Need expert Opinion


#1

Hello All,
I am in the process of buying a billboard. This billboard is inside the city near decent junction. (It is not accessible/viewable from Interstate highways).
This billboard is in a triangle shape, meaning that 3 ads can be displayed simultaneously. The expected rent is $1000 per month (per side). That makes say $3000 per month for the whole (if all 3 gets leased) …(Please note: These figures I got from the person who is selling the billboard).
He is asking for $110,000 for this. What does the experts say? Is it worth buying? Is the cost ok or should be less?
Regarding the lease. I will be paying 15% (after all expenses deducted, electricity bill, county tax etc.), to land owner once they get leased. If for some reason none of the sides got leased for say 3 months, I will not be paying anything to land owner.
Expert advice/suggestion/comments are highly needed.

Thanks
Pat


#2

Patrick,
I can give you an opinion, but I am definitely not going to say it is an expert opinion. Everything I look at is dictated by numbers and what I expect in return for my money I have tied up. I am going to assume that you bought it for $110,000 and put $10,000 down and had $5,500 annually for electricity and property taxes. You obtain a note for 10 years at 8%. The one thing you don’t mention is what the vacancy percentage is so I figured it at 75%.

Return on equity is 12.3% - A little better than the average stock market return, of course right now a lot better.

CAP rate is 14.6% - Higher than a rental property in most cases, but I have no idea what a typical cap rate is for a billboard. This would be something Frank could provide.

Your cash flow after taxes and debt service is around $1,200 figuring a 25% tax bracket.

With only $10,000 down your debt covenant ration is 1.11 and banks will typically want something around 1.2 which means you would probably have to put 20% down in order to meet that if you needed a loan.

I would definitely want to see signed contracts and invoices from previous years of how much it was rented and payments received on it. I have learned not to take any ones word for it even though I am a trusting person. If they can not provide any hard paperwork I would definitely proceed with caution.

The main question you have to ask yourself is am I going to be happy with the return on the money I put in, or can I find another deal that will provide a better return with maybe even lower risk. Dropping the price to around $90,000 will give you an annual cash flow of around $3,400 which makes a huge difference. You need to find out how badly he is wanting to sell it and if he can’t provide any paperwork to verify his numbers, I would say the price drops significantly.

I would definitely see how much lower he can go.


#3

Patrick,

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.