You need to keep your billboard lease increases to less than 2%/year. Here’s an actual lease Insider has reviewed. Payments are as follows:
2014-2017 $2,000 per year.
2017-2020 $2,500 per year.
2020-2023 $3,000 per year.
2023-2026 $3,500 per year.
2026-2029 $4,000 per year.
A $500 increase every three years probably didn’t seem like much when the lease was originated. But the cost of this lease will grow 4.75%/year over the leases 15 year life. Since inception the lease cost has increased at more than three times the rate of inflation the rate and almost 6 times faster than US out of home revenues when you factor in this years slump in revenue. That’s bad for margins.
Here’s the data on inflation and US out of home revenues since 2000. Inflation and US out of home revenues growth have averaged approximately 2%/year since 2000.
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Am I reading this correctly? You said the lease had increases that were 3 times the rate of inflation. And that was “bad for margins.” I think that’s good for margins. I’ve never seen an industry that charges what the highway will bear (pun intended) like billboards. Some operators fail to increase 2-3% per year. They should be increasing 2-3% per year rather than staying below 2% per year. And if they started at a below market rate, they need to be doing some catching up in the next few years.
The billboard ground lease costs paid to the landlord have gone up three times faster than the rate of inflation. Not the ad contract.