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Welcome to the Billboard Mastery Podcast, where you will learn the correct way to identify, evaluate, negotiate, perform diligence on, select the construction type, build, rent the ad space and operate billboard signs. And now here is your host – the guy that built from scratch the largest privately-owned billboard company in Dallas/Ft. Worth – Frank Rolfe.
If you wanna build a billboard on someone's land, there's two key things they're concerned about. Number one, where's the sign go so they know the impact of the property? Number two, where's the money? This is Frank Rolfe, The Billboard Mastery Podcast. We're gonna focus on the second one, how to set the amount of compensation you're gonna give the landowner for placing your billboard on their land. Now, there's two different ways to pay a property owner. One, giving them a percentage of revenue. Number two, giving them a flat base. But yet, there's a third way. That's giving them a percent of revenue versus a flat base. And how do you do each of those? Well, obviously in the percent, that's simple, you're gonna give them percent of the revenue that you take in. But the revenue you take in needs to be net of any cost, like ad agency commission.
So typically it's a percent of the net revenue defined as a revenue that you collect. That's only fair and proper. There's nothing wrong with that. But how do you pick the percent? Well, we know that the big companies in the billboard industry, back in their real estate department, their goal is to try and keep the ground rate at roughly about 15 to 20% of revenue. So if you give someone more than that, a bigger percent than 15 to 20%, when you go to sell that sign down the road, they may not wanna buy it from you because you're gonna screw up their numbers because their goal in life is to hit a number of 15 to 20%. And if you've offered a guy 40%, well then you maybe you're signed forever; you may never find any sign company that's gonna buy it from you, and you'll probably be unhappy with that.
So when it comes to percent, based on what the market will allow, 15 to 20 is pretty much normal. I've done deals that were 25, even 30%, but I wouldn't wanna do a whole lot of 'em. You wanna try have an average of about 20%. So that was kind of easy. That's just kind of set in stone from the way the industry works. The one that's harder is what would the flat amount be and why would you need a flat amount anyway? 'Cause some property owners will not let you put something on their land unless they knew it for a fact, they're gonna get some money. So when you say, Well, I'll give you X percent of the revenue, and they say, Well, but what if it's vacant? I'll get nothing. No way. Forget it. Then you have to start giving a base.
Now, the problem with giving the base is the base is a guarantee. And if it sits empty, you have to pay the base anyway. And if the base would work out to 50% of the revenue, you still gotta pay the base. So you don't dare give them a base that equates to what you think the percent would actually be. You've gotta allow in some vacancy; you gotta allow in the realities of life, economic cycles, recessions, depressions. So typically the most you're gonna wanna pay in a base is roughly half of that, which you think for sure you'll get on the percent side.
Let's break that down for a minute. Let's assume you think the sign can rent for a thousand dollars on each side. That's $2,000. Let's say you wanna offer them 20% of that. 2000 times 12 is 24, 20% of that's 4,800. Would you make the base 4,800? No, that's not fair. You don't know if you're gonna hit those revenues. Who knows if you're gonna hit those every month of the year, every day of the year? So maybe go for half that. Maybe $2,400 would be the base amount.
And then the third alternative is the percent versus the base. Now, once you know the percent of the base, you've already got that one locked down. So in that case, what you would offer them would be 20% of the net revenue against a base of, in this case, $2,400 a year. And that's probably what you need to have as your offer. So the base should always roughly be what you think half of what you really think you will get.
Remember with every billboard, there's three options. Best case scenario, worst case scenario, and realistic case scenario. The best case would be that, you thought the sign would rent for a thousand a month, but suddenly you get 2000. I've had that happen before. I built some billboards out on Interstate 20, highway 80 out there in east of Dallas. And what happened? They put in the Shreveport casinos and the revenues just shot to the moon. I was getting $500 a month. Next thing I know, I'm getting 2000 a month. That's fantastic. That's best case. You can't rely on that. That was just sheer luck.
Worst case would be that you never get the sign rented ever, but that's really not fair. If you really don't think you can rent it at all, then I wouldn't even be building it. So your worst case has to be tempered a little bit on reality. Then realistic is between the two, it's the average. You never wanna do a deal that you can't survive the worst case, that you're not even happy with the real, and you gotta get the best to make life worthwhile. You wouldn't wanna do that. So to help guard against those worst case scenarios and unhappy realistic case scenarios, you can't offer revenue that's at the absolute zenith of what you think the sign itself will generate. Gotta be a whole lot more reasonable than that.
Now, as far as the payment goes on the rent, sometimes you set it up where it's paid monthly, sometimes quarterly, but when you present it to the property and you're always best presenting it in an annual fashion, $4,800 a year sounds a whole lot more attractive than $400 a month. So it's all about the way you express the numbers. Many businesses do this. They find that when they express things in grandiose fashion, it attracts people who otherwise would not be interested enough to actually do it. So I would suggest you always heed that advice. And if you're gonna throw out the 4,800 in our example, that's a percent of revenue. When you first talk to the owner, you can tell 'em, look, I have an opportunity for you to make up to $4,800 and more with the sign. That's part of selling the sizzle of the deal.
But of course, what you then are gonna have to realize is when it comes to actually locking that down with the base, that's probably not a smart or fair idea for you. Remember, the things go up and down, hot and cold. That's how the nation's been built. That's how it's worked in cycles since its founding. And you don't wanna be in trouble. You don't wanna be negatively cash flowing in the bad times. It's only fair that the property owner share the bad times via the percent revenue and that the base is not there as punishment to you. The base is not there to reflect the actual income they will get. It's simply a fail safe mechanism for those periods in which the sign is vacant. This is Frank Rolfe, The Billboard Mastery Podcast. Hope you enjoyed this. Talk to you again soon.