All Forum Posts by: Paul Klei

The $1200 rate is based on comparable signs, but apparently they estimate 65% occupancy on "everything they build".

I'll let you read their last email: 

"It looks like you have done your research. To simplify the situation, I would propose a lease that pays 20% of collected revenue annually. That way, your revenue grows along with ours. The figures you worked out are assuming 100% occupancy which is almost never the case. I would project an advertisement in this area to get an average rate of $1200 per 4 weeks based on our other inventory, and we estimate everything we build at 65% occupancy. In this scenario, your revenue would look like this:

$1200 x 2 faces x 13 billing periods = $31,200 total revenue x 65% = $20,280 x 20% collected revenue = $4,056 annual rent."

 Interesting points. 

They did not make that clear to me. It seemed to be a pure revenue share without a base rent. The 10% and 10% was going to be my proposal to show compromise so that I could get base rent and still get some extra revenue. If what you're describing is the case, perhaps that could work. So is the 20% "base rent" a minimum payment? How would the amount be determined if they want to pay it in advance after construction (before they have revenue)? 

No I wouldn't scrap the lease. They asked for a minimum 25-50 lease but their standard contract is 75 years. I planned on agreeing to a longer lease as a compromise so they would consider my terms. We'll see.  

Since you have an acquisition company, how do you appraise leases?

The annual escalation is on base rent, not revenue. It is commonly advised to seek either an escalation provision or some other provision that protects against inflation. Yes they have signs with bi-annual 3% escalation or escalation tied to CPI. A set percentage is better for both parties, which I am presently attempting to negotiate. By year 75 rent will only have reached $36,000, so it's not unreasonable. 

Please elaborate on the 96k/500k numbers. 

Perhaps I misunderstood. It sounded like you have a base rent and because a certain benchmark has never been breached, you have never received a revenue check above and beyond that base rent. That is the hybrid lease I am trying to describe.  

Perhaps I am also not understanding revenue sharing vs base rent. If I have a pure revenue share lease, I would not receive a minimum base rent if their revenue went down. 20% of revenue might be a bigger piece of the pie on good times, but doesn't provide any predictability for valuation, nor does it provide any guarantee in case of their revenue dropping. If I agree to a minimum rent of 10% and 10% of revenue, I would have predictability, guarantee and a piece of the pie. 

Apparently annual escalations are both common and recommended. Either a set percentage or tied to CPI. They would agree to it for the same reason that commercial tenants do. It's reasonable protection against inflation. Also, they know the same people I do in DOT that predict a significant increase in traffic count. That's why I don't want to be locked into today's rates.

Maybe you can clear something up for me. They want to pay annually in advance, beginning after construction. But how can they know in advance what 20% of revenue will be? If they are basing it on their own metrics, then that is a negotiable number as they cannot accurately predict that far into the future.

These are market-wide historical numbers. Typical occupancy rates for companies in the U.S. are 80-85% during economic expansions and 75% during recessions. Billboard revenue grew 7-9% each year from 1993 through 2000. Afterward ad spending only fell by 2% in 2001 and 1% in 2002. Typical occupancy rates for companies in the U.S. are 80-85% during economic expansions and 75% during recessions. The Billboard and Outdoor Advertising Global Report 2023 also states that in the short-term, the Russia-Ukraine War disrupted the chances of global economic recovery from the COVID-19 pandemic, hence the market-wide 3.6% CAGR for 2023 and the expected 2.9% in 2027. However from 2020 to 2021 the market was expected to grow at 10.6%, after recovering from the COVID-19 impact, and then by 7.8% by 2025. These are closer to the normal growth numbers. 

Regarding the language that allows them to cancel. I've received advice to revise the language to take the one-sidedness out of it. For example, if it says "in their sole discretion" then make it a reasonableness standard instead. 

They are saying that they expect to make $1200/month per face. But this means that they will be charging $0.65/1000 views instead of their normal $1.95/1000 view rate. Presumably they are claiming to predict long-term contracts over the length of the lease. But a normal discount for long-term advertising contracts is 5-10%, not 67%. And again like I said, if they are going to pay in advance based on revenue before they even receive any revenue, they have to base my revenue check on some kind of math. 

Please clarify what you mean what marketable lease. A 30k loan based on a lease "valued at" 20-50k: How is that number reached? I was told that valuation of the lease is based on 8-10x annual revenue. To your knowledge, is that true for lenders and acquisition companies? Does the gross value of the lease factor in at all? (as you can see I'm trying to get this number up). Also, assuming value is based on a multiple of annual revenue, what would add value? (escalation clause, revenue sharing clause, etc)

I was using their stated rates ($1.95/1000 views) at 100% occupancy and their impression count of 60,000 views/day, plus an annual 3% escalation clause. At the rates they quoted me, even at 65% occupancy, they should be making $59,319 annually. 20% would be $11,863 x 3% escalation is still $3.2 million+ over 75 years. My job now is to determine why they're assuming $0.65/1000 views instead of $1.95/1000 views. But even at $0.65 ($4056 annually) with a 3% escalation the gross value is still $1.1 million. 

Quote from @Shane H.:

if you are talking about something completely different please let me know if you work it out. I’m always open to learning. That’s a serious question at the end. I’ll often throw out made up numbers for examples for a conversation. If I’m just not understanding how you’re getting to the big numbers I’d love to understand. Other than the yearly percentage increase. If you manage to get that it’s just not applicable to me because my leases don’t have it. 

 That is what I was talking about. I like to learn as well, I'm happy to discuss it further. The numbers were based on the metrics and the clauses I am trying to negotiate into the lease. I'll respond to your previous post this evening if I am able. I'm working on an email to the billboard company today. 

The sign will be a double-faced static bulletin. 

The site is on a highway, not an interstate. 256,802 vehicles weekly. 420,000 impressions weekly according to the company. DOT is expanding the highway 30 miles away from 4 lanes to 6 lanes, which will increase capacity from 37,000 to 55,000. They predict traffic flow will increase by 42% in 18 years, but it only takes 3-5 years for traffic to adapt to expanded roads. The point is, I want the rent to keep up with rising traffic count. The company has now offered me a pure 20% revenue deal, so that my "revenue grows with theirs", but I want a base rent as well. The metrics I provided ($18,252/yr) were based on their own rates ($1.95/1000 views when I contacted them as an advertiser, which they claimed was already a discount) and 100% occupancy. They predict 65% occupancy - low relative to industry standards (75% in recession, 80-85% during expansion). $1.95/1000 views at 65% should put my revenue at $11,863/yr. The numbers they are predicting implies they will charging about $0.65/1000 views, 1/3 the rate they quoted me, which would give me $4056/yr. I stated upfront that I want an escalation provision and a revenue-sharing provision. They may be 'assuming' a low occupancy rate and long-term advertising contracts ($0.65/1000 views) for the entire 75-year term because they want to keep the base rent low. My idea is to agree to set the base rent at their 65% occupancy rate, perhaps at lower than 20% revenue, assume a RANGE of advertising rates ($0.65-$1.95), and use a revenue-sharing provision to bridge the gap they're attempting to avoid. It sounds like you have a hybrid lease that is structured similarly. How is the language articulated?

The industry expects 5% annual growth based on average occupancy rates - it has seen 7-9% annually before. In tough times ad spending only drops 1-2%. Inflation occurs every year, not every five years, or only at the end of a lease. For the best valuation of the lease, I think it's important to try to negotiate an annual escalation. 

So the sole discretion language that allows them to decrease/stop rent or remove the sign needs to be mitigated or removed so that it's attractive to a lender. Otherwise, the lease can be sold to an acquisition company, even if that language is in place. Is that correct?

Quote from @Shane H.:

Is this proposal for a digital, or standard, and single or double face?

 double face, static, bulletin

I do appreciate your advice. I am trying to structure it correctly because I know once I sign it I can't change it for 15+ years.

In rural areas (outside of Times Square, Chicago, Vegas Strip), advertising companies keep the amount they pay landlords between 15-20% of their revenue, because they are making less. In Times Square where they are making insane amounts of money, they can afford to pay landlords 50% of revenue. So, given traffic count, the company's own view rate for the location, and their rate card, 20% of their projected revenue would be over $18k annually. If a set percentage escalation is added, the numbers begin to add up over 75 years. This is a calculator for cell tower leases but it helps to see the math: https://www.steelintheair.com/. You can play with the Escalation Rate and see how a single percentage point makes a very big difference over that length of time.

Your lease that receives $750/year - what is the traffic count?

The highest you've ever seen was less than the numbers I mentioned - Which numbers and what were the highest you've seen, out of curiosity?

I wasn't aware that the lease acquisition companies are REITs. Do you know of a resource that lists a number of these companies?

The clauses would be a hinderance with lenders, but not as much with buyout companies. If I read that correctly, why would that be the case?

This advertising company will make annual payments in advance each year, beginning as soon as construction is completed. They have signs very near to where this will be so they know how it will perform. And the first term is 15 years and that is a long time to test a site, so I wouldn't agree to that.

You said the base rent is set the same as the revenue share on yours. Do you mind me asking what percentage that is? It makes sense that it's a set percentage instead of tied to CPI to avoid spikes in inflation. Do you have an escalation clause?

You have yet to receive a revenue check because it hasn't reached a certain benchmark? What is preventing it? 

If the annual income was sufficient I would consider keeping the lease. However I would like to have the option to monetize the lease/income stream beyond the annual payments. Borrowing against the lease/land would be ideal. I'll consider selling the lease/land/easement but I have to make sure the language is included for it. Which would be most profitable?

Quote from @Shane H.:

So they never mentioned a number at all yet? Have you seen any other leases to know what they generally bring in?

They asked what it would take to make it worth it to me. I did the market research, got their rate cards and ran the numbers. I'm less concerned with the firm numbers than the structure of the lease that allows me to monetize it. 

Quote from @Charlie MacPherson:

It depends entirely on what your contract says. 

For all we know so far, it could expire in 3 years, with five 10-year options, meaning you could conceivably be tied up for 53 years!

What does your contract say about lease renewals?

This brings up a concern I have. I'm negotiating a lease for a sign on my land. They want a term of at least 25-50 years. The boilerplate agreement describes an initial term of 15 years followed by two successive 30-year terms. If I want to sell the lease or want it to be attractive to lenders, I want a long lease. How would you suggest that I structure it so that I'm not "tied up", but the lease is still attractive to lenders and lease acquisition companies?

Quote from @Jerry K.:

He recommends a shorter lease (5-10 years) with a slowly increasing percentage for you, the land owner. 15% - 20% or more of the billboard rental. Lots of older leases are for very small fixed payments, but the bigger companies will agree to percentage of face rental for a good location 

Why does he recommend a shorter lease (5-10 years)? I'm negotiating a long lease on my land. They want at least a 25-50 year lease. Their boilerplate lease is an initial 15-year term, followed by two 30-year terms. What kind of escalation provisions are recommended? (fixed percentage, CPI, etc) and at what frequency? (annual). I know the advertising companies try to stay within the 15-20%  range - should that be the minimum base ground rent? Or would a lower base rent with a 15-20% revenue-sharing provision be better?