How should you pay the property owner for allowing you to build and operate a billboard on their land? There’s two basic methods: 1) percentage of revenue or 2) flat amount. But how do you select the right option? In this Billboard Mastery podcast we’re going to explore the variables to constructing a fair deal for all parties.
Episode 73: Fixed Vs. Percentage Ground Rent Transcript
There's an age-old issue in the billboard business, and that is, should you pay property owners a variable rate or a fixed rate? This is Frank Rolfe, The Billboard Mastery Podcast. We're gonna talk about that ratio, that theory, of if the rent should be variable, typically based on revenue the sign has, or a fixed amount. Now, there's good and bad aspects to both. If you pay a property owner a flat amount, on the positive side, if you are able to rent the sign for a lot of money, it limits how much they get. But on the negative side, if you pay them a flat amount, then you're paying them even when the sign is vacant. So there's no right or wrong answer to it. It's got good things, and it's got bad things. If you instead pay them a rent based on a percent of revenue, so a variable amount, the issue is going to be that they are always going to be getting a big and ever larger, assuming rents go up, piece of the pie. But at the same time, if they're paid strictly a percent of the revenue and you get no ad revenue in that month, then they share in your frustration and they also get zero.
Now, there's really no set answer to which is better between fixed and variable. One common way that billboard owners bridge the gap is by having a lease that has both, it has a minimum amount the seller will receive versus a percent of revenue. Now, you might say, "Well, that seems to be the worst of both worlds, because you've got a flat amount you have to pay even if the sign is vacant versus a variable, which means you're gonna pay them even more as the sign rents increase" and that's correct. But what's an issue here is, what can you get the seller to sign off on, because it's typically the owner of that property, that's the person that you have to appease, that's the person that you have to get to sign your lease agreement, and they, and not you, are really going to make the decision on whether that lease will be variable or fixed. Some people, when you go to them wanting to build a billboard on their property, they're going to say, "Well, I'm only gonna do it if I make $1000 a year," or $5000 a year, or $10,000 a year, whatever the number comes in at, and it's absolutely set in stone, they have to get that much or they don't want that big lumbering sign on their land. So you can either take that deal with the fixed rate or you can walk it.
And there's other sellers or owners who say, "Well, no, I want a variable. I wanna get more money as your rents go up. I know how this works. I know that 10 years from now, the ad rents will be far higher than they are today, so I want my cut of that." So in that case, now, the property owner is saying, "Nope, if you want me to sign this thing, I gotta have the variable amount." And then in some cases, you've got the property owner that says, "No, I gotta get both. I gotta get at least $1000 a year, but I also want a percent of revenue because as rents go up with inflation, I want more money." Now, from your perspective as the sign owner, is any of that forbidden? Well, let's look at that for a moment. Now, most of your large billboard companies, they evaluate the performance of their signs based on the percent of revenue that is paid in land rent. Many shoot for about a 15% ratio between cash coming in and cash being paid out, the ground rent. If whatever you structured is greater than that, let's say it's 40%, that may make that sign impossible for you to later sell because a big company is not going to wanna buy something that's not in line with their other ratios, but it's not the end of the world. If you're not gonna ever sell that sign, well, then that may just work for you, but you gotta think about what you're trying to achieve yourself when you set that rent.
Now, I've known many people who have built very successful portfolios of signs, yet are paying a higher percent of revenue to land rent that many of the big companies do. They may average 25%. And there's still plenty of money at 25% to make that happen, but you've gotta think through yourself what you're trying to attain. You're trying to get signs that are profitable? I'm sure you are. Trying to get them in abundance? Probably true. That means you'll have to be somewhat flexible in meeting the demands of the property owner, because at the end of the day, the property owner is the one who determines what the rent is and how that all works. Now, you can always push back, given the market comp, say, "No, I can't pay you $1000 a year because the market, it's only $500 a year. Here's my revenue, and here's why that's impossible." And sometimes you can persuade them to change their attitudes, and they'll say, "Okay, well, based on those facts, alright, I guess I was wrong. I guess I can accept a lower amount" So some degree of what you pay is gonna be based on your own negotiating ability. But you're also gonna find that many of your property owners, they just have certain impressions of things that they will or will not do based on certain amounts of money. And if you wanna get that deal done, you're going to have to expand your offer to a level where they'll agreeably sign your document.
So those are your three things you have to work with. Those are your three weapons. You have a percent of revenue, you have a flat amount, or you have a hybrid flat amount with percent of revenue. Now, let's fill in some of the variables on those. On the percent of revenue, again, most of your large companies try and shoot for 15%. But if you had to go all the way to 25%, I think you'd be okay. I've got as high as 30% before and done fine. So your percent is gonna be somewhere between probably 15% and let's say, 25%. That would be probably an acceptable guideline. But again, that's very rough guideline based on any number of items, supply, demand, and everything else. On your fixed amount, you need to shoot low on that fixed amount, because you may have periods where that sign is vacant, particularly when you first build it. Nobody likes writing checks every month for losing money doing something. So think to yourself, What about you think you can truly hit and be able to cover, particularly in lean years, at times you're in recession, things like that. If you feel really, really good that you can pay out $5000 a year and still cover the mortgage, then maybe that's where you can be. But don't go crazy high on your fixed amounts, because you will have periods of vacancy. You may even have periods where revenue is declining. So try and keep that fixed amount obviously as low as you humanly can.
On the hybrid between the fixed and the variable, because you're giving them the additional variable amount, you need to get that fixed even lower. I would typically go for about half of what you feel the variable amount would be. So if you choose something which is, for example, 20% of revenue versus a base, I would set that base at roughly what you believe to be half of 20% of the revenue, because again, you have to accommodate the reality that we may have a recession, or when you first build the sign, the market may still not be there completely and you have to let it grow out to meet your numbers. The bottom line to it all is that even though you can come up with all kinds of ideas of what you wanna pay for the land rent for a billboard, it doesn't much matter. All that matters is what you can get the property owner to agree to. But using one of those three factors, fixed rate, variable rate, or a hybrid, you should be able to meet most of your property owner's desires. This is Frank Rolfe, the Billboard Mastery Podcast. Hope you enjoyed this. Talk to you again soon.