Leasing Exterior Space Generates Extra Income for Property Owners.
One of your clients owns a well-located multitenant office building and wants to generate some ancillary income to augment the rental revenue. Another client who owns an acreage abutting an interstate highway is looking for a way to help offset the costs of carrying unproductive land.
Surprisingly, the answer is the same for both clients: lease exterior advertising space.
Off-premise general advertising signs in the form of billboards or wall murals “are a secondary or tertiary use of a property that can bring in some extra income,” says Randall Romig, vice president of real estate for Atlanta-based Adams Outdoor Advertising. Sign companies usually maintain the billboards, so after leasing the space, property owners “have little to do but cash the checks as they come in,” he says.
Although outdoor advertising deals can be difficult to procure, they can be lucrative. Brokers should learn more about this profit-generating strategy to prepare for the next client seeking a creative way to earn supplemental property income.
Outdoor advertising or sign companies typically own billboards, which are attached to building roofs or sunk into the ground along major roads, and wall murals, which are secured to buildings' exterior walls. The companies lease sign locations from property owners and rent the space to advertisers.
When a sign company negotiates a lease with a property owner for billboard or wall mural placement, a number of special issues come into play, according to John R. Parks, a partner with Powell Goldstein Frazer & Murphy, an Atlanta law firm whose clients include several outdoor advertising companies.
One major issue is visibility. “A sign isn't any good unless its visibility is protected,” Parks says. The sign company needs assurance that the landlord “is not going to put up anything on the property that would in any way obstruct the billboard.” Kick-out clauses can be written into lease agreements to protect visibility. Under such agreements, view obstruction by a third party's building construction or road relocation is grounds for lease termination.
At the same time, leases usually contain hands-off provisions establishing that the landlord “cannot dictate the content of the billboard as long as it is not prohibited by any sort of law,” he says. Sign companies also retain the rights to assign leases or sell billboards to other companies, as well as have access to electricity for lighting billboards. However, the sign company must pay for utilities.
Property owners also give billboard companies access rights to maintain their signs, says Richard L. Vairo, CCIM, SIOR, president of RCV Properties in Ocala, Fla. For example, “If the property is land along the interstate and has valuable crops on it, you have to make sure there is a way for the billboard company to get through to their sign. They can bring in some big trucks and cranes, so whatever area they pass through is going to get pretty well destroyed.” Lease agreements typically contain provisions requiring the property owner to provide the billboard company with “reasonable access,” although this rarely is defined specifically. If the billboard is placed on a rooftop, access rights generally are similar to utility easements, and the billboard company can access the sign as would workers doing roof maintenance or repairs.
Sign companies compensate landlords in a number of ways. Unlike leased space in a building, billboard rents are not necessarily based on square footage. “There may be fixed rentals, which may have escalation clauses tied to the consumer price index,” Parks explains. “Sometimes you even see the use of percentage rents tied to the revenue generated by the billboard.”
Property owner remuneration for placement rights can range anywhere from 10 percent to 18 percent of the billboard's annual income, Vairo says. “If it's a really good location on a major thoroughfare or an interstate highway, the billboard company is going to pay even more.”
Although property owners may embrace them, “Billboards are more and more looked upon as a blight on the landscape,” says Ed Johnson, CCIM, owner of Invest-Com Real Estate in Tucson, Ariz. “Governments are reluctant to approve new locations, which makes it hard to put up new billboards anywhere.”
Outside of major urban areas such as New York, Chicago, and San Francisco, few jurisdictions allow wall murals, Romig explains. Billboards typically are confined to properties with commercial or industrial zoning, and municipalities impose a list of restrictions “that gets longer and more prohibitive with each passing month,” regarding items such as size, color, setbacks, and spacing between signs, he says.
For example, Ocala heavily regulates the size and placement of billboards through zoning enforcement. “If a billboard is within the city limits, it has to be on commercially zoned property,” Vairo says. As is commonplace throughout the United States, Ocala has minimum standards in place for how closely billboards can be placed to one another. Additionally, if a nonconforming sign allowed to exist through grandfather clauses is damaged substantially, it has to be removed, a situation that results in “billboard companies rushing to fix a damaged sign before anyone else has a chance to notice it,” he says.
Government constraint on new billboards makes existing locations even more valuable to the sign companies. “The bottom line is that when [billboard companies] have a position somewhere, they want to keep it. They are extremely slow to take a billboard down under any circumstances,” Johnson says.
He cites a client who dealt with a billboard company's reluctance to remove a sign from his property. “The lease had expired, so according to the lease terms, the billboard company was obliged to come in and remove [the billboard],” he recounts. The sign itself wasn't generating any advertising income, “but the billboard company was using it as a pawn in their battle to obtain and retain billboard sites in the city, holding it in reserve for a time when they could offer to take it down in return for keeping another site.” The billboard company eventually dismantled its sign — two years after Johnson's client had sold the property.
Despite government and sign company headaches, property owners can profit from billboards.
Late last year, William Hugron, CCIM, CPM, managing director of the Charles Dunn Co. in Irvine, Calif., brokered the sale of a 5,000-sf commercial building in San Bernardino, Calif. A billboard company was paying the landlord around $400 per month for a 48-foot-long billboard attached to the building's roof.
“You can see [the billboard] from four or five blocks away,” Hugron says. “It could never be duplicated — not that the city would ever allow that to happen,” he adds.
A bit of investigation revealed ownership of the billboard had changed a number of times over the years, and the billboard was generating approximately $5,000 per month in advertising fees for its current owner.
“That billboard is worth more than the building,” Hugron says. The building sold for around $120,000, while the billboard has been valued at $250,000. “We think that we should be getting $2,000 to $2,500 a month off this billboard,” Hugron says. “It's a really rare situation — but one that's made the building owner very happy.”