Sign-Valuation Arguments Thwart Amortization Against Michael’s

Richfield, MN, realized what it might have to pay in just compensation and let Michael’s keep its on-premise billboard

The following article originally appeared in the December 1998 issue of Signs of the Times magazine.

By John Yarger, Esq.

A Michaels crafts store in Richfield, MN, was recently the target of an amortization scheme. On top of the Richfield Michaels sits a billboard-style, single-face sign that functions as an on-premise sign. At best guess, the sign was erected in the 1950s by the building’s previous tenant, a local craft store that Michaels purchased in 1994. The sign has excellent exposure to the eastbound traffic of I-494, a large retail corridor leading to the Mall of America.

In 1987, the City of Richfield passed sign restrictions that prohibited billboards and certain types of on-premise signs, including roof signs; these restrictions included a 10-year amortization provision for existing roof signs. In 1997, faced with the removal deadline and possible lawsuits from billboard companies, the city passed an extension that allowed billboards to remain standing until the year 2000, and other non-conforming signs (including roof signs) to remain until January 1998. The extension also established a hearing process for further extensions.

At the December extension hearing, Dr. R. James Claus, a representative from Michaels and I provided extensive testimony regarding a sign’s value as an advertising device. The extension request was denied, and the sign was ordered to be removed by Jan. 5, 1998. On Dec. 31, 1997, Michaels filed suit to halt the removal of its roof sign.

Legal issues
In seeking to save the sign, Michaels’ attorneys raised a number of legal issues. These issues included both federal and state violations of equal protection, deprivation of property without due process of law, and denial of rights to due compensation under 23 U.S.C. S131 (Federal Highway Beautification Act) and the applicable state statute. The complaint also included a claim of unconstitutional restriction of Michaels’ federal rights to free speech. Because the sign was adjacent to the highway, the right to compensation under the Highway Beautification Act was the strongest argument.

Equal protection: The equal-protection claims were based on the 14th Amendment to the federal Constitution and a similar provision in the state constitution. Both constitutions essentially ensure that every individual is accorded equal protection under the law. Courts have interpreted this to mean that government officials must provide a legitimate reason when they seek to treat similarly situated individuals differently.

This issue arose from the discrepancy in treatment between billboards’ extension to the year 2000 and the Michaels on-premise, billboard-style sign, with an extension only until 1998. The City of Richfield provided no reasoning in its deliberations for the disparate treatment. However, even if the city had asserted reasons to treat the signs differently, the reasoning would have still been subject to an equal-protection challenge.

Deprivation of property: The deprivation-of-property claims were based on the 14th Amendment, as well as similar state constitutional provisions, and the fact that the city was requiring removal of the sign without just compensation.

The City argued that the sign, because of amortization, was diminishing in value annually. “Amortization” means that a piece of property depreciates in value over time, and eventually is used up or worthless. A vehicle is a good example of an object that amortizes over time. By applying this principle to Michaels’ sign case, the City claimed it did not have to pay just compensation because, theoretically, the sign had lost its value.

However, the appraisal provided expert testimony that a sign’s value does not depreciate like a vehicle’s value does. Rather, a sign’s value usually appreciates, much like the value of a building does. Why does a sign’s value usually appreciate? There are several reasons. First, because traffic and population generally increase over time. And second, because alternative forms of advertising become increasingly expensive over time, making signage an economical option.

Therefore, the forced removal of the sign, even with a number of years to “write off’ the sign’s expense, is a governmental taking of property with high value to its owner.

Rights to due compensation: If the city would have the right to require removal of the sign, then Michaels would be entitled to reimbursement from the city for the value of the sign, as required by both the federal and state constitutions.

Should the court have decided that the city had the right to require removal of the sign, then it would have been necessary to introduce evidence of the sign’s value that the court would find compelling. In this case, the appraisal was the testimony from an expert witness that provides the evidence for the sign value. The appraisal stated that the value of the sign is not the sum of its components, but the value that it provides to the business.

Free speech: Finally, we included a free-speech argument in the complaint. All sign restrictions must meet the test of being reasonable in time, place and manner. There are myriad ways this standard has been enforced, and we wished to reserve the right to more completely address the issue. Failing to raise it in the original complaint may have precluded such an assertion later in the suit.

Perhaps the most interesting aspect of the case was Claus’ estimate of the sign’s value. Three methods were employed to estimate the value of the sign to Michaels: the cost of replacing lost impressions, the income approach, and the real-estate market comparison value.

Method 1 — Cost of replacement: Exposure replacement is premised upon the idea that a sign is a tool (or asset) that provides impressions. The goal is to determine the cost necessary to achieve the same number of impressions through other media. Because the Michaels sign provided extensive exposure to eastbound I-494 traffic, the number of impressions was high, at roughly 3.7 million per month. Michaels estimated that it would cost $825,000 per year to replace those impressions using other forms of advertising.

Also, because the sign, if allowed to remain in place, would have provided these impressions for many more years, we wanted the city to provide $825,000 per year to pay for replacing the impressions. Rather than the city paying Michaels $825,000 each year, however, the city would pay $8.25 million once. Then, that money would be placed in an account earning a 10-percent return per year. (This method of renumeration is called “capitalization,” and holds true for the two other methods of valuation described below.) The account would supply Michaels enough money each year to purchase the impressions missed due to the removal of the sign. Using this valuation approach, one measure of the sign’s worth totaled $8.25 million.

Method 2 — Income approach: The profit-contribution method calculates the amount of business generated by a sign. Without the sign, the store would not attract as many customers and, therefore, those sales would be lost, and the profitability of the store reduced. To properly estimate the profit contribution of a sign, one must look closely at the location’s economic factors. The location’s fixed and variable costs, margins and break-even point must be considered along with a careful survey of the customers.

Claus has consistently found that 20-3% of a store’s volume can be attributed to its signage. The loss of 20-30% of a store’s volume is often disastrous. Generally, any substantial loss causes a retail location to fall below its break-even level. The Michaels location’s likely falloff in profit was estimated at $200,000 per year. Replacing the profit generated each year due to the loss of the sign would require $2 million in an account earning 10-percent interest. Therefore, another estimate of the sign’s value was $2 million.

Method 3 — Market comparison: Real-estate analysis rests on the idea that if the only difference between two sites is the exposure received, then the difference in lease rates can be attributed to the exposure. This method examines the price per square foot between the subject location and comparable locations without the same exposure. Due to the difficulty of obtaining sites to use as a comparison, this method can be quite difficult to successfully complete. The best calculations in Richfield yielded a difference of $56,100 per year for this site. To replace the value of the sign, Michaels would need an account holding $561,000 at a 10%yield.

Choice of method
Finally, it is necessary to choose one of the three numbers as most accurate. Because the case was settled, it was not necessary to finalize the appraisal and determine which would have been most appropriate. Once we provided legal arguments and estimated the value of the sign, the City of Richfield agreed to a settlement. The settlement allows the sign to continue functioning for Michaels through the term of its current lease.

A key reason we were successful was the early involvement of key experts. Claus supplied not only reliable estimates, but also effective guidance. Mark Wisser of Robins, Kaplan, Miller & Ciresi provided experienced and reliable legal assistance. Michaels provided the information necessary for us to carefully craft and submit our arguments. Such communication among the industry, its customers and its experts is fundamental to continued victories for the sign industry.

John Yarger is the president of North American Signs, South Bend, IN, and chairman of the Sign Research Foundation.

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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Posted in 1st Ammendment / Freedom of Speech, Amoritzation, Outdoor Advertising, Research, Sign Codes, Signs' Advertising Value, Supreme Court.