These types of signs exist due to a loophole in the original Highway Beautification Act (now fixed by most states). In it, they arbitrarily chose a distance from the right-of-way beyond which the ordinance did not apply, which is around 660’. These signs were built to take advantage of that loophole – that’s why they are so far off the road and, to make up for it, so large. They are normally made out of wood since they pre-date metal construction and they are normally in more rural areas.
Their unusual size and construction gives them unique issues. The first issue is the perpetual problem of keeping them intact. This sign is probably made out of 38 sheets of 4’ x 8’ plywood, with six to eight telephone poles. There is a ton of windload on this structure – a 20’ x 60’ is like turning a 1,200 sq. ft. house up on end. In big winds, it is not at all unusual to lose a few panels. The best example is Howard Hughes’ “Spruce Goose”: huge wooden things are just tough to hold together. This leads to the second issue, which is understanding the grandfather status on the permit. Most areas allow you to make repairs up to a certain percentage of new construction cost. But if the whole sign comes down, your permit is lost and you are out of business.
Another problem is renting the space. Because they are so far off the road, many advertisers are turned off to them. And then there is the issue of how to get financing on such an odd-ball structure. And finally, figuring out an exit strategy down the road.
So how much is one worth? That’s a very difficult question. From an income perspective, you can use a return on investment benchmark, such as a 20% cap rate, making it worth five times the annual cash flow [revenue minus expenses]. However, you’ve got to take additional discounts since you have the risk of it falling down, the risk that you can’t put it back, the difficulty in renting the space, etc. And then on top of that, you have the problem of calculating the real revenue it will safely produce during the recession, and the impact of vacancy. You will probably end up with a value equivalent to around two to three times existing annual cash flow. But even then, make sure to use plenty of “padding” in your numbers.
Sure, the seller will tell you “why should I sell it that cheap?” That’s the problem you always get into on these signs. To the owner, assuming he has it paid off, there is no risk to calculate. Whatever he rents it for each month goes straight into his pocket. But you are approaching it from a different perspective – you are having to evaluate a risk-adjusted return on capital going forward. Don’t let him “bully” you into making an incorrect valuation. If the sign blows down two years into the deal, he is not going to be there to help you or give you that portion of your money back. All business has risk in it – but you should never engage in “stupid” risk. Leave that to the subprime lenders.