Billboard Business, Billboard Investing

Annual Lease Inflators Impact Billboard Values

The quickest way to destroy the value of a billboard is to agree to a bad lease with a high fixed minimum lease inflator.  Inflation has averaged 2%/year for the past 10 years.  Outdoor revenues have grown at approximately 1.8%/year for the past 10 years.  If you agree to an annual lease increase of more than 2%/year your billboard cashflow and billboard values will decline.

Here’s an example of how you can get into trouble with a two sided 14 by 48 static billboard which is generating $2,000/month in revenue.  Lease expenses start at a reasonable 20% of revenue but increase by 5%/year.  By the end of year 10 lease expenses are a high 31% of revenue.  Sales expense is 20% of revenue and electricity is $100/month.  The monthly cashflow of the sign declines from $1,100 at closing to $879 at the end of 10 years due entirely to increased lease costs.  The value of the sign declines by 20% from $132,000 at closing to $105,000 at the end of 10 years due to the impact of lease increases.

Year Rev Lease Exp Sales Electricity Cashflow Lease Exp/Rev Value (10x cashflow)
1 $2,000 $400 $400 $100 $1,100 20% $132,000
2 $2,000 $420 $400 $100 $1,080 21% $129,600
3 $2,000 $441 $400 $100 $1,059 22% $127,080
4 $2,000 $463 $400 $100 $1,037 23% $124,434
5 $2,000 $486 $400 $100 $1,014 24% $121,656
6 $2,000 $511 $400 $100 $989 26% $118,738
7 $2,000 $536 $400 $100 $964 27% $115,675
8 $2,000 $563 $400 $100 $937 28% $112,459
9 $2,000 $591 $400 $100 $909 30% $109,082
10 $2,000 $621 $400 $100 $879 31% $105,536

 

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