Yesterday Billboard Insider discussed the drawbacks of percentage leases.  Huntington Outdoor CEO Justin Powell tells Billboard Insider percentage leases make sense for several reasons:

I’m firmly in the percentage land lease camp. I think they’re the best structure for building a lasting relationship between a billboard operator and a landowner. Four main reasons:

1. They align our interests. If a tree grows into the visibility of the sign or a truck gets parked where it blocks the billboard, that hurts both of us financially. We both have a reason to get it fixed. The landowner has a direct interest in helping the location succeed.
2. It’s like a built-in, real-world CPI adjustment. As advertising revenue grows, the landowner’s rent grows with it. The increase reflects what that particular location is actually earning. The landowner participates in that growth without waiting for a lease renewal to ask for more.
3. You turn a fixed cost into a variable cost. You might pay more than you would on a fixed lease during good times. But when revenue falls, your rent falls with it and stays the same percentage of revenue. That protection is incredibly valuable during a recession.
4. It’s difficult to know what any individual billboard will ultimately earn. Some locations surprise you, and others disappoint. Just like buying a basket of stocks because you don’t know how each individual one will perform, I think it makes sense to use percentage leases across your portfolio. You’ll pay more on the winners and less on the underperformers, but each location’s rent stays tied to what it actually earns. You don’t have to get every prediction right.

COVID showed how much this matters. In the second quarter of 2020, OUTFRONT’s billboard property lease expense equaled roughly 50% of its billboard revenue. Revenue fell much faster than lease costs. A true percentage lease helps protect against that squeeze.

The accounting is also much easier than it used to be. Most billboard enterprise software (like Apparatix) can calculate percentage rent automatically. If you aren’t using one of those systems, it’s pretty easy to do the calculation now with AI.

The percentage still has to make financial sense, and a minimum changes the equation. But I’m happy to write a bigger rent check when it means we’re both making more money.