Establishing the Worth of an On-Premise Sign

How to apply the market-comparison and cost-of-replacement valuation methods to an on-premise sign

This article originally appeared in the October 1999 issue of Signs of the Times magazine.

By Dr. R. James Claus and Thomas A. Claus

In last month’s column, we examined a car wash’s new, $15,000 pole sign and began assessing its economic impact on the business.

We described how, during the new sign’s first year in service, the business’s gross revenue increased $135,000. And we concluded our article by applying to the sign a valuation techniques specified under the Federal Uniform Standards of Professional Appraisal Practice Guidelines, specifically, the “income approach” to valuation. As you recall, using this approach, we calculated the car-wash sign’s value as $339,724.

In this month’s article, we apply two other valuation methods to the same car-wash sign: the market-comparison valuation method and cost-of-replacement/substitution valuation method. We’ll also compare our new calculations to last month’s approximate $340,000 figure.

Market-comparison method
What will the market bear for a similar property? That question is addressed by the market-comparison valuation method. Using this approach, an appraiser inspects sites with varying street-exposure potentials, obtains square-foot rental figures, and makes comparisons.

The value of a site’s “visibility” is reflected in the fair-market value of its real property or the rental/lease rates it commands. Of course, location, parking and accessibility are dominant appraisal factors, but visibility considerations can also be extracted from other valuation indicators.

The basic formula under the market-comparison approach is stated as:

Annual sq. ft. rentals based on street exposure Present value of street exposure
——————————————- =
“Cap rate” Life of business

Looking to our case study, we learn the lease rate for the car wash’s 5,000-sq-ft. facility is $2/sq. ft., plus a $2,000 per month “visibility” premium. The lease rate in the area for medium- to low-visibility sites runs $1.60 sq. ft. Applying the above formula — and assuming a cap rate of 9% and a 25-year life for the business — we can establish the value of the visibility component of our subject site:

Although the car wash is located on a busy arterial, the facility is set far enough away from the road that, without its sign, much of the site’s premium visibility would be lost. In other words, the sign serves as the visibility component of this site.

If an on-premise sign couldn’t be placed visible to the street, the landlord could no longer command premium rental rates. Further, the landlord would need at least $236,000 in the bank, earning 9% interest over a period of 25 years, to recoup rents lost because of diminished site visibility.

Conversely, the lessee would require the same amount of money and same interest rate, deposited over the same period of time, to recoup sales lost due to lack of optimally visible street signage.

Cost-of-replacement method
The cost-of-replacement/substitution valuation method estimates the cost of replacing an existing property interest with another of equal value. In signage-appraisal terms, this method hinges not on the cost to replace the sign itself, but on the cost to replace the sign’s communication abilities via other media.

Calculating comparable costs per 1,000 exposures for signage and other advertising media (such as television, radio, newsprint, Yellow Pages and direct mail) primarily relies on “frequency measures.” Frequency data addresses how many times a viewer/reader/listener is exposed to the advertiser’s message.

A newspaper advertiser, for example, can accurately determine how many people will be exposed to an ad based on the number of newspapers sold. It is more difficult to determine exposure frequency for on-premise signage because many drivers are “just passing through” and may see the sign only once. In contrast, other drivers living or working close to the business are exposed to the sign many times a month.

Plus, the sign’s message may pertain to some drivers and not to others. (Note: Although traffic counts provide accurate information on the number of vehicles that daily pass a sign, this number must be adjusted, using tested formulae, to account for infrequent passers-by or viewers who may see the sign but who are not potential customers.)

Replacement-cost analysis for signage is a fairly complicated evaluation. However, a reasonable estimate can be made based on the sign’s original costs (design, fabrication and installation), plus maintenance and depreciation. Returning to our car-wash sign, the formulae are as follows:

Original cost: $25,000 (two faces)
Amortization/depreciation period: 7 years
Cost/month $298
Estimated traffic count after adjustment: 60,000 cars/day
Formula: Monthly cost/Monthly exposures
Calculation: $298/1.8 million exposures/month
Cost/1,000 exposures: $.00016

The cost to replace the double-faced, car-wash sign with a double-faced billboard can be estimated by examining outdoor-advertising rates in the business’s neighborhood.

Leasing a “poster” billboard in the vicinity of the car wash costs $500/face per month; leasing a “painted bulletin” costs $2,500/face per month. Therefore, using the above formulae, the cost per 1,000 exposures for a “poster” near the car wash is $.00055, which is 5.5 times higher than the cost of the on-premise sign. And the cost per 1,000 for a “painted bulletin” near the car wash is $.0028 – 28 times higher than the cost of the on-premise sign.

If the car wash suddenly lost its on-premise sign and had to lease the billboard across the street, how much would it cost to replace the original sign’s communication power? Assuming a 25-year remaining life for the business, the car-wash owner would need $595,000 in the bank at 9% to fund the billboard’s $60,000 annual lease rates. Moreover, this added cost would eventually erode profits to the point of business failure. (Note: If the owner went to a poster, the amount needed to fund annual lease rates would be $120,000 at 9% – but the exposure would be less effective than a painted bulletin.) The cost per 1,000 exposures for other possible substitution media is even less palatable.

The charts are based upon exposures over a four-week period (or approximately 30 days). Although a billboard provides 20 million gross impressions/exposures in a 30-day period, the medium’s cost per 1,000 exposures is considerably less than the cost of other major media. For example, radio, which provides only 5 million exposures, costs 20 times more than outdoor advertising. And television, which provides 2.5 million exposures over 30 days (or eight times fewer exposures than outdoor), costs eight times more!

Given the costs of other media, all of which are “off-premise”, it’s easy to see how effective and inexpensive an on-premise sign is.  A business can expose its services or products to potential consumers who, because they are essentially on-site when they see the sign, can immediately accept the business’s invitation to stop.

Reconciling the approaches
Even the most successful businesses often fail to fully use their site’s visibility component. Retailers often forget a well-designed and appropriately placed on-premise sign provides more visibility and “street expression” than all other visibility factors combined. What’s more, an on-premise sign achieves these goals at a fraction of the cost. Replacing this resource with another communication medium would escalate expenses and hinder profitability.

The appraisal methods and results outlined in this article clearly show the car-wash sign, which is responsible for most of the business’s visibility, has a minimum present worth of $250,000. The total assessed value of the site – real property and improvements – is $1.5 million. Therefore, the sign represents at least 16.7% of its total value. Truly, no other asset-management tool is more cost-effective than an on-premise sign.


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 Outdoor Advertising, Signs' Advertising Value, Visibility and Legibility.