THE SIGNAGE FOUNDATION FOR COMMUNICATION EXCELLENCE, INC.

To illustrate how a real estate appraisal methodology can be used to determine the portion of the value of a real estate site that can be attributed to its signage, we present a case study of a Best Buy electronics store in San Antonio, Texas. In 1994, the Best Buy Corporation sued the owner of a shopping center in which a new Best Buy outlet was being opened to recover damages from the delayed placement of two pole signs. The shopping center had agreed to install the two signs on June 1, 1995. One sign was installed on August 17, 1995, and the other on September 4, 1995. The store opened on August 18, 1995. Best Buy sued to recover damages based on the value of advertising that was lost when signs were not erected on schedule.

Best Buy hired Claus Consulting Services, Inc. of Sherwood, Oregon. (R. James Claus the proprietor is credited in the signage and appraisal professions as having pioneered the technique for appraising the visibility component of a site.) In the Best Buy appraisal, Claus used the three traditional components of a real estate appraisal in his estimate of damages: a cost of replacement (or substitution) approach, a market comparison approach, and an income capitalization approach.

Prior to the three-part appraisal process, a highest and best use analysis of the site is undertaken. This type of analysis establishes the most profitable use of site in light of any legal or financial constraints. According to Claus, highest and best use as applied to signage means that the subject on-premise sign can be seen by the intended audience (i.e., passing motorists, pedestrians) and that its copy can communicate as intended (i.e., is readable and understandable by the intended audience) (Claus 1997).

Cost of replacement approach. In standard real estate appraisals, the cost of replacement approach is used to describe the cost of replacing a building with a structure that is functionally equivalent to the existing structure. Claus's signage appraisal method applies a cost replacement approach to determine the cost of replacing the signs' commercial communication or advertising value with other forms of advertising, such as newspaper, television, and radio ads. It is not used to measure the cost of replacing the physical structure of the sign, as is the common measure of sign value in amortization cases.

Market comparison approach. This approach involves comparing a property being valued with comparable properties that have recently sold or are currently on the market. In the Best Buy evaluation, Claus notes that because the visibility or communication function of signage cannot be bought and sold, the market comparison approach has to instead be applied to an analysis of the rents and sales per square foot of similarly situated sites with various levels of signage.

Income capitalization approach. This approach is used to ascertain the present value of anticipated future income to be generated by a property over its remaining useful life. For the purposes of signage, the Claus model focuses on income generated by customers who were prompted solely by the sign.

For the Best Buy evaluation, Claus relies primarily on the cost of replacement and income capitalization approaches. To determine the replacement cost of a sign's advertising value, Claus measures the number of "exposures" that would have resulted if the two signs were in place as originally scheduled. The standard advertising measure of "cost per 1,000 exposures" is then used to determine the cost of a comparable number of exposures in newspaper or television advertising.

The study finds that freeway exposure to the signs in question can be estimated at 12,000,000 (3 million per sign face per month). This figure is derived by using daily traffic counts for the section of I-410 where the Best Buy is located and were obtained from the Traffic Audit Bureau's (TAB) Daily Effective Circulation (DEC) for that interchange. Based on the DEC at that intersection, 396,000 exposures occurred daily or 99,000 daily per sign face. (Each vehicle passing by any of the four sign faces is counted as one exposure.) In total, the study finds that Best Buy missed 15,444,000 exposures for the sign that was installed 78 days late and 19,008,000 exposures for the sign that was installed 96 days late.

In the Best Buy example, the appraiser estimates the cost to recover the lost exposures with other advertising mediums at $36,700 per month. That is based on the cost of a midweek and Sunday newspaper insert reaching 545,000 people and 182 gross television-rating points that reach 2.4 million exposures. Multiplying the cost of replacement exposures by the number of days of lost exposures by the number of sign faces, Claus estimates that the total replacement cost equals $424,767. A 50% percent reduction is then applied to the total replacement costs to account for "other ways to mix the advertising dollar to obtain these lost exposures" (Claus, 1997, 9).

Turning to the income capitalization method, Claus then derives additional damages from lost income that would have resulted if the signs were in place as scheduled. This portion of the appraisal is done by measuring the number of customers who patronize a business on a given day solely because they were prompted to go to the store by the sign. Based on in-store customer surveys, Claus concludes at least 25 percent of the store's business can be directly attributed to the sign. (The surveys indicated that 33% of customers were initially attracted by the sign.) According to actual Best Buy sales figures, gross profit at the store for the first year of operation was $308,000; 25 percent of which ($75,000) Claus attributes to the signage. This amounts to $1,286.20 per day per sign face. The daily measurement of lost income is then derived by multiplying the number of days each sign face was absent (78 days for one sign; 96 days for the other) by the daily gross profits attributable to each sign face (1,286.20) to arrive at a total figure of $223,799 estimated lost income.

Claus' evaluation acknowledges that Best Buy was not bargaining for lost income during the time the sign's were not in place (indeed, the store was not open during that period) but, instead, was seeking recovery of the value of the exposures lost during that time. However, to reach a final determination of value following reconciliation of all methods utilized, one measure of damages can be predicated on the value of pre-opening signage exposures, which in this case would have assisted in creating "top of the mind awareness" during the critical pre-opening period, even though some of the viewers might not be interested in stopping -- then or ever.