There are numerous decisions a billboard operator must make in the early stages of developing a new billboard location. These decisions can have dramatic impact on the profit and value of each sign. One of these decisions that may have to be made is if a land lease is appropriate with the property-owner, or an easement.
The remainder of this article is intended to discuss the differences between land leases and easements, and to highlight pros/cons to each.
Author’s Note: Chris Stark has been involved in the Billboard and Communication Tower Industries as a lender and advisor since the late 1990’s. The following blog information is intended to highlight his experience inside the industry and provide value to independent operators. The following information is based solely upon the experience of the Author and should not be used for legal or financial advice.
A land lease is a written agreement between a property owner and a person who wants to use a portion of that land. In the billboard industry, a land lease is typically a document that is used to define the financial and usage terms for a company to put a billboard structure on another person’s property. Some of the key terms identified in a land lease are listed below:
With a lease you are typically paying for the use of the property over the same period of time you have access to the site. This means you can match your site expenses with the revenue
the location generates vs. having to pay a lump sum on the front end of the agreement. This can be an advantage for companies who have limited access to capital or are developing signs rapidly.
A land lease is usually structured as a flat payment, a percentage (10-20%) of revenue generated, or a combination of both.
Note: If a billboard company thinks they might convert to a digital sign at some point, a fixed payment agreement is a better option because the increased revenue will not increase their lease cost. On the contrary, some billboard operators opt for percentage leases, so they can minimize their expenses in the event the sign has vacancy.
Most land leases are 20-30 years before maturity. Although that may seem like a long amount of time, having to monitor and renew leases can be a drain on a billboard company’s time and resources. In addition, as the term remaining under the land lease decreases, so does the value of the asset in the event of a sale.
Additionally, due to land leases being paid for over the life of the agreement, this recurring expense will continue to decrease your overall cash flow of the sign. Billboards are valued based upon the cash flow they generate. Billboards with a land lease expense are valued lower than billboards located on owned land or easements.
What is an Easement?
An easement is the right to use someone else’s property for a specific reason. In the billboard industry, a permanent easement is typically bought from a property owner for a lump sum payment. The easement typically gives the right for the billboard company to have perpetual use of a portion of the property to locate the structure, access the sign, run electricity to the structure, and protect the sign’s visibility from the roadway.
The major pro to a perpetual easement is that the billboard company does not have a recurring lease payment each month. With lower expenses, the asset will generate more cash-flow, and thus have a higher valuation.
Additionally, you will have full control over the location in perpetuity without the risk of the property owner increasing rent upon renewal or terminating the lease altogether.
Easements typically require a large upfront payment. This can take funds away from potential additional development and limit a company’s growth.
In addition, many property owners like the idea of recurring payments, making the negotiation of an easement more difficult.
Overall, the decision between a Land-Lease and an Easement really comes down to your company’s capital budget, and what a property owner is willing to negotiate. If you are in a major development phase, a land-lease may be your best option; if you have adequate access to capital and are wanting to eliminate the recurring expense of your lease, securing a perpetual easement may be your best option.