Billboards have been around for a long time, dating back to the late 1800s and early 1900s. In time, the billboard industry became “Outdoor Advertising.” Today the industry is “Out-of-Home,” which includes ads in elevators, in restrooms, and on screens in airports. Billboards are still the largest part of the industry. This article focuses on ground leases for billboard purposes.
If you are going to lease land to a billboard operator, you need to understand the business. If you are a billboard operator, you need to understand the law surrounding licenses, ground leases, and easements.
At its most basic level, billboard operators rent space on their signs to advertisers. In that sense, it’s similar to offering office or residential space for rent. At the same time, it’s more. Just as a hotel combines rooms to rent with other services, billboard operators provide more than space on their signs. They provide design services. They print advertising copy for display.
Operators can design a campaign or “showing” that reaches a large percentage of the population in an area. They also can design a campaign that will reach people within a certain distance of every location of the advertiser’s business. Those are just two examples.
People and companies that erect a single billboard generally cannot provide those services. The authors are aware of a billboard that is vacant a large part of the year despite being within a mile of Los Angeles International Airport on one of the major streets that feed into the airport. In the authors’ opinion, unless you are ready to jump into the outdoor advertising business with both feet, you will probably be better off leasing your structure to a billboard operator.
Billboards have either “static” or “digital” displays, also known as “faces.” Static displays show copy that stays the same until changed manually. Digital faces are screens that change electronically.
Whether static or digital, the faces are attached to support posts. Older signs were usually supported by steel I-beams. A sign face might be supported by three to eight steel posts sunk into the ground, depending on the size of the face. The most common sizes for static signs are bulletins (14 ft. × 48 ft.) and poster panels (12 ft.× 24 ft.). Larger signs (“spectaculars”) and smaller signs (“8-sheets”) are also common.
One very creative spectacular demonstrated the power of billboards. There is a mid-rise office building near the intersection of I-10 and I-405 in West Los Angeles. It’s one of the busiest interchanges in the country. To promote a disaster movie, a billboard operator wrapped vinyl around several of the higher stories of the building. The picture on the vinyl made it look as though a meteor had crashed through the building, showing blue sky through it. It brought traffic on I-405 to a standstill.
Billboards do not have to be large to be effective. A shaving cream company used to advertise on very small signs, perhaps 1ft. × 3 ft. on a single wooden pole, placed only a few feet above grade. There would be a series of signs perhaps 15 feet apart. Each sign had three or four words and rhymed with the previous sign. The last sign said, “Burma Shave.” (According to Wikipedia, American Safety Razor Company bought Burma Shave in 1963, stopped using the signs, and filed for bankruptcy in 2010.)
Digital signs have a greater range of sizes, from small enough to fit in an elevator to the size of a large jumbotron in a football stadium. Although a static sign requires a crew of installers to change copy, a digital sign requires only a connection to the Internet. This permits digital signs to be used for current news. It also permits them to change copy frequently. Typically, copy changes every eight seconds.
Modern displays are usually supported by a single steel column. For a free-standing sign, the installer digs a hole as deep as the height of the sign the column will support. The diameter of the hole will be a foot larger than the diameter of the column. Once in the hole, the installer surrounds the column with fast-drying cement.
Often, a column will support two sign faces. These may be back-to-back with the faces parallel to each other. In the alternative, the two faces may be angled away from each other in a V-shaped formation.
Before the invention of digital signs, some operators tried to increase the available space for ads by constructing triangular panels that rotated in tandem. That allows a single sign face to display three different ads (Tri-Vision).
Typically, operators erect billboards as close to a property line as possible. This permits the greatest development of the remainder of the property. A billboard on the property line is less likely to interfere with construction on the rest of the property.
Real estate includes land and fixtures. Fixtures are improvements that are permanently attached to the land. Billboards qualify as fixtures, as the supporting columns are placed into the ground and surrounded by concrete. The superstructures are bolted to the columns.
Billboards are engineered to withstand high winds and other risks. A static sign will typically last 40 or 50 years, or perhaps longer. The support structures for digital signs typically last as long as a static sign, although the faces will need to be replaced from time to time. Some buildings have a shorter useful life than a billboard.
Like any other real estate, location matters. An advertiser might pay tens of thousands of dollars a month for space on a billboard on Sunset Boulevard in West Hollywood or on Times Square in New York. The same sign in a rural area might command only a few hundred dollars to a couple of thousand dollars a month from an advertiser.
For a ground lessor, billboard operators are ideal tenants. A hole with a five-foot diameter occupies less than 20 square feet on the ground. An operator who receives $200 a month in ground rent receives $10 per square foot of rented space per month. That’s a better return than paid for most retail space. The lessor also has no capital investment in erecting the billboard and no expense to maintain it. Those are usually the billboard operator’s responsibility. This kind of return generally justifies the risks described later in this article.
For a billboard operator, the expenses of erecting and operating a sign do not change significantly with the location. Subject to difficulties of access and distance from the operator’s plant, it generally costs the same to change copy, illuminate, and provide electricity to a sign, regardless of location.
Specific regulations will vary with the jurisdiction, but billboards typically are heavily regulated. President Lyndon Johnson used his legislative skills to pass the Highway Beautification Act (HBA), reportedly at the urging of his wife, Lady Bird Johnson. She did not like billboards (perhaps because they competed with her television and radio stations for advertising dollars).
The Federal Highway Administration (FHWA, to distinguish from the FHA) administers the HBA. The HBA imposes nationwide restrictions on placement of billboards: The HBA prohibits construction of new signs other than those permitted by 23 U.S.C. § 131. It requires states to enact strict controls on the construction and maintenance of billboards. If an individual state fails to impose those restrictions, it will lose federal highway funds. Though the HBA allows individual states to enforce stricter regulations, if the FHWA concludes a state is being too lax, it will threaten to withhold federal highway funds.
The FHWA enters into agreements with the individual states. California’s agreement with FHWA allows signs to be erected only within 1,000 feet from the nearest edge of an active commercial or industrial building or activity. On interstate highways and primary freeways, static signs on the same side of the road must be at least 500 sq. ft. apart. On non-freeway primary highways, signs on the same side of the road must be at least 100 sq. ft. apart in incorporated cities. Outside of incorporated cities, they must be at least 300 sq. ft. apart.
Spacing restrictions generally don’t limit back-to-back or V-shaped displays. They might limit multiple signs and murals painted on the same property.
Most zoning regulations distinguish between on-site and off-site signs. On-site signs offer goods and services that are available on the same property as the sign is located. Off-site signs offer goods and services that are not available on the same property as the sign is located.
The HBA and related state statutes and local ordinances generally apply stricter limits to off-site signs. These limits generally appear in a city’s zoning ordinance. Recently, the US Supreme Court upheld the distinction, which had been challenged on First Amendment grounds.
Zoning ordinances enforce the state and federal restrictions required by the HBA. Individual cities may require greater spacing or greater distance from schools, parks, and other government activities.
In addition to complying with zoning regulations, anyone building a new billboard must comply with local building codes. In California, for example, signs must be engineered to withstand earthquakes. In the southeast and the gulf coast, they must stand up to hurricanes.
Digital signs are not covered by the HBA or by any regulations issued thereunder. Digital signs had not been invented at the time the HBA was enacted. An FHWA memo addresses digital faces. Digital-billboard operators generally leave individual ads in place for eight seconds to avoid the distraction of moving copy. The operators also generally limit the brightness of digital signs to avoid blinding drivers and disturbing neighbors.
Though the HBA reach is national in scope, billboards are still real estate, and most real estate regulation is local. In Los Angeles County alone, there are about 115 incorporated cities. Here are typical sources of local regulation:
The enforcement and interpretation of these ordinances are often left to staff. One needs to have a good understanding of staff’s concerns. Staff are the necessary gatekeepers for elected officials.
Local elected officials have the ultimate authority to approve development agreements and ordinances that affect construction and placement of billboards. Even when their constituencies overlap, they may have different concerns.
For example, although a majority of local jurisdictions limit billboards, Las Vegas, Nevada, and Times Square in New York allow digital signs with animation and flashing lights. (Studies show there are no more accidents per vehicle mile at these locations than anywhere else. This is true of billboards in general.) West Hollywood, California, recently adopted a special ordinance for the Sunset Strip. Billboard owners were allowed to submit proposals for creative and artistic signs.
It may be easier than expected to achieve community support. A professor at Villanova University collected opinions from 26,000 people. About 75 percent of the people were okay with billboards in commercial and industrial areas. About the same percentage thought billboards were useful for travelers and helped businesses to attract customers and create jobs.
The authors’ own experience with much smaller samples, voir dire of potential jurors, reached similar results: About 25 percent of the people on jury panels liked billboards; about 50 percent thought billboards were okay in appropriate locations; and about 25 percent disliked billboards. A large percentage of those who disliked billboards worked directly for government agencies. The authors suspect that the potential loss of federal highway funding may explain that prejudice.
In recent years, local governments have become more receptive to billboards if they can receive a percentage of the gross revenue. Smaller cities with tight budgets are often very receptive to installation of a billboard if the city can participate in the revenue from the sign.
Sometimes people rely on overly literal readings of legislation and regulations in an effort to build and operate billboards. Here are a few efforts that have failed:
Occasionally, a billboard operator or property owner will simply build a sign without proper permits. When caught, the operator or owner faces a risk of forfeiting all profit earned by the illegally placed sign.
Landowners and billboard operators face many of the same risks that owners and tenants of other real estate face, but with a twist. Other risks generally come up mostly in a billboard context.
Billboards are generally built close to heavily traveled roads. The authors have been involved in several cases in which a state or county widened a freeway, turnpike, or other highway. The expansion required any signs that encroached on the new right-of-way to be removed. Although the foregoing is the most common situation requiring removal of a billboard, below are other examples that might require removal of a billboard:
California allows compensation for business goodwill, so that is not an issue there. As noted above, billboards are solidly affixed to the land. Many of them last longer than some buildings. Leaseholds are an interest in real estate.
If a condemning agency sues to take the property, a taking has occurred. If the condemning agency purchases property under threat of condemnation, a taking has occurred. If an agency purchases property in an arm’s-length transaction, a taking did not occur.
Some landowners will want the right to terminate the lease if the landowner sells the property. That makes sense if the billboard will be incompatible with redevelopment. Government agencies might use that tactic to avoid paying compensation. To reduce the risk of that result, the lease drafter should include a provision that excludes sale to an entity with the power of eminent domain from any right to terminate the lease upon sale of the property.
If a city conditions the issuance of a building permit upon removal of a sign, that is arguably a taking. Although condemning agencies argue that it is the property owner who removed the sign, that’s disingenuous. In California, a statute exists that expressly defines this situation as a taking.
It is advisable to take notice of a state’s procedural requirements. For example, California requires affected parties to appeal from a taking by condition of approval. The parties must give the permit-issuing entity the opportunity to consider the cost of the condition. If the appeal is unsuccessful, the billboard operator must seek relief through administrative mandamus (which may be combined with inverse condemnation).
The HBA requires just compensation when a condemning agency requires removal of a lawfully erected sign by regulation, ordinance, or imposed condition of land use. 23 U.S.C. § 131(g)).
Certain states argue that the property must be valued as a single interest. These states argue that the owner and the tenant must work out the division of the condemnation award between them. This typically leads to disputes between the owner and the tenant and may become a sticking point when negotiating a lease. Property with billboards should be valued differently than those without.
The HBA entitles the owner of the display to compensation for all rights, title, leasehold, and interests in the display. The owner of the property on which the sign is located must be compensated for the owner’s rights and interests to keep the sign on the property. When viewed this way, there is no conflict between property owner and billboard owner.
A billboard is a separate property interest. It produces revenue above what the property alone can produce. The property should be valued based on the revenue it produces, including rent paid by the billboard owner. The billboard owner should be paid for the value of the billboard, based on the income stream it produces.
Condemning agencies argue that paying the replacement cost is sufficient. Most urban areas in California ban construction of new billboards. The billboard cannot be replaced near its current location. Building a replacement sign in the same area is seldom possible. As one judge observed during an eminent domain trial, a sign on a freeway in Los Angeles will earn more revenue than a sign in the Mojave Desert.
In one eminent domain trial, the state’s appraiser argued that the sign should be valued by a formula using hypothetical numbers for factors such as rate of growth, cost of capital, and expected interest rates. The problem with this approach: The assumptions and predictions of the relevant factors must be accurate. In that case, when we plugged the actual rate of growth into the appraiser’s formula, the valuation went from one-third of the appraiser’s value to about 95 percent.
Billboard companies rarely sell individual signs. Sales that do occur are unlikely to be in the same immediate area as a sign that is subject to eminent domain. That makes it difficult to determine comparable sales. The best way to value a billboard is by capitalizing its income stream. When sales data are available, valuing signs as a multiple of revenue or net operating income will also work.
Some billboards are placed using short-term leases. Many billboards located on railroad rights-of-way are described as licenses and terminable on 30 days’ notice or less. Condemning agencies will argue that the billboard owner has “only an expectancy” and not an interest in real estate. This confuses liability (the taking) with damages (just compensation). (Mark Ulmer, a billboard attorney in Florida, developed this analogy.) In a 1973 case, United States v. Almota, 409 U.S. 470 (1973), a lessee owned a grain silo with an indefinite useful life. His lease had five years remaining. The government wanted to value the silo based on the remaining term of the lease. The Supreme Court held that given the reasonable probability of continued renewal, the lessee was entitled to value the silo based on its useful life.
Like the grain silo, billboards have a useful life that is generally much longer than the lease term. Billboard operators usually have a reasonable expectation that the lease will be renewed for the entire useful life of the sign. Once there is a taking, the billboard owner is entitled to compensation. The duration of the lease and the expectation of renewal determine just compensation.
When there is a taking, there is often a chance to negotiate with the condemning agency for the right to relocate the sign elsewhere on the same property or nearby. That will save the agency money and permit the operator to continue to sell advertising in that market.
In jurisdictions where it is illegal to construct new billboards, existing signs are “grandfathered” in as legal nonconforming signs. (This applies only to signs that were legally built.) FHWA regulations allow “customary maintenance.” 23 C.F.R. § 750.707(d).
Sometimes “customary maintenance” is clear. On static signs, billboard operators may change copy without losing their legal, nonconforming status. Repairing broken pieces of the superstructure is permitted. On digital signs, replacing burned-out LED bulbs is typically permitted. The issue arises when there is greater damage to the sign. If a legal nonconforming sign is destroyed, it typically cannot be replaced. Some bright-line measures are based on a percentage of either the value of the sign or the cost of construction. Others are qualitative rather than quantitative.
Unless contractual, there is generally no view easement for a billboard. Absent a view easement, there is nothing a billboard operator can do about a blocked sign or rerouted traffic.
If an agency builds a sound wall, bridge, or other impediment, the jurisdiction might have a statute that will allow the billboard operator to raise the height of a sign enough to be seen. Some states will issue permits that allow a billboard operator to trim foliage that blocks the view of the sign. Most billboard operators will insist on a right to end the lease or reduce the rent if the view of the sign from the street becomes blocked. It’s reasonable for an operator to insist on such a provision. A billboard’s value stems from its visibility.
A common billboard lease provision bars a property owner from permitting any construction or plantings from blocking the view of the billboard from the street. The restriction applies to any adjacent property the lessor owns.
The vast majority of billboard operators comply with regulations, state laws, and local ordinances. There are a few that do not. These operators build signs without permits and without leases. They may trim, remove, or kill trees on another’s property.
That’s a risky way to run a business. There are cases in which courts have ordered billboard companies to disgorge revenue received from illegal signs. Courts have awarded substantial damages, including punitive damages, against billboard operators that have trimmed trees without the owner’s consent.
Rogue operators are also risky for the landowner. Some ordinances make the landowner responsible for code violations by a tenant. This may result in fines or loss of nonconforming status, which will result in removal of the billboard. At best, the property owner could incur attorney fees to deal with problems created by a rogue operator.
As mentioned above, billboards are generally erected as close to a property line as possible. That permits maximum use of the property. It also means there are likely to be other tenants on the property. The leases between the property owner and billboard operator must be coordinated with leases between the property owner and its other tenants. The property owner is in the best position to avoid any conflicts between uses of the property by billboard operators and other tenants.
Entering into a billboard lease can be daunting, and property owners should familiarize themselves with billboard law and retain experienced counsel. The outdoor advertising company (OAC) leasing the billboard has the advantage of fully understanding the practical details and potential pitfalls in outdoor advertising.
A thorough site inspection and title search is the OAC’s first necessary due diligence. The OAC has to know who owns the land or building and whether there are any easements or mortgage restrictions that could prevent the installation of the sign. Although the property owner will agree to ensure that there will be nothing obstructing the billboard, the OAC must investigate the likelihood of such obstructions developing.
Another significant aspect of due diligence for the OAC is to navigate the complex bureaucracy governing outdoor advertising to ensure the viability of the planned location. The state and local regulations can be extremely complicated. Most states regulate the erection of billboards within a certain distance of a park or arterial highway. Permit applicants also must comply with federal regulations such as the Highway Beautification Act (and its numerous amendments and modifications). The more populous and urban the city of the billboard’s location, the more complex the laws.
The OAC almost always handles obtaining the permits. Regardless, the billboard lease must be clear on each party’s responsibilities to avoid getting bogged down in permit limbo. Both the property owner and the OAC have an incentive to expedite the permitting process, as the rent generally commences when the permits are approved. The property owner should specify the deadline by which the OAC must obtain the permits. The parties should consider that location’s required laws and regulations when negotiating that deadline.
The details in the billboard lease need to be precise. The lease should spell out the exact location, size, and design of the billboard; the direction the billboard faces; and the number of poles supporting it. It should also dictate and sanction the access route, and whether it is an easement or license. The lease should include a diagram of the completed billboard. The OAC has a personal stake in the construction design because it must remove the sign and restore the land or property at the lease expiration.
The OAC should also try to prevent the property owner from negotiating a right to relocate the sign or easements in case of new construction or redevelopment on the land.
The lease should also limit the mode of advertising. The OAC’s right to use alternative technology, such as an outdoor LED or passive repeater, should be contingent on the property owner’s consent and the rent should be revisited in such case. The cost of lights and electricity can be significant. Many billboards have sub-meters to measure their usage. The maintenance, insurance, and a portion of real property taxes are the responsibility of the OAC.
As in any lease, the rent can be a fixed rent or a percentage rent above a defined breakpoint or other methods. How the property owner is compensated can vary. In quieter areas, a fixed annual rate is standard, considering escalations based on the Consumer Price Index. In a large urban area, a percentage of revenue is usually more desirable to the property owner. The goal of the OAC is to generally keep percentage rent below 25 percent of potential ad revenue. High-traffic locations may result in the parties agreeing to higher amounts.
Assigning or subletting should require approval by the property owner. Assigning the billboard to a less-established OAC will decrease the quality of the advertisements and negatively affect the percentage of rent.
The lease must have provisions regarding the control of content on the billboard. The lease should also restrict the billboard’s content for two main reasons. First, property owners must control the content so that the billboard does not carry offensive or controversial advertisements such as adult entertainment or religious or political opinions that can severely damage the property’s primary use of the land. Second, property owners do not want the billboard to compete with existing commercial tenants, if applicable. For example, if the property owner rents to nearby businesses, the owner will not permit competing businesses to advertise on the billboard. Ultimately, there is no one-size-fits-all language that sufficiently addresses all of these issues. The parties must consider the current and potential concerns unique to that location.
A well-thought-out billboard lease should cover all acts of God and force majeure events. The property owner should maintain control over what would result in the termination of the billboard lease. If the property owner is concerned that the billboard may negatively affect its resale price, then it can include a provision that gives the property owner the right to terminate the lease on the sale of the land or building. Alternatives that the OAC would likely agree to are giving the OAC the right of first refusal on the property or the property owner giving the OAC a large buy-out payment. Failure of the parties to effectively negotiate termination issues may result in the billboard lease running with the title to the property.
As in any commercial lease, a billboard lease must include default provisions, subrogation language, personal guaranties, and many other applicable clauses. The goal of this article is to address some primary concerns related to billboard leases.
