Are Digital Billboards a Good Investment?

I am making lots of loans for digital billboards.  Digital billboards make sense in markets where there are no new sign permits (you can have up to 8 advertisers on face sign) and in urban markets where high rents are possible.  A regular 14 by 48 billboard, however, will offer a better return on your capital due to the lower upfront costs.

Here is the return on capital for a simple two sided 14 by 48 billboard:

• Construction cost is $40,000.
• Useful life of the board is 20 years.  This is a very conservative assumption.  I've heard of 30-40 year lives of some steel monopoles.
• Revenues are $2,500/month consisting of $1,250/month for each side.
• Expenses include sales commission ($500/month or 20% of revenue), land rent ($500/month or 20% of revenue), electricity ($100/mont) and insurance ($45/month). 

This results in a cashflow of $1,355/month or $16,260/year on an investment of $40,000.  The IRR is 40%/year over the 20 year life of the steel sign.

Here is the return on capital for a digital billboard:

• Construction cost of $270,000 for a one sided digital billboard.
• Useful life of the board is 7 years.  I have heard of some estimates that the useful life of signs is closer to 5 years.  The sign may last longer than that but you will be pressured to replace it within 7 years in order to stay up with the latest technology.  I've seen digital signs which are older than 10 years and they look tawdry compared to new signs.
• Revenues are $8,750/month assuming the sale of 7 of the 8 possible flips at $1,250/month.  I've assumed that one flip is always vacant.
• Expenses include sales commissions ($1,750/month or 20% of revenue), land rent ($1,750/month or 20% of revenue), insurance ($45/month), electricity ($200/month) and internet connection ($45/month).

This results in cashflow of $4,960/month or $59,520/year.  The IRR is only 13%/per year over the 7 year life of the sign due to the high upfront capital cost.  The IRR drops to 4%/per annum if the sign has only a 5 year useful life.  To generate a 40%/year IRR you need to generate at least $20,000/month from the digital sign.

Conclusion:  Use digital only at your best locations where high rents are possible.  A digital sign won't make a bad location good and will probably make a fair location bad when you look at the return on capital.