The Economic Worth of On-Premise Signs, Part II

Appraising techniques can isolate the cause-and-effect value of on-premise signs to merchants

This article originally appeared in the October 1998 issue of Signs of the Times magazine.

By Dr. R. James Claus and Richard M. Bass

Last month, the authors discussed the First Amendment protect ion that signs (as commercial speech) enjoy. In addition, they compared signs to other forms of advertising with regard to advertising standards: cost per impression, reach, frequency, market share, etc. In this second and final installment, the authors will outline other valuation and evaluation methodologies.

Dr. Walter Hardwick a professor at the University of British Columbia, contributed to this and last month’s columns. He wrote a separate column in June (see “Everyone Wins with Third-Party Out-of-Home Advertising,” ST June 1998, page 92).


Establishing real-estate worth
Every activity on a commercial site enhances or detracts from its success, and each component can be valued. As stated last month, determining such value falls into the hands of private real-estate and appraisal professionals and public tax assessors. The purpose of these valuations and appraisals is to place a value on a real-estate interest for a specified date. Consequently, a valuation’s shelf life is limited, because variables and comparative local uses change.

In contrast, an evaluation study may or may not assign a value, although it uses many of the techniques of a valuation study. Evaluation studies include:

Marketing studies: At its most basic, a marketing study determines the total dollar volume of an existing market.

Benefit/cost analysis: Juxtaposes all costs with expected gains.

Absorption rate study: Determines the time period necessary for a market to absorb all items available or potentially available.

Feasibility study: Outlines consumer preferences and whether or not a market exists.

Risk management study: Evaluates probability of an event’s occurrence, given management control variables; assesses value of changing one variable.

Highest and best use: Determines best use of a real-estate parcel, similar to a minimal feasibility study.

Origin/destination study: Plots driving patterns within a finite space and time period for various categories: to/from work, to/from shops, transient/non-local visitor, etc. Includes adjustments for daily commutes and seasonal traffic.

Simulation models: An attempt to create a set of variables that will predict performance.

Valuation outline
For any appraisal/valuation, specific steps are mandatory as part of the research procedure.

Defining parameters. Valuation is site and time specific in determining a “market” price. The property, property rights, value to be analyzed and purpose of the appraisal must be identified.

When appraising on-premise signs, the value of the physical sign is irrelevant, because, once in place, the sign itself is not bought and sold. (In contrast, billboard structures are.) Its real value is its visibility, also known as its “communication component.” This value must consider local sign codes that could regulate every aspect of a sign’s visibility.

Although billboards are a primary land use, and on-premise signs are accessory uses, we borrow the outdoor-advertising industry’s straightforward valuation techniques: reach, frequency and cost per thousand exposures. Highway travelers react similarly to billboards and high-rise, on-premise signs, and customer profiles and capitalization rates can be equally relevant.

Preliminary analysis and data. The data must reflect social, economic, legislative and environmental forces that affect property values. This could include population demographics, occupancy rates, and new business and housing. Mandatory information includes specific data on the property itself and potential comparable-property information.

Evaluating a site’s visibility component must include a complete understanding of the general public’s need for the communication, as well as the individual site’s need to communicate. For example, zoning that permits impulse and point-of-distribution retail activities clearly should permit signage readable from the street.

Conversely, an exclusive upscale store or a destination store (i.e., WalMart, Home Depot) may have a lesser need for highly communicative signage.

Highest and best use. Before actual value can be assessed, one must first determine the most profitable use of a property, both as it currently exists, and as if it were vacant and ready to develop. This process involves a four-part analysis. The use must be:

  1. Physically possible
  2. Legally permissible
  3. Financially feasible
  4. Maximally productive

In a signage appraisal, a highest and best-use analysis must demonstrate that sufficient signage exists, or can exist, to allow the subject business to operate normally, compared to similarly zoned and regulated sites. The appraiser must determine that the existing or proposed sign can or will be seen as intended, and that the copy communicates as intended. Then these four criteria can be applied.

The “maximally productive” variable generally involves questions of sign size and conspicuity — essentially, the sign’s ability to stand out from its background. The first three criteria may be satisfied, but if the visual communication device – the sign — can’t be detected and read by its intended audience, the site cannot possibly attain its maximum use.

Three valuation approaches. Barring mitigating circumstances, appraisal involves three generally accepted methods:

  1. Use of comparable closed sales or executed leases, i.e., determining what the market will bear for similar property.
  2. Use of the income approach, i.e., anticipating the amount of revenue that a real-estate site could conceivably generate.
  3. Use of the cost approach, i.e. estimating the cost of replacing an existing real-estate interest, including accrued depreciation and add-back for land value.

For market-comparison, an appraiser will inspect sites with varying street-exposure potentials, obtain square-foot rental figures and make comparisons. For illustration purposes, we’ll consider three separate retailers in one shopping center, with most non-signage factors equal. The accompanying square-foot/month rental figures are from Portland, OR.

  1. Freestanding stores, $1.20 to $1.50
  2. In-line buildings (with street frontage), $.90 to $1.00
  3. Hidden stores (no street frontage), $.50 to $.70

Clearly, the visual-communication component is critical.

The income approach to valuing on-premise signs relies on consumer surveys. When the results are applied to total sales volume, a capitalization rate arises. “Cap rates” are relatively complex when used by appraisers, but a rudimentary knowledge is advisable for anyone interested in valuing on-premise signs.

Simply, a cap rate works much like interest on a bank deposit. If you want to earn $10,000 in interest in a year, and the bank offers a 10-percent “cap rate,” you’d need to deposit $100,000. If the interest is only 5 percent, you’d need to deposit $200,000 for the same return.

To illustrate the cap-rate technique, a 1,000-square-foot retail building with superior street visibility (Store A) rents for $1.50 per square foot/month. Store B has no street visibility and rents for $.50 per square foot/month. Store A nets $1,500 monthly (triple net rent after tax, maintenance and upkeep expenses), while Store B nets $500. Store B, lacking visibility, is worth $1,000 less per month ($12,000 annually) than Store A. Using a cap rate of 10 percent, Store A’s visibility component is valued at $120,000.

When using the income approach, the appraiser must be careful to correctly categorize the store, because the income attributable to on-premise signage will vary by business category. The appraiser must also ascertain if a store’s success depends on local or transient customers.

The two general retail categories are impulse retailing and destination-oriented retailing. The impulse “point-of-distribution” (often freeway oriented) retailer relies more on signage than local merchants with whom customers have regular contact. The signage of destination retailers like Toys R Us differs from that of the local and point-of-distribution merchant because the consumer is “bound for” that location anyway.

However, destination cities like Las Vegas and Santa Fe/Taos must strive to meet the signage needs and expectations of both local residents and the thousands of annual visitors. Such cities generally succeed by emphasizing “theme” design.

Appraisals cannot be completed without knowing what percentage of those who view the sign actually stop. Chain stores often compile comprehensive marketing data that tracks revenue directly attributable to signage. Even independent retailers often have some idea of which customers have been attracted by the signage.

For a true mom ‘n’ pop operation, an appraiser may need to commission a separate market study, although related trade associations might be able to provide or verify information. Regardless, appraising demands reliable information that documents the interaction and interdependence of signage, customer behavior and revenues.

Cost of replacement. This does not involve the cost of replacing the sign; rather, it details what it would cost to replace the sign’s communicative abilities via other media. What would it cost to achieve the same level of exposure? Such consideration is mandatory.

In most cases, an advertising agency or consultant should be used to validate any cost-per-thousand comparisons. Input from a transportation engineer may also be necessary for verifying traffic counts.

Sometimes, place-based communication systems cannot be replaced, either directly or by substitution. On most major freeways, ingress/egress is restricted. If the adjacent retailer cannot communicate to the motorist from a distance, the business opportunity may be lost forever. For point-of-distribution retailers and most small, independent merchants, lack of highway or street visibility destroys not only the business, but the business district, as zoned.

The principle of substitution and the loss of place-based communication was addressed in a Wisconsin state court decision, Beaver Dam Raceway Inc. v. Town of Beaver Dam, 1981. A raceway owner voluntarily removed his high-rise on-premise sign to make way for a public improvement. During the takedown, the raceway was sold. The city then refused to issue the new owner a permit to reconstruct the sign.

The Court ordered the city to pay the new owner the difference between the property’s value as residential property versus its greater commercial value. Expert valuation of the lost freeway exposures was key to determining damages.

Final value estimates. All three valuation approaches generate value indications using different market data.

After each approach is completed and analyzed, the appraiser applies it to the defined market. The appraiser invokes tests of reasonableness to the data and mixes in personal expertise and experience to reconcile a final and verifiable value estimate.

For billboards, the sales-comparison approach is most common. Valuing on-premise signs is often more complicated, due to the variety of businesses that may occupy a given parcel of land. A national franchise may be next to a mom ‘n’ pop.

Other techniques
Matched-pair analyses are popular for determining what the market will bear for real estate. Variables need to be minimized as much as possible. For example, an appraiser may look at two homes, similar in every way except location, that sell for $100,000 and $105,000. If the former is located on a busy collector street, and the latter rests on a quiet residential side street, an appraiser might report that location is worth $5,000.

Matched-pair analyses also can be used to quantify the effects of changing one variable. For on premise-sign considerations, the trick is ensuring the two locations are similar. Only with extreme caution can a shopping mall and a shopping center be compared.

A shopping mall often charges an anchor tenant less rent per square foot than an accessory tenant, depending on the anchor tenant’s ability to attract consumers. A typical shopping center may not have either of these advantages or disadvantages.

Again, other expertise should be sought. Local real estate and leasing agents should have appropriate marketing information.

Matched-pair studies are especially useful in signage cases to refute naive arguments that sign size is irrelevant. Most matched-pair studies show that an increase in sign size, accompanied by compatible lighting, can raise sales volume by 15% or more.

The Omni technique. This method fuses market comparison, income capitalization and matched-pair analyses into a single technique. It allows the appraiser to identify the “extra” income a sign generates, and answers, “What is the economic benefit of the on-premise sign?”

For example, Business A is a well-established independent retail operation with no signage or other direct means of communicating its location at a particular shopping center. It’s making a profit after eight years at the same location. A major tenant moves out, and on-premise signage becomes available. Business A then installs a sign.

One year later, the analysis indicates a 17% increase in sales volume. Can this be attributed solely to the signage? Yes. However, the appraiser must document and isolate the source of the added revenue through the following indicators.

  1. Market area. The appraiser must determine the geographic area from which the retailer draws the majority of its income. This requires examination of non-sign-based marketing programs, mailing lists, credit-card transactions and any other customer-based indexers.
  2. Income and expense analysis. This requires determining a breakeven point for the business, as well as trend lines for projected income and expenses. This information can be generated from 2-5 years of the following business data: gross-sales history, cost of goods analysis, and overhead costs (rent, utilities, insurance and labor).
  3. Demographics. Note any measurable changes in community demographics caused by any new big employers or business closures and/or significant layoffs.
  4. Retail purchasing power. Noticeable changes in consumer spending can result from recession and economic instability. Those that could affect general spending patterns should be noted.
  5. Transportation. Have there been any construction projects that have re-routed customers toward or away from the business district? Are there any new roads? Has access to public transportation changed dramatically?
  6. Competition. Has new or expanded competition infiltrated the area? This can be detected by new or expanded ad campaigns in print, electronically or on billboards. Have any competing businesses closed or moved away, creating more available market share?
  7. Point-source surveys. This seeks to determine the percentage of revenue generated by customers who stopped because of the sign. The essential data is obtained by in-store surveys of the merchant’s customers. (For an excellent case history, see “A Grassroots Approach to the Value of Signs, “ST, June 1998, page 240.) Questions for the first-time customer can include: “How did you learn about this establishment?” or “How did you locate us?”

All of the above techniques strive to isolate the contributory value of the on-premise sign. The data must first be quantified by estimating a one-year increase in true net income. This income must then be projected over the business’ typical life and capitalized into a present value indication.

The Omni technique can be applied to signage valuations for a single business type, such as a franchise. One franchise unit may have signage, and another may not. In these cases, the appraiser considers national marketing programs, logo signage and brand-name recognition factors, in addition to indicators already mentioned.

The Omni technique also can be applied to matters of private deed restriction, lease disputes or other civil-litigation issues that involve loss of signage. Finally, the technique is also specially suited to government takings via condemnations, sign-code restrictions or anything else that reduces size, readability and the ability to communicate.


Photo credit: Cathy from USA

Wade Swormstedt

Wade Swormstedt

Wade is Executive Director of the Foundation for the Advancement of the Sign Industry. Formerly he was Editor and Publisher of Signs of the Times magazine.

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