The average billboard ground lease is 20 years. Since you only have one shot every 20 years to negotiate your ground lease, it is imperative that you do a good job at it. And it’s not something you are going to learn from experience – you will only do it about three times in your lifetime!
So here are some of the initial things you need in a good ground lease, from the landowner’s perspective.
CPI increases in the base rent
When you are talking long periods of time, nobody can predict where inflation will head. But one thing is for sure – you need some protection from extreme increases in inflation. Without that, you are locking in a bad lease when you sign it. The year after you sign the lease, the value of your stream of payments is reduced by the inflation rate. And, although everybody has forgotten by now, there have been periods of 10%+ annual inflation in this country. CPI stands for Consumer Price Index, and it is a good barometer of inflation, and easy to track and verify.
The ability to cancel the lease
Let’s say that you get a call one day from Hilton Hotels, and they want to develop what is now your piece of farm land into a luxury high-rise hotel. They are ready to close on the deal, but there’s one small item – you have to get that billboard off there. Can you deliver? That scenario is not as far-fetched as you think. All the developments you can think of began as raw land. So it makes sense, regardless of what your property is currently being used for, that you have a way to get out of the lease in the event of a great development opportunity.
But you have to be fair about it. It will take the billboard company about 10 years to pay off the sign before they make a dime with it, meanwhile, you’ve been getting money the whole time and have no investment in the sign at all. The termination provision should only be for situations where the sign must come down as part of new development. Not just the land being sold. And certainly not for any condition, whatsoever, at the discretion of the land owner.
Control the content
Do you care if there’s a bank or hospital on your billboard? Well, what about an adult bookstore? Or a topless bar? Better yet, what about a direct competitor to your tenant (such as an ad for Chevrolet on a billboard in the middle of a Ford dealership). Now are you getting worried? Good. You need the ability to have the final word on what goes on the sign. But, again, you have to be reasonable. You should only have the right to negate a finite subset of advertisers such as competitive products, adult bookstores and clubs, and political messages. You can’t make it impossible for the billboard company to find a single client you will allow.
At the end of the term of the lease, it becomes month-to-month – not a rollover
There are billboard leases out there that have a provision that, if the land owner does not contact them by a certain date, the lease rolls over for an additional term of 20 years, or whatever the primary term was. Just think about that. You have to remember to contact the company 19 years out, or the lease rolls over for another 20 years. What if you forgot the deadline by one day (it is 19 years out in the future, after all) so you are screwed for another 20 years?
If you can’t live under that type of pressure, you need to make sure that the lease changes to month to month at the end of the initial term. That way you are not under the gun to orchestrate events, or be penalized for having a memory lapse.
Conclusion
There are some logical steps to take when negotiating a billboard ground lease. You need to learn them and act on them. You cannot afford to make a mistake that you will be stuck with for decades.
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