Billboard income

[Ken B]

Subject is a retail strip center fronting a heavily-travelled commercial corridor. A billboard is located at the front of the site. The tenant has leased the right to construct the billboard on the site. Per the lease, the tenant is responsible for all expenses associated with the billboard during the lease and is responsible for the cost to remove the billboard at the end of the lease (assuming the lease is not renewed). The lease has a 20-year term with 15 years remaining. The landlord receives a pure NNN rent from lease.

There is little to no risk associated with this cash flow. The lease does not provide for renewal options. The landlord does not own the billboard. Any sale of the subject property would be subject to the encumberance created by the billboard lease. The lease provides for rent escalations every five years.

I'm thinking the cash flow from the billboard lease should be valued using a DCF and a discount rate approximating a safe rate. The value of this cash flow should be added to the value of the strip center as estimated using a direct cap approach to provide an indication of the subject's overall value.

What think you?

 

[Joyce Potts]

Contact Ron Nation of JVI in the Orlando/Lake Mary area. That's all he used to do was Billboards.

 

[Ken B]

Thanks Joyce. No response, however.

FWIW, I put the income from the billboard in the direct cap approach as other income and cap'ed it at the rate used for the strip center. I also did a cap approach just on the strip center and added the NPV of the billboard cash flow discounted at a safe rate. The difference between the two overall values was 2%. The results of both methods bracketed the SCA value indication.

Works for me.

 

[Lost Cause]

Works for me, too.

 

[Terrel L. Shields]

http://www.dornc.com/publications/billboard/billboard_valuation.pdf

http://www.irwaonline.org/eweb/upload/0505b.pdf

http://www.appraisalinstitute.org/store/p-97-the-valuation-of-billboards.aspx

Do what your peers do.

 

[Pittsburgh Pete]

http://www.dornc.com/publications/billboard/billboard_valuation.pdf

http://www.irwaonline.org/eweb/upload/0505b.pdf

http://www.appraisalinstitute.org/store/p-97-the-valuation-of-billboards.aspx

Do what your peers do.

Ken B is peerless! Sounds like he's got it under control nonetheless.

 

[Ken B]

Thanks Terrell, good info.

I suppose my problem was not as complex as the typical "billboard valuation" problem in that the billboard itself was not being valued. It was the cash flow from the lease which permitted the tenant to construct a billboard that was being valued.

The problem was simply one of valuing an "other income" cash flow. Initially, the "other income" was simply added to EGI and capped in the income cap approach. A reviewer questioned the method and asserted it would have been better to discount the CF to an NPV to be added to the capped NOI of the rents from the building tenants.

As previously noted, both methods resulted in similar valuations, with the separate valuation method resulting in a slightly higher overall value indication. Had the lease had a remaining term of less than 5 years, rather than the 15 years actually remaining, the reviewer would have had more of a point about capping a relatively short-lived income stream into perpetuity.

FTR, I bounced the question of valuing the CF from the "billboard" lease off a couple of MAIs in the office as well as a CCIM specializing in retail properties and familiar with this sort of problem. The CCIM thought the DCF approach was "on the right track" and the MAIs thought there was nothing wrong with the direct cap method (given the long-term nature of the remaining term of the lease), conceding the reviewer had "something of a point."

Lesson learned.

 

[Terrel L. Shields]

assuming a 15 year DCF and zero reversion at the end would, imho, result in the most reasonable value. Determining what rate to apply would hinge upon how you would rate the "risk" in an income stream that terminates with no reversion whereas the reversionary value of the strip mall might be substantial. So if I were applying a 9% rate to the retail stores, perhaps i might consider if I should apply a different rate for the billboard.... the trade off is that the mall requires more management and has more expenses whereas the billboard has few expenses but no reversionary value possibly...in short, I really think it would rely solely upon the judgment of the appraiser...

 

[PropertyEconomics]

One may could argue for small management fees and a pro rata share of real estate taxes (are billboards insured??) ... but I agree with Terrel and Ken B ... the DCF method seems to be the most appropriate method to me as "added" value to the retail center overall.

Question ... can the billboard be sold separately from the retail center??

 

[Ken B]

Pure NNN cash flow from the lease for the tenant's right to construct a billboard. Tenant is responsible for all costs associated with the billboard, from construction to removal. Landlord does nothing except deposit the check. Tenant is credit-rated with very deep pockets and is one of maybe three national companies involved in these activites. CF is not quite as safe as a 10-year T-bill, but is close.