the length and risk of the lease. A short term lease must provide more cash flow to make it worthwhile. Another variable is how much vacancy that you think the sign will have. Finally, the type of structure you build has a huge impact. You can’t pay as high a percent on an 8-sheet as you can a 14’x48’, as there is less money to go around.

As you can see, it’s pretty complicated. And really, nobody knows the correct answer — it is just a bunch of educated guesses.