The most important document for a billboard is the ground lease. It sets out the terms of the agreement between the billboard owner and property owner. In this Billboard Mastery podcast we’re going to go over some observations of creating a successful ground lease. And there’s so much to discuss that we’re going to break this up into two sessions.
Episode 48: Billboard Lease Trivia - Part I Transcript
Let me start off by saying I'm not an attorney, nor have I ever desired to be one. However, over the decades, I've used many an attorney and attorneys are extremely important when drafting legal documents. And as we all know, the primary document of interest to any billboard owner is in fact their sign location lease. This is Frank Rolfe, the Billboard Mastery Podcast. We're gonna be going over billboard lease trivia, and we're gonna do this in a two-part series because there's so many items I want to convey to you.
So let's start off. Well the first thing you need to know about a billboard sign location lease is that you need to be very careful in how you describe the actual location of the sign. In most of these leases, it references that you will show on exhibit A, the area that is being leased. Be very careful that you pick the spot where the sign actually goes. You wanna cast a pretty big net. Here's why. In many occasions, when you go to install the billboard, it won't fit where you thought it would. The primary reason when you drill the hole to put the sign in, you hit rock. When you hit rock, you try and shift over to see if you can find a way to dig past and not hit the rock that just moved where your side pole went.
Other times when you go to get the permit, the authorizing body that gives you the permit, whether it's city or state, tells you, "No, that location doesn't work. You gotta be another 20 feet over that direction." And the problem is, if you try and put just a little tiny dot on a map of where that sign goes, that dot will probably not be the Indian spot. So you want to identify where the sign goes in more general terms of a box that it will be contained within, but don't narrow yourself to one spot. I've seen many a sign, even signs that I have purchased over the years, where the original permit was screwed up and the sign location lease is therefore screwed up because they thought it was going to be a center mount and it ended up having to be full flag because they couldn't get the pole where it was supposed to go. So give yourself some breathing room for that.
As far as the lease payment goes, typically you're going to have to choose whether it's a percent of revenue, a flat minimum, or a revenue versus minimum. And a revenue versus minimum, let's assume that you pay the customer 20% of the actual gross cash receipts versus $1,000 a year. That means your 20% becomes greater than that, you pay the greater amount, but in worst case, they get a flat minimum of a thousand. I've always found those leases to be the easiest to sell. If you offer just the percentage-only lease, you always get the kickback. Well, what if you don't rent it? And that's a reasonable question. And then if you do the flat lease, people say, "Well, what if there's inflation and the ad goes up a whole lot more in price?" and that's also a good argument. So if it's important to you to get that lease signed, the easiest is to simply to have a base versus a percent. It's also vital in there that you based at... Based on the actual cash receipts, it has to be the collected rent. If you put an advertiser up on the site and they don't pay you, you should not have to pay the property owner a percent of rent that you never got. And also put in there that no payment shall start until the sign is constructed.
Let's assume you go to get your permit and it's held up, which can happen for months. You can't just start paying rent. And then what if you don't get the permit at all? So make sure that you have something in there where the payments don't start until the sign actually goes up. Next, the term of the lease. Typically, billboard leases are very long-term. You don't wanna build a short-term billboard. You want that billboard to last forever. So in a lot of leases, you're talking about a 15-year with a 15-year option, or a 10-year with a 10-year option, as long as you can humanly go. So try and put as many years into that as you humanly can and make the renewal term only at your option, not their option. That way, even though they may have not read it clearly, it makes the lease actually run on in an equal term with or without their approval. That gives you on the frontend, if you have a 15-year with a 15-year right to renew, but only you choose to renew or not, well, that means you have a 30-year lease.
Also put in the lease on that renewal term, 15 years or 10 years or five years in the future, whatever you can get, that it basically automatically renews unless the landowner terminates with some degree of notice, like 30 days or 60 days' notice. You can bet where I'm going with this. There's no way the property owner will remember when that 60-day or 90-day or a 30-day period, when it starts, or even when the sign ends. Many times the original person you sign the lease with, they're not even there anymore. They may have sold the property, they may have died, no one will ever remember to terminate your lease and you'll roll for another period of years. In fact, as long as you're getting their lot rent like clockwork, they probably won't even bother pondering anything to do with the sign at all. Next, most leases wanna contain something in there that gives you the right if the sign is blocked from visibility to remove it. Now, the reason that you want this is because that can happen. You can have a two-sided sign and minding your own business, the Highway Department makes suddenly that highway one direction. It happened to Fort Worth, Texas, I was there.
Or you may have a situation where the state or someone builds a giant grove of trees in front of the sign, been there on that, that was in Oklahoma. Or you may have a neighboring property build a big old property sign that totally obscures the one side of the sign. Had that happen too, out in Rockwall, Texas. So what happens then? Well, you can't be stuck paying the rent to the property owner for a two-sided sign if it only now has one side. So by having that option to get out of the lease, to cancel gives you negotiation ability with the property owner to say, look, "I can't pay you the same rent. I'm only one-sided sign now." Or if it's just a one-sided sign, to go back and say, "Look, I can't get as much rent for it now because they put that American flag in front of it," something like that. Also, typically, your lease is gonna have something which is going to allow the property owner to have some say in what is on the property, and in so doing, you're gonna have to give them the ability to cancel an ad message that they find offensive, but it has to be within limitations. It has to be based on reasonable judgment. It can't be that they just hate every capitalist business. But you could have a Ford dealer saying, "Well, now you can't put a Chevrolet dealer on that." And I would allow that.
It's very hard to sell someone on the idea that they have no control over the content, particularly in the current world of all these political issues. Obviously someone who's Republican doesn't want a Democratic ad on their sign and vice-versa. Also, it's very important in your lease that you do not give the property owner the ability to obstruct visibility of your sign. Now, I've seen it happen, sometimes the property owner decides to build something on the property, maybe a property sign, maybe a flag or something, that blocks your billboard. Well, you can't have that. You can't have the property owner who's supposedly on your team, now on the other team. So you need something in there that says they can't block it, and if they do block it, you have the ability to remove it.
You can't have a situation where they can simply, based on something that's good for them on the property, damage your business and then still expect to even get payment. You may or may not need to have in your lease the ability to cancel the lease on the part of the property owner. This is a decision you'll have to make. If you give them that ability, at least narrow it down that it has to be built upon development that impacts exactly where the sign currently sits, not just development. Many signs on raw land, when the property becomes developed, those signs end up in parking lots or in green field parts of the land that don't actually get impacted.
So as a result, if you don't have in there that it must be torn down because of the actual development, then a property owner may just wanna tear you down 'cause they didn't like the sign or someone offered more money, and then deliberately trigger that mechanism, even though it's not true and there is no development. Also, you need to have in there, if you are... If you do give them the right to cancel, that upon canceling, they cannot put another billboard back in that area on their property unless you have first option to do so. That stops the unscrupulous property owner from terminating your lease just so some friend of theirs or maybe they themselves put an identical sign back right after you tear yours down. You have to give yourself that ability if the property is supposedly being developed, to be the only one they can put it back.
Alright, well, that wraps up our first of this two-part series on things you need to have in a billboard site location lease. This is Frank Rolfe, the Billboard Mastery podcast. We'll be back for part two shortly.