I am new to the outdoor billboard industry but well read in advertising and media placement, I also bought Frank’s book ‘Big bucks’ last year right off this site and it is invaluable, I refer to it a lot…Great well written book.
I would like to know how to determine the value of a Permit after establishing a land lease agreement to build a billboard. I know there are variables such as lease length\ rental rate\ DEC and billboard size among other things, but since there is no billboard yet, how do I determine the value of the permit?
The value of the lease and permit can be calculated in the following manner:
Projected revenue based on market comps and reasonable vacancy allowance minus projected operating expenses = projected net income.
Take the net income and multiply by 10 (equates to a 10% cap rate) and then subtract the projected cost of building the sign, including structure, panels and lights. This gives you the initial asking price.
Of course, that’s just an asking price. You probably won’t get it. But it gets the ball rolling. You may have to retreat to a 20% cap in some markets – maybe even higher. So be flexible and ready to make a deal. There are only a finite number of players in any market, so be “easy to buy from”. Remember that you will probably be back trying to sell to these same people in the near future – so keep it friendly and win/win focused.
Thanks Frank. So the Projected revenue would be a yearly figure I assume?
Say my net is 12,000 a yr, the computation would be 12,000 X 10 = 120,000 minus building cost? I think I mis-understood your example.
You have it correct. Net income of 12,000 valued at a 10% cap rate is $120,000 less the cost of construction (for example $60,000) would yield an asking price of $60,000 for the lease and permit. This is just a starting point, and explain to the buyer the methodology you used. Be open to their rebuttal that either the cap rate is too low, or the estimated cost of construction is too low, or the net income of the sign is too high. Listen to what they are saying and adjust accordingly. Remember that all successful deals must be win/win – especially if you want repeat business!