First of all, Dennis did an excellent job of providing a framework to figure out the numbers on the deal. He left out the cost of vinyl installation, insurance and repairs on the expense side, but those are fairly minor in the big picture.
This deal has a lot more risk than average. The first problem is that the sign is not on a major highway. I don’t know the traffic count or the market you are in, but $1,000 per month in most markets is very high for a surface street, even if it is a major intersection. Secondly, on a tri-face sign, it is rare to have all three sides renting for the same amount. Surely one of those faces is weaker than the other. The fact that the seller is telling you that they all rent for $1,000 makes me extremely suspicious. Normally, they would all rent for a different amount, as they all have different quality of reads, traffic directions and traffic counts. Also, what is the size of these faces? Is it 12’ x 24’ or 14’ x 48’? They better be a standardized size, or you may have no exit strategy in the future, plus a really hard time renting the space.
Now for more concerns. Let’s assume the seller is telling the truth about all three sides renting for $1,000 per month each. We are going into the worst recession since the Great Depression. I will bet you $100 that those faces are not renting for $1,000 by this time next year. In a bad recession, it is not uncommon for the outdoor rates to drop 50%. And the vacancy that Dennis used is O.K. for right now, but you know that it’s going to go up exponentially by next year. Don’t let the seller tell you “but the recession started a couple months ago and it hasn’t affected the rents at all”. That’s because ad leases are normally 6 to 12 months in length, and they have not even expired yet.
I am probably the biggest miser on earth, but I would cringe at spending $100,000 on this unit. That same amount could build you 2 brand new 14’ x 48’ structures on a highway, or 3 or 4 12’ x 24’. Or 10 wooden signs on the interstate. Any of those options would give you a ton more cash flow and a lot less risk. And I will also bet you that this same sign will be available for a whole lot less next year.
One last word of caution. Who is going to finance this? Will the loan be all the way to ammortization or have a balloon? If so, do you think you’ll be able to find another bank to replace the loan with? Commercial lending right now is very scary. And the interest rate at some specialty lenders for outdoor run over 10%.
My goal here is to keep you out of trouble, not shoot down your deal. I have never seen it or the market. Just be careful – you have to error on the side of caution during a recession. I should know. I survived the one in the 1980s.