THE SIGNAGE FOUNDATION FOR COMMUNICATION EXCELLENCE, INC.

Every activity occurring on a commercial site contributes to the success or failure of that site, and is capable of valuation. The following outlines the specific steps mandatory to the descriptive research task of appraising/valuation:

1. Definition of the Problem

Valuation is site specific and establishes the "market" price for a specific real estate parcel or interest at a particular point in time. To begin, one must identify the type of property to be analyzed and the legal rights afforded such property. When valuing on-premise signage, one does not directly appraise the value of the sign itself. Rather, what needs to be determined is the value of the site's visibility or communication component. Before reaching a determination of value or what the market will pay for the interest, one must also analyze and understand the relevant sign code(s), which may or may not regulate every aspect of a site's visibility/communication component.

2. Preliminary Analysis and Data Selection and Collection

Preliminary analysis, data selection and collection impact the quality of the valuation result. General data includes trends from social, economic, legislative and environmental forces that affect property values. Such data may include, for example, population demographics, occupancy rates, and new business and housing starts. Specific data on the property to be appraised and potential comparable information must always be collected.

A critical factor in evaluating the contributory value of the retail site's visibility component is a complete understanding of the general public's need for a communication system, as well as the specific communication needs of the individual site. For example, zoning which permits impulse shopping or point-of-distribution retail activities should also permit signage visible to and readable from the street; on the other hand, an exclusive upscale store or a destination-oriented store (e.g., Wal-Mart; Home Depot) may not have as great a need for highly communicative on-premise signage.

3. Highest and Best Use (of Site and Signage)

Before completing an opinion of value, one must first determine the most profitable use of the property as it currently exists and then as if it were vacant and ready to develop. The process involves a four-pronged analysis: the use must be 1) physically possible, 2) legally permissible, 3) financially feasible, and 4) maximally productive.

Briefly, highest and best use in signage analysis involves determining if sufficient signage exists or can exist for the subject business to carry on its normal practices as compared to similarly zoned or regulated sites. Generally, "use" 4 involves questions of sign size and legibility or readability and conspicuity -- a sign's ability to stand out from its background. If a visual communication device cannot be easily seen or read by its intended audience, it will fail its intended purpose, and the commercial site cannot be maximally productive. Local sign codes impact all highest and best use tests; of particular importance are size and placement requirements.^[43]

4. The Three Traditional Valuation Approaches and Applications

In the absence of unusual or mitigating circumstances, valuation involves three generally accepted ways to reach a realistic conclusion: 1) the market approach using comparable closed sales or executed leases, i.e., determining what the market is willing to pay for a property interest similar to that of the subject property; 2) the income approach, i.e., anticipating future economic benefits or "income stream" to be realized from the subject property interest, assuming it is capable of producing income; and 3) the cost approach, i.e., estimating the cost to replace or reproduce an existing property improvement or interest, taking into account deduction for accrued depreciation, and/or land value, as appropriate to the valuation.

(a) Market Comparison Approach

Although on-premise signs are not actually bought and sold in the marketplace, one can use the market comparison approach to establish how much the market is willing to pay for a high-visibility site. Sales of outdoor advertising structures may be utilized because such sales reflect add-on value attributable to street exposure.^[44] By knowing what users will pay to acquire an outdoor advertising structure, the value of all place based communication systems is better understood and easier to establish. Furthermore, the outdoor advertising structure functions similarly to the high-rise on-premise sign that can be seen from major highways and arterials. Potential customers react similarly to both sign types, and customer profiles, as well as capitalization rates developed and provided for the billboard user, can be equally relevant to the owner of a high-rise on-premise sign.

Additionally, differences in square foot rental are often attributable to differences in signage exposure to the street. For illustration, assume a signage valuator is valuing three distinct retail locations in one shopping center, where most non-signage factors are equal. The locations under study are the 1) freestanding buildings, 2) in-line buildings, and 3) buildings that do not face a primary street. The differences in square foot rentals for each type of location will usually provide a good idea of how the visual communication component of the various sites relates to rent per square foot.^[45]

(b) Income Approach - Capitalization Rate

Capitalization rates, commonly referred to as "cap rates", are a relatively complex tool used by appraisers. However, a basic understanding of this tool is advisable for any individual seeking more knowledge on valuing the economic worth of signage.

Simply, a cap rate for commercial appraisal purposes works similarly to interest earned on a bank deposit -- if one wishes to earn $10,000 in interest per year, and the bank offers a 10% interest or cap rate, one deposits $100,000 in order to earn $10,000. On the other hand, if the bank offers only 5% interest, one must deposit $200,000 to realize the desired return.

As a signage appraisal example, assume that a 1,000 square foot retail building with superior street visibility (Store A) nets $1,500 monthly income (triple net rent after tax, maintenance and upkeep expenses) while same size Store B, lacking street visibility, nets $500 monthly income (or $12,000/year less than Store A). Both stores are located in the same retail complex. Using a cap rate of 10%, the value of Store A's visibility component can be reported as $120,000 (or $12,000 - .10 = $120,000).

Under cap rate analysis, the same example may be used to illustrate calculation of the value of Store A's visibility based on rental rates. Assume that Store A rents for $1.50/sq ft (or $1,500/month) while Store B rents for $.50/sq ft/month (or $500/month).  The annual difference in rental rates is $12,000. Using a cap rate of 10%, the value of Store A's visibility component, based on rental rates, is $120,000/year (or $12,000 - .10 = $120,000). Although in real situations, the value reached by rental rate and net profit analysis may not so conveniently arrive at the same figure, the above simplified example illustrates how the market recognizes the add-on value of the visibility component of a specific commercial site, based on net income -- and/or rental rates, when suitable comparables can be found.^[46]

When using the income approach to valuation, one must correctly categorize the retail store or site because the income attributable to on-premise signage varies by business category. Additionally, one must know if the business intends to rely for its success upon customers within the local trade area or instead upon the in-transit consumer. Finally, reliable valuation under this approach is dependent upon data concerning what percentage of those who view the sign will stop.

Generally, the valuator must rely on others for information. One data source is the typical chain or franchise store, which usually has access to comprehensive marketing data relevant to revenues attributable to signage. Most independent or non-affiliated businesses keep records or have some knowledge concerning business revenues resulting from customers who stop by due to a sign. In a true "mom and pop" situation, it may be necessary to commission a separate market survey or study in order to obtain necessary data. In any event, reliable information documenting the interaction and interdependence of signage, customer behavior and revenues are of critical importance to the valuator.

(c) The Cost of Replacement (or Substitution) Approach

Once one determines how much exposure an on-premise sign provides, the value of that sign can be determined by what it would cost to replace it with another advertising medium capable of performing as effectively. Briefly, the approach is based on the cost to replace exposure by substitution of an alternate source. As earlier mentioned, exposure is valued according to "cost per thousand exposures". In most cases an advertising agency or consultant should be enlisted to assist in determining the validity of cost per thousand media comparisons. The sign industry itself can provide market data regarding costs of on-premise signs and other place-based advertising. Input from a transportation engineer may also be necessary.^[47]

If a business has a commercially effective on-premise sign and loses it through retroactively applied regulatory action, then the owner must set aside a certain amount of "capital" to pay for its replacement -- enough, presumably, to last for as long as business signage is needed. Sometimes, however, place-based commercial communication systems cannot be replaced, either directly or by substitution. For example, on most major freeway systems, both off-street visibility and ingress/egress is restricted. In such cases, if an adjacent retail site is not adequately communicating its goods or services and location through signage easily visible to motorists at some distance, the traveler consumer may miss the nearest exit and be lost forever as a customer. For "point of distribution" retailers, and most small, independent merchants, lack of highway or street visibility may result in destruction of not only the business but also the business district, as zoned.

In addition to the Agoura Hills litigation, loss of place-based communication has been addressed in several other court cases. One, for example, was decided in a 1981 Wisconsin state court.^[48] In this case, a raceway owner agreed to temporarily remove his raceway's high-rise on-premise sign, visible from a main freeway, to make way for a public improvement. Although the sign was nonconforming at the time the city induced takedown, it was protected under a nonconforming use state statute. During the period of takedown, the raceway was sold; the municipality then refused to grant the new owner a permit to reconstruct the sign. The Court ordered the municipality to pay the new owner the difference between the property's value as residential property and its greater commercial value as a business site with effective "exposure" to the street. The amount awarded was $4,000 for loss of the sign itself, plus $165,965.26 for the consequent loss of business and property value, which in 1981 dollars was a considerable amount. Expert opinion concerning the value of the freeway exposures lost because of the sign's removal was the key factor in determining damages.

A more recent example, involving both income/capitalization rate and cost of replacement analyses, is the Caddy's case, which arose in a lower court in Hamilton County, Ohio -- a state which recognizes the "visibility component" of a commercial site as a partial real estate interest. "Caddy's" was a very successful sports bar occupying a building which was to be "taken" under exercise of eminent domain to make way for a municipal stadium. The county tax assessor placed a value of $1.3 million on the land and building and no value on the premises' business signage advertising the bar.The signage had been "grandfathered in" and was highly visible to adjacent streets and highways.

Because Caddy's distinctive wall mural and roof sign were non-conforming under present codes, they could not be duplicated on the replacement buildings used by the county as comparables; neither did the comparables have equal or similar exposures to the freeway. Therefore, if income levels were to be maintained after relocation, alternate forms of commercial communication, such as outdoor advertising (billboards), or TV and radio commercials, would have to substitute for the lost on-premise visibility to potential customers.

During trial on the issue of just compensation for lost visibility, expert testimony established that the cost of visibility replacement in the form of outdoor advertising was $180,000/year; this number was based on how much the subject signs would have rented for, had they been "outdoor advertising" instead of on-premise signage. The jury awarded $1.3 million for the real property and building, and using a capitalization rate of 10%, awarded an additional $1.8 million for the value of on-premise signage which could not be duplicated on a replacement location within the vicinity of the stadium. Thus, the combined award gave the owner sufficient money with which not only to replace land and building, but also to protect the former income stream, i.e., if the $1.8 million award for "lost" signage is prudently invested, annual interest earned should fund the annual cost of replacement exposures without affecting sales volume.

(See Appendix 1 for a case study on the application of real estate appraisal methodology in determining the portion of the value of a commercial site that can be attributed to its signage.)

5. Matched Pair Analysis

The matched pair analysis often is the most valuable tool available to those seeking to establish or understand what the market will pay for a retail site's visibility component. For the residential valuator, the matched pair analysis is routinely relied upon to bolster the findings of value reached by use of other methods. For example, to arrive at a reasonable value for a tract home, a residential real estate appraiser may look at recent market sales data concerning two nearby tract homes, similar in every way except location, i.e., one home, which sold for $100,000, was located on a busy collector street, and the other, which sold for $110,000, was located on a quiet residential side street. The appraiser can reasonably assume and report that the $10,000 difference between the two otherwise comparable homes is due to location.

Matched pair analysis also can be used effectively to quantify variable changes in the value of commercial sites which are attributable to on-premise signage as permitted by the respective municipal sign code. An excellent example of such analysis is provided by the experience of a small, four-store independent home improvement chain located in southern California. Home Depot moved into the chain's trade areas. (Home Depot, a big box, one category national chain, is known in the trade as a "category killer", or in other words, a terminator of smaller, local home-improvement retailers.) In this case, the small chain owner decided to go head to head with Home Depot, and initiated a total remodel of his old and obsolete stores...."old" with respect to structure and "obsolete" with respect to on-site marketing techniques, including signage.

The chain's stores were located in Cresenta Valley, Valencia, Simi Valley and Thousand Oaks. All of the stores, before and after remodel, were approximately 44,000 square feet in size. Prior to remodel, signage for all four stores was similar and gross sales were within 15% of one another. Because the stores were located in different trade areas, with different municipal sign codes, the owner had to tailor each store to fit the relevant code. Although he was able to somewhat standardize building storefronts with respect to corporate logo and colors, the owner could not standardize the balance of on-premise signage -- specifically wall or fascia signs and freestanding signs.

Cresenta Valley has a progressive, liberal sign code which permitted the chain owner to place a large store-front wall sign over the main entrance and border wall signs listing products, e.g., housewares, paint, electrical, plumbing, along the sides of the building. A large, double-pole free-standing sign displaying corporate colors and logo is located adjacent to the street; the sign is not shared with any other retailer and has a variable message board which permits the owner to advertise special sales. Valencia has a similar sign code, and the owner was able to place large wall signs over the main entrance and along the sides. In contrast to the Cresenta Valley location, however, the visibility of the freestanding sign is somewhat hampered by a landscape median between the street and sign and a parking barrier in front of the sign; the sign is also somewhat shorter in height.

Simi Valley has a much more restrictive sign code than either Cresenta Valley or Valencia, and consequently, the site's storefront signage is considerably smaller, limited to narrow border wall signage. Although the on-premise sign is tall and located close to the street, the store must share the sign with others, because the code does not permit individual free-standing signs for retailers located in a retail "ribbon."

The sign code of Thousand Oaks is very restrictive and the site's storefront signage is limited to a small entrance sign and two small "hanging" signs at either end of the building. The freestanding on premise sign is located on a landscaped strip next to the road, and because the code limits sign size to 6 x 6 feet, the sign's visibility is severely compromised by surrounding foliage.

Following remodel, and despite Home Depot's presence, Cresenta Valley increased its sales by 45% and Valencia by 38%; on the other hand, Simi Valley's increase was only 20% and Thousand Oaks', 10%. Further, the difference in sales volume between the Thousand Oaks' site and the Cresenta Valley site, which prior to remodel was only 15%, considerably increased. Since the chain owner reports no increase in local media advertising (e.g., local TV and radio spots, newspaper ads and "flyers"), the disparate increases in sales volume between all the stores can only be attributed to the availability, or lack thereof, of on-premise signage easily visible and readable to street traffic.^[49]

Essential to the matched pairanalysis is that the sites being compared are truly similar, with the exception of one variable. In the residential example above, the homes were identical except for location; the difference in value between the comparables then could reasonably be traced to location. In the retail example, store size, products and services, and pre-remodel sales and signage, for comparable purposes were fundamentally identical; the post-remodel difference in sales volumes (or value of each site to the business), with all other things remaining equal, then could be reasonably traced to the controlling sign codes.^[50]