Billboards and the legal and regulatory environment.

abstract

This article is intended to provide insight into the diverse and complex legal and regulatory environment affecting billboard valuations. Most case law and statutory interpretations restrict the choice of valuation approach in order to constrain the type of property to be included in the valuation. Although the Interpretation of the legal and regulatory environment applicable to a billboards appraisal assignment is ultimately the role of an attorney rather than an appraiser, an understanding of the complex underlying legal environment and its constraints is an important element to the production of a competent, professional appraisal.

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Before the 1960s, for the most part, there were no legal restrictions on the location of billboards. Because legal sites were abundant in those days, site rents and values were relatively low. Some artifacts of that era remain today as appraisers still occasionally encounter extremely low land rents being paid for billboard sites that have been in use for decades. Historically, billboards were considered to be personal property, and eminent domain procedures did not include compensation for billboard structures. At most, compensation was paid to relocate a sign, which was relatively easy and inexpensive to accomplish.

The economics of billboard sites changed dramatically during and subsequent to the 1960s and 1970s with new regulations stemming from the Bonus Act, the Highway Beautification Act (HBA), and the Uniform Relocation Assistance Act (URA). Higher site rents evolved as legal sites became scarcer. Also, billboard sites and structures received a great deal more attention in eminent domain actions due to increased site rents and problems associated with relocation. In addition, sign structures became subject to ad valorem taxation in some jurisdictions.

Issues that were essentially irrelevant before the 1960s have become highly relevant because of the change in billboard economics resulting from increased regulation. Leasehold interests in billboard sites can be quite valuable when they include sizeable "bonus value" to the tenant resulting from contract rent being substantially less than market rent and, for specific outdoor advertising plants, a synergistic fit with an acquirer. Also, although billboard structures are usually considered to be personal property for contractual purposes, prevailing laws often require them to be valued as real property for eminent domain and for ad valorem taxation in some states.

The valuation of billboards has become a complex and interesting endeavor principally due to the financial, economic, and legal climates that appraisers now encounter. In addition to the maze of regulations and legal precedents that affect billboard appraisal in each jurisdiction, the separation of income attributable to other business assets from site and structure income is becoming an issue as adjudicators and taxing authorities have become more open to considering income-and-revenue-dependent approaches to value.

An understanding of the legal and regulatory environment affecting a billboard appraisal is important. Billboard appraisal is a unique appraisal specialty due to billboard-specific federal, state, and local regulations. Also, rules, regulations, and legal precedent vary markedly by state; thus, outdoor advertising appraisal practices and procedures will vary by state as well, and in some cases, regulation and legal precedent may impose jurisdictional exceptions on appraisers. Additionally, federal and state regulations can, and often do, conflict, and an appraiser must know which rules apply to a particular appraisal assignment.

Although the interpretation of the legal and regulatory environment applicable to a billboard appraisal assignment is ultimately the role of an attorney rather than an appraiser, an understanding of the complex underlying legal environment is an important element of competent execution of a billboard appraisal. The appraiser's role is, therefore, to ensure that the end product has been completed in accordance with the legal and regulatory requirements set forth by the client (typically by the client's attorney). This should be well documented within the scope of work section of the billboard appraisal report.

With the appraiser's role in mind, this article introduces the appraiser to some of the regulations that have the greatest impact on billboard valuation, cites and discusses cases illuminating the most contentious issues, and touches on current ad valorem taxation policies in three states. The goal here is not to provide an exhaustive legal and regulatory reference applicable to all jurisdictions. Instead, this is intended to provide insight into how diverse and complex the legal and regulatory environment has become. One message should be evident to all appraisers who read it: It is vitally important to understand the legal and regulatory context of each billboard appraisal assignment. A checklist is included in the Appendix that appraisers can use to help ensure that legal and regulatory issues have been addressed thoroughly. Readers are encouraged to modify the checklist and adapt it to their billboard appraisal practice.

Are Billboards Real Property or Personal Property?

Billboards may arguably be viewed as personal property, trade fixtures, or fixtures depending on one's perspective, biases, and the underlying facts. Since personal property is not normally taken by eminent domain, when billboards are considered to be personal property just compensation is generally not paid, except when Federal Highway Administration (FHWA) rules related to acquisition of tenant-owned improvements apply. (1) Assertions that billboards are personal property can stem from one of two circumstances: (1) lease clauses stating that the billboard is the personal property of the lessee, (2) or (2) a claim that a billboard structure is a trade fixture, (3) or both.

According to a New York decision, it is difficult to assert that a billboard is personal property when it has been erected by the owner of fee title to the land. In Richards-Dowdle, Inc. v. State of New York (1966) (4) the court, in its decision that a sign located on condemned land had been taken with the land, gave a great deal of weight to the fact that the owner of a sign was also the owner of the land. The underlying theory here is that a landowner is more likely to intend permanent affixation than a tenant who is in temporary possession of the land. Occasionally an instance arises in which a billboard company leases both the site and the sign structure from the holder of fee title. Additionally, billboard companies do hold fee title to a few sites occupied by one or more billboards. Typically, however, the billboard company has a leasehold interest in the site along with full ownership of the sign structure. Under the typical situation a billboard sale would be documented by an assignment of the leasehold interest in the site accompanied with a bill of sale for the sign structure.

The New York courts have consistently held that provisions in a lease calling for a sign to remain the personal property of the tenant are not transferable to a dispute between a sign-owning lessee and a condemnor. (5) This perspective is referred to as "the New York rule" in Nichols on Eminent Domain, (6) and postulated therein as having been adopted within the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970 (URA). (7) This contention is supported by the wording of Section 24.105(b) of the FHWA rules for real property acquisition, which says "any building, structure, or other improvement, which would be considered to be real property if owned by the owner of the real property on which it is located, shall be considered to be real property for purposes of this subpart." Courts in Ohio, among other states, have taken the opposite view, holding up lease clauses as agreements of the parties that result in signs being viewed as the personal property of the tenant rather than fixtures and therefore not appropriated with the land. (8)

Several opinions on this issue are summarized below. The opinions in Lamar Corporation v. City of Richmond and City of Scottsdale v. Eller Outdoor Advertising Company of Arizona, Inc. appear to be consistent with current FHWA rules. On the other hand, Commissioner of Transportation v. Rocky Mountain, LLC, et al in Connecticut challenges the conventional interpretation of FHWA rules.

In a case not listed in Table 1, the Arizona Court of Appeals provides an interesting departure from the traditional three-pronged test of fixtures: annexation, adaptation, and intent of the parties. In Arizona Department of Revenue v. Arizona Outdoor Advertisers, Inc. (9) the appeals court stated, "What is needed is a test that is intellectually honest, that invites consideration of all circumstances that might bear on the fixtures inquiry, and that permits consideration without the kind of language-skewing exercise necessitated by [the traditional test]" The court proposed and adopted a "reasonable person test." That is, "Would a reasonable person, after considering all the relevant circumstances, assume that the item in question belongs to and is a part of the real estate on which it is located?" In determining whether or not a billboard is personal property in this tax appeal case, the appeals court affirmed the tax court's finding that billboards are personal property based a reasonable person test. The problem with this test is that one person's (or court's) view of what a reasonable person would assume is likely to differ from another's. The appeals court in this case viewed the tax court as fulfilling the role of a reasonable person. If nothing else, the case offers a new perspective on the real property versus personal property issue.

The Connecticut Supreme Court offered a unique perspective in Commissioner of Transportation v. Rocky Mountain, LLC, et al (10) on interpretation of the URA and FHWA rules concerning billboards. In this court's view the State's obligation to purchase billboards (located here via property rights obtained through an easement in gross) on land being acquired through eminent domain hinges on whether or not the state compelled the billboard owner to "surrender the billboards." The State offered to either acquire the billboards at a price that reflected the depreciated cost new, or pay the billboard company salvage value if the billboard company chose to remove and retain them, noting that the billboard company had the option of choosing one of these two courses of action. Because the State had not compelled the billboard owner to surrender the billboards, the court found it was under no obligation under state and federal relocation acts to treat them as real property and value them as such. Further, the Connecticut Supreme Court upheld the trial court's view that billboard income was derived from Viacom's outdoor advertising business rather than from its real property interest. It cited the trial court's determination that "advertising space generates income whether it is on a structure in a fixed location, on the side of a bus, or on a Web site." It noted that, although the business income depends somewhat on location, this does not render the business itself to be real estate. The court rejected the claim that owning the billboards "gave rise to a leasehold interest in the two billboards that was an interest in real property for which Viacom was entitled to receive just compensation." Rather, it determined that the billboards were "personal property, not real property, but that the billboards were intrinsic to a consideration of the fair market value of the easement." Billboard use was the highest and best use of the land encumbered by the easement in gross, and the appraised value of the land had appropriately reflected its highest and best use through allocation of 25% of billboard advertising revenue to the land and capitalization thereof. Capitalization of the remaining income as an indication of the value of the billboard structures was deemed to be an inappropriate "attempt to obtain direct compensation for loss of personal property and business income."

Admissibility of Various Approaches to Value Estimation

The Uniform Relocation Act is often viewed by the states as requiring payment of "just compensation plus." Just compensation, from this perspective, is the value of the leasehold interest (bonus value) plus the value of the sign structure. The plus component is measured under the URA as the amount by which the billboard enhances the value of the real property or the value of the billboard for removal from the real property, whichever is greater. This sentiment was expressed by the Arizona Court of Appeals in Whiteco Industries, Inc. (11) when the court said, "just compensation will include either the bonus value of the lease, if any, plus enhancement value, or the bonus value plus purchase of the billboards, whichever is greater."

As the cases in Table 2 demonstrate, there is little agreement on the approaches to value that should be applied to derive the amount by which the billboard enhances the value of the real property (enhancement value). Condemnees usually favor income capitalization, gross rent multipliers, and sales comparison whereas condemnors usually prefer the cost approach, arguing that the application of other approaches may taint the just compensation evidence by inappropriate inclusion of business value, or by failure to recognize the short-term nature of a site lease, or both. To a large extent this conflict stems from failure to address the overarching billboard appraisal issue of identification of the property being acquired. The valuation axiom that "A problem well defined is half solved" is particularly appropriate here. Selection of the applicable approaches to value should be rather straightforward once the acquired assets have been correctly identified.

In State of New Hampshire v. 3M National Advertising (1995) (12) the New Hampshire Supreme Court heard an appeal of a superior court's just compensation award for sign structures and site leaseholds located along the F. E. Everett Turnpike in Merrimack, NH. At issue were appraisal methodology, deduction of post-taking net rent from the award, viewing the signs as personal rather than real property, and failure to consider 3M's expectation that the site leases would be renewed. Although this case sheds some light on the personal property versus real property issue, the decision regarding appraisal methodology is of interest here.

3M's appraisal expert witness employed an income capitalization approach in support of a condemnation award amount that was far in excess of the sum of the bonus value in the lease and the cost approach applied to the sign structure improvements. The court found that "the most appropriate method of arriving at the proper value for these properties is to add to the State's value of the physical structures [by the cost approach] to the value of the [unexpired] leasehold interest [in the land]" The income approach was not considered in determination of the final award because the capitalization rate was not derived from sales of single signs having short-term leases similar to the signs being condemned.

The Minnesota Outdoor Advertising Control Act authorized billboard acquisitions by payment of just compensation consistent with the federal Highway Beautification Act for signs lawfully in existence prior to June 8, 1971. State of Minnesota v. Weber-Connelly, Naegele, Inc., et al. (1989) (13) addresses condemnation of 13 billboards (23 faces on 10 site leases) erected before June 8, 1971. Each of the 10 site leases called for the structures to remain the personal property of the tenant.

Three court-appointed commissioners heard evidence and awarded damages based on the cost approach. At trial the sign company's appraiser presented expert testimony based on all three approaches to value, whereas the State's expert had assumed relocation of the structures in his appraisal, making no allowance for loss of income. Since evidence suggested that the billboard structures could not "be replaced in any meaningful way within the same market area," the trial court determined that the market approach, based on a gross rent multiplier, (14) was more relevant than the State's cost approach and its underlying assumption of relocation.

Three issues were addressed in the State's appeal of the trial court verdict: (1) Did the Minnesota statute require compensation for lost rental income? (2) Is lost income from billboards rental income or business income? and (3) Is the gross rent multiplier method more applicable than the cost approach? The appeals court found that although the State generally cannot compensate for personal property that must be removed when a lease terminates, billboards constitute a special situation under the Minnesota Outdoor Advertising Control Act. The court also noted that "no Minnesota case has addressed the issue of whether income from billboards constitutes rent or profits" It further noted that both positions are supported in various other jurisdictions.

The test for allowing use of the income-dependent appraisal methods in a billboard appraisal, as noted by the appeals court, is: (1) the property must be income producing, rather than the locus of a business generating income, and (2) the billboards cannot be relocated. Allowance of the use of advertising revenue in estimating just compensation ultimately hinged on unrefuted testimony that the signs could not be relocated and on the appeals court's opinion that the state statute requires compensation for lost rental income. This case therefore supports the use of a gross rent multiplier for the valuation of billboards in eminent domain when the structures cannot be relocated in the market area.

Arkansas State Highway Commission v. M. F. Cash and Josephine Cash (1979) (15) provides a look at the admissibility of the income approach unclouded by the personal property issue because the owner of the underlying fee title also owned the billboards. At trial the property owner and the owner's appraisal expert presented testimony based on a net income multiplier (property owner) and income capitalization (appraisal expert). The State Highway Commission contended that this was improper because the income was business income, or profit. In its opinion the appeals court says, "Here we are dealing with net income to the property, something that would be the prime consideration of any purchaser of income-producing land" This case therefore supports the admissibility of the income approach, using direct capitalization, without consideration of whether the signs can be relocated, since the signs are viewed as real estate due to unity of title in the signs and the land.

In State of Washington v. Obie Outdoor Advertising, Inc. (1973) (16) a jury instruction saying, in part, "Neither should you take into consideration in determining the amount of damages to be awarded for the taking of the property condemned, any injury to such business or any loss of profits of such business, even if such injury or loss appears from the evidence" was deemed to have been in error. The appeals court stated that the instruction to the jury should have been modified because "in some instances the nature of the business done on the land may be so closely related to the land itself that the nature and amount of business and the income therefrom may be admissible" In addition, evidence was presented stating that Washington law prohibited relocation of the signs in the extant market area. In light of the jury instruction and the inability of the sign company to relocate its signs within the market area, the appeals court affirmed the trial court's order for a new trial.

When viewed from a valuation-theoretic perspective these cases indicate a great deal of confusion within the legal and appraisal communities concerning the results of the various approaches to value. If a business income component is being inappropriately capitalized into an indication of value, that component can, and should, be isolated and removed in order to derive an indication of the value of a leasehold and improvements thereto. (17) If this has not been done, then sign companies are likely to be compensated for the loss of business income as well as the value of the leasehold and the improvements thereto. Hence, an appraiser must reach an understanding of the assignment and knowledge of what is being condemned.

A situation arising from an inability to relocate a sign and consequent compensability of business income loss differs from a situation where the business income can be retained by relocating the sign. It is possible to derive credible value indications via income analysis in either of these situations. Only the manner in which the income approach and sales comparison approach are applied differs in these two scenarios.

Pragmatically, the decision to apply the various valuation approaches in practice should be a function of the property being appraised and the data available to the appraiser. Professional standards require an appraiser to know when each approach can be employed reliably and to possess the skill and knowledge requisite to application of each approach. Nevertheless, jurisdictional exceptions may require an appraiser to omit an otherwise credible approach to value or to assume that trade fixtures or personal property are real property for valuation purposes.

As stated previously, the appraiser must not develop legal opinions, but rather rely on the client's legal counsel for directives that impact the appraisal assignment. Once the directives are understood, the relevant jurisdictional and legal issues identified in the regulatory checklist can be summarized in the Scope of Work, along with any additional language required to explain the impact on the appraisal assignment. One element of the Scope of Work could be a section stating, "This appraisal is based on the following legal and jurisdictional directives provided by the client's legal counsel." When the directives lead to hypothetical assumptions or jurisdictional exceptions that are necessary to complete the assignment, they should be set forth in the Scope of Work consistent with the requirements of the Uniform Standards of Professional Appraisal Practice (USPAP).

Given the misunderstandings and complexities that often arise in billboard appraisal assignments, it is useful to include brief summaries in the appraisal report stating what is being appraised and what is not being appraised. This clearly delineates what property is being valued (site, structure, and/or other related business assets) and what property interests are not being appraised (fee simple, leased fee, leasehold, interests in personal property, or other business assets). In addition to informing the user of the report, this exercise helps the appraiser become and stay focused on relevant issues, data, and analytical methods.

Ad Valorem Taxation of Billboards

Property tax law varies by state, and no national trend is evident in the manner in which billboards are taxed. Some states view the structures as personal property, while others view them as being real property. Some states have recently changed the personal property versus real property classification of billboards. In addition to differences of opinion regarding the type of property, there is an ongoing dialogue between states and the outdoor advertising industry regarding whether it is appropriate to employ income capitalization and income multipliers when appraising billboards for property tax assessment purposes. The industry argues against these appraisal methods because they usually result in higher property values than those derived via the cost approach, ostensibly picking up value attributable to business income that is not subject to property tax.

The Outdoor Advertising Association of America (OAAA) is resolute in its assertion that the value of a billboard for property tax purposes is unrelated to the value of the same asset for condemnation purposes. In a direct quote from its Web site, the association says, "There is no rational link between property taxes paid on a billboard and its fair compensation value under condemnation." (18) This position persists despite the fact that many states adopt the same market value standard for property taxation and eminent domain.

The professional appraisal community understands that the OAAA stance may or may not be correct, depending upon the circumstances. For example, if the billboard structure is to be valued as real property included with the leasehold interest in the site, and no other business assets are to be included in the valuation, then market value estimates should be the same for each purpose (assuming equivalent definitions of market value). While differences in value are not caused by appraisal for assessment purposes versus appraisal for condemnation, per se, there are situations that will result in differing value estimates for eminent domain and for ad valorem taxation. Examples include regulatory differences between assessment and condemnation in assumptions regarding site lease renewal, classification of the structure as real or personal property, and exclusion or inclusion of business income. As the discussion in this article demonstrates, these factors differ dramatically from jurisdiction to jurisdiction.

This article cannot accommodate a detailed discussion of property taxation for each of the 50 states and the various territories of the United States. Instead, recent property tax activity in three states (California, New Jersey, and Florida) will be examined to frame current property tax issues. These three states were chosen because they are instructive with regard to the valuation issues from the most relevant perspectives-regulatory, legal, and political.

California's New Assessment Guidelines

On November 13, 2002, the California Board of Equalization (CBOE) adopted new guidelines pertaining to the assessment of billboard properties. (19) These guidelines are comprehensive, addressing unresolved issues such as property classification, the appraisal unit, approaches to value, intangible business assets, and the division of property interests.

Prior to these recent CBOE guidelines, billboards were not being assessed uniformly across the State of California. Some assessors were applying gross income multipliers and sales comparison techniques without considering business income allocation, and inconsistencies arose that were attributable to application of data derived from bulk sales to the valuation of a single sign. These inconsistencies did not go unnoticed by the outdoor advertising industry, resulting in a comprehensive review by the CBOE. The rest of this section summarizes the most recent guidelines relating to billboard assessment in California.

Real or Personal Property

Billboard structures are classified as fixtures (real property) for assessment purposes. This position is based predominantly on the manner in which the structures are affixed to the land and the intent to keep them affixed for the term of the lessee's leasehold interest in the land. Lease clauses classifying the structures as the personal property of the lessee are irrelevant to classification for property tax purposes.

Appraisal Unit

The guidelines define appraisal unit as "the nature and extent of the property being valued." Here it is identified as the unit of property commonly bought and sold: the sign structure, the use permit. (20) and the leasehold interest in the land. This appraisal unit is referred to as the "billboard property" throughout the guidelines.

Divided Interests in the Land

The guidelines recognize that the typical scenario will involve a divided interest in the land. One is part of the appraisal unit, which is the leasehold interest in the land. The other is the leased fee interest of the ground lessor. The values of both interests are included in a single assessment to the owner of the underlying fee interest in the land, and no separate assessment is provided to the ground lessee. (21)

Approaches to Value

The guidelines indicate that all three generally accepted approaches to value may be used to value a billboard property. However, the reliability of data or other factors may result in one or more of the approaches being preferred. Notably, a CBOE staff decision reported in a letter of transmittal accompanying the new guidelines says, "[T]he use of operating income is disfavored because of the difficulty in isolating the income attributable to the taxable property" This is interpreted as referring to the difficulty associated with allocating billboard revenue and income to nontaxable (business) and taxable (real property) components. The guidelines address each of the generally accepted approaches to value separately, as follows:

* Cost approach. The adjustment for the value of intangible assets and rights is not required within the cost approach because they are not components of the appraisal unit. Also, in a later section dealing with intangible assets and rights, the guideline points out that the value attributable to location should be assigned to the land, not to the structure.

* Sales comparison approach. With this approach, difficulty can arise because billboard properties typically sell in groups and little data related to the sale of single billboards is available. Also, an adjustment will often be required for differences between subject and comparable properties for contract rent and market rent disparity. Finally, the guideline cautions assessors regarding possible inclusion of nontaxable value when applying the gross income multiplier method. Adjustments that should be made to the comparable sale price prior to calculation of the gross income multiplier (22) include

1. removal of the value of any real property that is not part of the billboard plant (e.g., office buildings, shops, and maintenance facilities)

2. removal of the value of any personal property included in the sale (e.g., vehicles; furniture, fixtures, and equipment), and

3. removal of the value of any intangible assets or rights.

* Direct capitalization. With this approach, the guidelines state that operating income should not be used. A lease of a billboard structure to a separate billboard business operation is the preferred source of income data, but this rarely occurs. In a related footnote, the guidelines say, "Although income attributable solely to taxable billboard property might be imputed by excluding income related to nontaxable operating assets, this technique is disfavored because of the difficulty in making the deductions necessary to identify the discrete income stream for the taxable property only."

Intangible Assets and Rights

The billboard use permit is classified as an intangible asset under California law, which is not subject to taxation. However, since a "use permit is necessary to put the land to beneficial and productive use," the land is assessed and valued under the assumption of the presence of a use permit. This appears to be a highest and best use issue. When the highest and best use is for a billboard site, assuming the permit exists (based on its actual existence), the fact that a permit is considered to be an intangible asset under State law does not prohibit valuation of the land as a billboard site. Practically speaking, since a permit is site-specific and emanates from the application of police power, the value of the permit is subsumed into the site value when the land is valued as a billboard site. Other nontaxable intangible assets mentioned in the guideline are business relationships, an assembled workforce, multiple billboard ownership synergies, and company reputation. (23)

Allocation to Land and Improvements

The guidelines recommend a land residual approach to allocating the assessed value to the land and improvements. First, the appraisal unit (billboard property net of all non-taxable property) is valued using any or all of the approaches to value. Next, the value of the improvements is estimated based upon cost new less depreciation. This represents the allocation to the improvements. Finally, the improvement value from the previous step is subtracted from the value of the billboard property to arrive at an estimate of the land value. Based on the manner in which the term "appraisal unit" is defined in the guidelines, the land value is the value allocated to the leasehold interest in most instances.

It is obvious that the CBOE grappled with a number of contentious issues in its attempt to bring statewide uniformity to the assessment of billboards. While there may be room for disagreement regarding the appraisal policy adopted in the guidelines, it is commendable that the CBOE was able to identify and confront many of the complex issues unique to billboard appraisal and adapt their standards to the constraints of California statutes and case law. Particularly important aspects of the CBOE guidelines are recognition of the mix of taxable and nontaxable property income in billboard advertising revenue, possible inclusion of non-billboard real property assets, tangible personal property, intangible assets in sales of groups of billboards (e.g., acquisition of all or part of a competing outdoor advertising business), and recognition of the difficulty of comparing a sale of a group of billboards to a single billboard for valuation purposes. These difficult issues are not limited to assessment. They apply to all billboard appraisal problems.

Regulatory Change in New Jersey

As in California, billboards are now considered to be real property in New Jersey. The Real Property Appraisal Manual of New Jersey Assessors was updated in February of 2005 to state: "In accordance with the New Jersey Constitution, billboards, which are now defined as real property, are to be assessed at the 'same standard of value' as all real property." The manual mentions the three generally accepted approaches to value, with caveats regarding the use of the sales comparison and income approaches. Importantly, the manual states, "the income realized from the sale of advertising space is business income that is subject to other taxes in New Jersey" As with California, value increments attributed to location are allocated to the land. Although New Jersey seems to have arrived at essentially the same billboard assessment policy as California, the road there was more political and the State's ability to stay the course may consequently be more uncertain.

According to the now repealed New Jersey Business Personal Property Act (N.J.S.A. 54:11A-1 to 21), billboards were to be taxed as personal property. A contradictory 1991 attorney general's opinion proclaimed billboards to be real property in New Jersey, and they were taxed as such by Galloway Township in 1992. The township's action was challenged by a billboard owner, culminating in a 1996 New Jersey Supreme Court ruling. (24) Maxwell, the billboard owner, argued that its four wooden billboards were not real property because they could be easily moved without damage to the land or billboard and because they had a short life expectancy. The court agreed, ruling that the wooden billboards were exempt from taxation as real property. The question of whether steel billboard structures were taxable as real property was not addressed. A 2002 lame-duck session of the New Jersey legislature extended the Maxwell ruling to include steel billboards, essentially exempting all billboards from property taxation in the state.

In Chapter 42 of New Jersey Public Laws of 2004, the state reversed itself and changed the classification of all billboard structures from personal property to real property for tax assessment purposes. The new 2005 Real Property Appraisal Manual resulted from the 2004 legislation. Billboard taxation is highly politicized In New Jersey, with huge amounts of local tax revenue at stake. Hence, it seems likely that the 2005 Real Property Appraisal Manual may not be the end of the New Jersey billboard assessment story.

Litigation in Florida

Billboards have been assessed and taxed on a dual basis in Florida for many years. Sign structures are considered to be tangible personal property, valued on the basis of depreciated cost. Sign sites are included with the underlying real property, and are valued as a portion of the total fee simple land value. This classification scheme remains in effect today.

State Bill 715 required local units of government to pay just compensation if laws were enacted and enforced to remove nonconforming billboards. This new law, passed in 2002, required the City of Orlando to pay Clear Channel for several billboards the city was removing. Clear Channel argued that just compensation for these billboards amounted to much more than the current assessed value of the sign structures and land interests, claiming that value should be based on the advertising revenue generated by each sign location.

Clear Channel's claim prompted the Orange County Property Appraiser to reassess all of the billboard sites in the county consistent with Clear Channel's argument in the Orlando just compensation dispute, looking to a location's advertising revenue potential as an indication of site value. This reassessment had no effect on the value of the tangible personal property (the sign structure); nor did it affect the property-type classification of structures and sites. The reassessment did, however, result in approximately $600,000 of additional tax revenue. For example, the reassessment of nine Clear Channel sites resulted in new site values that were 12.9 times the old values, and one site value increased from $144 to $50,000.

Litigation ensued, with five complaints filed to date. One complaint, filed by Clear Channel, claims that the reassessment results in an unconstitutional tax on the income of Clear Channel's business. They argue that the new tax is analogous to estimating the value of a multitenant office building based on the revenue generated by each tenant-more an income or gross receipts tax than a property tax. In rebuttal, the assessment appraiser claims to have support for the reassessed site values based on comparable sales and ground rents. Other arguments offered by the plaintiff include the appraiser not having access to income and expense information necessary to complete a valid income approach and a need to recognize the fact that a billboard lease can typically be terminated by either party with 60 days notice.

A ruling was entered on one of the Orange County complaints at the circuit court level. In Pine Ridge Presbyterian Church, Inc. v. William Donegan, as Property Appraiser, and Earl Wood, as Tax Collector (2004) (25) a summary judgment affirmed the property appraiser's appraisal methods, resulting in assessed values of $50,000 each for two billboard sites. The judgment also affirmed the non-tax-exempt status of the leased fee interest in the billboard sites owned by the church and valuation of "different portions or areas of the real property at different rates"

While these issues are unresolved in Florida as of this writing, and are likely to remain unresolved until appeals are exhausted, they shed light on several important issues. One is the business income issue. It is difficult to argue that sign revenue includes business income in one venue while arguing that it doesn't in another. This rationale extends also to characterization of billboards as both real and personal property, the applicability of the income approach, and expectations regarding continuation of the landlord-tenant relationship between the fee interest and site tenant. How can a single entity responsibly argue that the landlord-tenant relationship is trivial and uncertain in one forum yet substantial and nearly certain in another, or claim that billboards are personal property unless they are being condemned? The inconsistency of some of these arguments seems to be migrating from the world of eminent domain into the world of taxation, at least in Florida.

Summary

It is evident that case law and appraisal procedures relating to billboards have evolved dramatically in the last several decades. Rather than following a common set of core appraisal principles, the evolution has occurred in courtrooms and state legislatures across the nation. The result has been a hodge-podge of regulation and case law, some well informed and some not. While this is an unsatisfactory outcome from a valuation theoretic perspective, it creates seemingly unlimited professional opportunities for the appraiser who is willing and able to learn the legal and regulatory particulars of billboard appraisal in numerous jurisdictions.

When paired with a competent attorney, an appraiser should be able to navigate through the maze of regulations and case law. Each assignment requires a determination of whether the undivided-fee rule applies, how and if the structure is to be valued, what constitutes the billboard's market area, compensability of lost business income, admissibility of the various approaches to value, and relevance of an expectation of site lease renewal. An understanding of these regulatory constraints on the valuation issue is paramount to the production of a competent, professional appraisal.

The legal and regulatory landscape continues to evolve. For example, the State of California now requires consideration of lost "goodwill" (26) in all condemnation actions, and lists circumstances where goodwill loss is likely to be compensable. The outdoor advertising industry continues to represent its constituents by lobbying government for favorable eminent domain and taxation regulations. Environmental interests lobby equally hard against the interests of outdoor advertising companies. Neither is an unbiased advocate for responsible valuation laws. The billboard appraisal profession is a small and highly specialized valuation niche, and needed advocacy for adherence to sound valuation principles often goes unsatisfied. Consequently, billboard appraisers should be constantly vigilant regarding new regulations and court decisions that affect their valuation practice.

Under most legal and valuation circumstances, primary emphasis is placed on the approach used to estimate the value of billboard property taken or taxed, instead of identification of the assets to be valued. This ignores the fact that all three approaches to value, if they can be properly applied, will provide consistent value estimates when the same property is (or assets are) valued in each approach. For instance, the cost approach estimate of the value of a billboard structure will be very similar to the income approach estimate for the same structure, if the income considered is only the portion of the advertising revenue ascribable to the tangible structure as rent.

Most case law and statutory interpretations restrict the appraiser's choice of valuation approach in order to constrain the type of property to be included in the valuation. For example, if the jurisdiction restricts compensation to the value of the tangible sign structure, it usually excludes the income approach and favors the cost approach. In contrast, if regulations require inclusion of other business assets, then the income approach, or sales comparison approach, or both are usually preferred to the cost approach. It would be better, from a valuation-theoretic perspective, to recognize that the most important consideration for obtaining equitable estimates of value among the approaches is to ensure that the property being valued is the same in each approach. In an ideal world, the appraisal of billboards should first focus on the property taken or taxed, and then on the applicability of the various approaches to value. An abundance or absence of usable market data would then determine the applicability of the appropriate approach or approaches to a particular valuation assignment.

This article is an excerpt from chapter 3 in Dwain R. Stoops and Marvin L. Wolverton, The Valuation of Billboards (Chicago: Appraisal Institute, 2006).

Appendix

Regulatory Checklist for Billboard Appraisal in Eminent Domain

Listed below is a checklist for appraising billboards in the area of eminent domain:

Federal rules

* Are HBA and URA directly applicable?

* Have they been modified by case law in the jurisdiction (e.g., South Carolina)?

* If not directly applicable to the appraisal, have they served as guidelines or mandates that have been adopted into state law?

State rules and regulations

* Governing definitions

* Governing regulations, case law, and important valuation considerations (e.g., impact of ability to relocate, are structures considered to be real or personal property).

Which property classifications are compensable?

* Real property

* Tangible personal property

* Intangible property 

* Business income

Do the undivided-fee rule, unit rule, or both apply?

* Understand how the undivided-fee rule, unit rule, or both impact valuation of real property in the state

* How should contract rent be considered in value estimates?

* Does case law provide direction regarding reliance on an expectation of site lease renewal?

* How are separate components (structure and site) appraised in the jurisdiction, and are they valued differently in condemnation and apportionment appraisals?

Valuation approaches

* Allowed approaches to value

* Do the allowed approaches to value vary by situation, or by total or partial taking?

* Does the ability to relocate within the market area affect the valuation method and the property to be appraised? (What is the prevailing legal definition of market area?)

Date of valuation

* Jurisdictional basis for determining valuation date

* Are other valuation dates relevant?

Jurisdictional exceptions

* Based on the foregoing, are jurisdictional exceptions requisite to completing a USPAP compliant appraisal?

(1.) See 49 CFR 24, Uniform Relocation Assistance and Real Property Acquisition for Federal and Federally-Assisted Programs, Section 24.105.

(2.) Fixtures exist when an item that was once personal property is either attached to the real estate so that removal would cause damage, adapted to the real estate so that removal would alter the utility of the real estate, or the intent of the parties to a relevant transaction clearly states whether or not an item is a fixture. The intent of the parties is generally viewed as the most important test of fixture status.

(3.) Trade fixtures are items that would ordinarily be viewed as fixtures due to attachment to the real estate, but instead remain the property of a tenant because they serve a specialized purpose in the tenant's trade or business.

(4.) 52 Misc. 2d 416, 276 N.Y.S.2d 795 (1966).

(5.) City of Buffalo v. Michael, 16 N.Y.2d 88, 209 N.E.2d 776,262 N.Y.S.2d 441 (1965); Whitmier & Ferris Co. v. State, 12 A.D.2d 165, 209 N.Y.S.2d 247 (N.Y.A.D.4 Dept. 1961); Rochester Poster Advertising Co. v. State, 27 Misc. 2d 99, 213 N.Y.S.2d 812 (N.Y.Ct.Cl. 1961); George F. Stein Brewery v. State, 200 Misc. 424, 103 N.Y.S.2d 946 (N.Y.Ct.Cl. 1951).

(6.) See Mark S. Ulmer, "Condemnation of Billboard Interests," Nichols on Eminent Domain, 3d ed. (New York: Matthew Bender, 1999), 31.

(7.) 42 U.S.C., Section 4601 et seq.

(8.) City of Lakewood v. Rogolsky, 22 Ohio Misc. 93, 252 N.E.2d 872, 50 O.O.2d 423 (Ohio Prob. 1969); City of Cleveland v. Zimmerman, 22 Ohio Misc. 19, 253 N.E.2d 327, 51 0.0.2d 50 (Ohio Prob. 1969).

(9.) 202 Ariz. 93, 41 P.3d 631 (Ariz. App. Div. 1 2002).

(10.) 277 Conn. 696,--A.2d--(Conn. SC 17317 2006). This case was so recent at the time this book went to press that it included no page references in the national reporter system.

(11.) Whiteco Industries, Inc. v. City of Tucson, 168 Ariz. 257,812 P.2d. 1075 (1990).

(12.) 139 N.H. 360, 653 A.2d 1092 (1995).

(13.) 448 N.W.2d 380 (Minn. App. 1989).

(14.) This is actually the income approach characterized incorrectly as the "market approach."

(15.) 267 Ark. 758, 590 S.W.2d 676 (1979).

(16.) 9 Wash. App. 943, 516 P.2d 233, 73 A.L.R.3d 1114 (1973).

(17.) In an attempt to sidestep this issue, advertising revenue generated by a condemned sign is often characterized in testimony as "rent." That is, the advertiser is portrayed as renting the sign face and displaying a message there. There are flaws in this argument, however. First, most advertising contracts specifically state that no property rights are transferred to the advertiser by virtue of entering into an advertising contract with the sign company. In fact, if the advertising revenue were "rent," then the advertiser would be a "tenant" and could also claim just compensation under the URA. To our knowledge, this has never occurred. Second, the advertising agencies are paid a commission for bringing together an advertiser and a sign company. If the advertising revenue were in fact rent, then the advertising agencies would be required to have a real estate brokerage license and the agents themselves would have to be licensed real estate agents. Again, this does not occur. Rather than inappropriately characterizing ad revenue as rent as a means of sidestepping the business-income issue, it is much more preferable to determine whether or not business income is compensable and appraise the property accordingly.

(18.) http://www.oaaa.org/government/Issues/issue.asp?id=31

(19.) http://www.boe.ca.gov/proptaxes/pdf/Ita02078.pdf

(20.) In a letter accompanying the new guidelines, the CBOE mentions a staff decision regarding billboard use permits, stating: "since a billboard use permit is necessary to put the land to beneficial and productive use as a billboard site, the land must be assessed and valued by assuming the presence of the use permit." This seems to be consistent with the State's general approach to permits and taxation (e.g., sanitary landfill assessment).

(21.) Taxes applicable to the lessee's interest in the land and structure are usually passed through to the lessee according to the terms of the lease agreement.

(22.) The gross income multiplier is inappropriately viewed as an element of the sales comparison approach by the CBOE.

(23.) The financial statement of outdoor advertising companies often allocate part of acquisition prices to noncompete agreements. These would most likely be considered intangible assets under California assessment guidelines.

(24.) R.C. Maxwell Co. v. Galloway Twp., 145 N.J. 547,679 A.2d 141 (1996).

(25.) 03 CA 2701.

(26.) Goodwill is defined more broadly in California than the term implies under financial accounting standards. Section 1263.510(a) of the California Code of Civil Procedure provides the criteria for goodwill compensation in eminent domain. Section 1263.510(b) defines goodwill as "the benefits that accrue to a business as a result of its location, reputation for dependability, skill or quality, and any other circumstance resulting in probable retention of old or acquisition of new patronage. Note, however, that loss of goodwill is not limited to loss of patronage in California (see People v. George H. Muller (1984), 36 Cal. 3d 263).

Dwain R. Stoops, MAI, SRA, is president of Metro-South Realty Services, Inc., a real estate valuation, research, and consulting firm located in Ozark, Missouri. Stoops is an appraiser and consultant specializing in research, analysis, and consultation pertaining to the valuation of outdoor advertising assets, and he has been a guest expert billboard valuation panelist at meetings of the International Right of Way Association (IRWA), the American Society of Appraisers (ASA), and the American Association of State Highway and Transportation Officials (AASHTO). Stoops is a Missouri State Certified General Real Estate Appraiser and has held similar certifications in many states in the past. He has been a member of the Appraisal Institute since 1994. Contact: [e-mail]

Marvin L. Wolverton, PhD, MAI, is a practicing real property valuation theorist and consultant. He is an emeritus professor and the former Alvin Wolff Distinguished Professor of Real Estate at Washington State University. Wolverton has authored some 40 articles in refereed academic and professional journals, coedited a book on valuation theory, and written articles for editorially reviewed real estate practitioner journals. Wolverton recently completed a five-year term as senior editor of the Journal of Real Estate Practice and Education, and he has served on the editorial boards of the Journal of Real Estate Research and The Appraisal Journal, where he currently serves on the review panel. He is a Nevada State Certified General Real Estate Appraiser and has been a member of the Appraisal Institute since 1985.

Contact: [e-mail]

Table 1 Cases Addressing the Issue of Whether Billboard Structures Are
Real or Personal Property *

Connecticut (2004)     CT Superior Court, may   Department of
                       be subject to appellate  Transportation v.
                       review.                  Rocky Mountain, LLC
                                                et al.
Michigan (1994)        MI Court of Appeal       In Re Acquisition of
                                                Billboard Leases
                                                and Easements;
                                                (Norton Shores v.
                                                Whiteco Metrocom,
                                                Norton Shores v. OCI
                                                Corporation of
                                                Michigan, DOT v. OCI
                                                Corporation of Port
                                                Huron)
Virginia (1991)        VA Supreme Court         Lamar Corporation v.
                                                City of Richmond
Arizona (1978)         AZ Court of Appeals      City of Scottsdale v.
                                                Eller Outdoor
                                                Advertising Company
                                                of Arizona, Inc.
S. Carolina (1978)     SC Supreme Court         Creative Displays,
                                                Inc. v. S.C. Highway
                                                Department
Ohio (1969)            Probate Court of         City of Cleveland v.
                       Cuyahoga County          Phillip Zimmerman,
                                                Executor
Ohio (1969)            Probate Court of         City of Lakewood v.
                       Cuyahoga County          Rogolsky
Connecticut (2006)     CT Supreme Court         Commissioner of
                                                Transportation v.
                                                Rocky Mountain, LLC,
                                                et al

Connecticut (2004)     Court disagreed with an appraiser's claim that
                       billboards were real property and found them to
                       be personal property by virtue of the way
                       ownership is transferred (bill of sale) and by
                       the manner in which they are taxed.
Michigan (1994)        In a comment tangential to the court's opinion,
                       the court says. "There is no dispute that all
                       the billboards in question are trade fixtures.
                       Thus ... The City of Norton Shores has an
                       obligation to pay defendants ... for costs
                       associated with moving their billboards to
                       another location."
Virginia (1991)        Sign structure is personal property per the
                       the agreement of parties to a lease, but a
                       conclusion as to being personal property is not
                       applicable to a dispute between a lessee and
                       a condemnor.
Arizona (1978)         The URA does not transform billboard ownership
                       from a personal property interest to a real
                       property interest. However, under the Federal
                       Uniform Relocation Act personal property "may be
                       deemed to be part of the real property for the
                       purposes of requiring compensation."
S. Carolina (1978)     The SC Supreme Court ruled that the sign
                       structure was personal property under state
                       law and therefore the Federal Uniform
                       Relocation Act did not require payment of
                       compensation for the sign structure.
Ohio (1969)            The site lease gave the tenant the right to
                       remove the billboard structures and the lessor
                       the right to require removal of the structures.
                       Lease clause stated the signs shall always
                       remain the personal property ... of the site
                       lessee. Hence, no compensation is due in
                       condemnation for the value of the sign structure.
Ohio (1969)            Billboard sign structures are deemed personal
                       property and therefore not compensable under
                       eminent domain. Also affirms the "bonus value"
                       approach to valuing a leasehold interest.
Connecticut (2006)     Billboard structures located on easements in
                       gross are personal property, and the condemning
                       authority is not obligated to purchase them
                       under the Federal Uniform Relocation Act.

* Cases addressing the issue of whether billboard structures are real
or personal property and the resulting impact on compensability under
eminent domain.

Table 2 Cases Addressing the Applicability of the Various Approaches to
Value in Billboard Condemnation

New Hamshire          NH Supreme Court        State of New Hampshire
(1995)                                        v. 3M National
                                              Advertising Company
Minnesota (1989)      MN Court of Appeals     State of Minnesota v.
                                              Weber-Connelly,
                                              Naegele, Inc., et al.
Arkansas (1979)       AR Court of Appeals     Arkansas State Highway
                                              Commission v. M. F.
                                              Cash and Josephine Cash
Washington (1973)     WA Court of Appeals     State of Washington v.
                                              Obie Outdoor
                                              Advertising, Inc.

New Hamshire          3M argued that the trial court erred by not
(1995)                employing a version of the income approach. The
                      supreme court upheld the trial court's sole
                      reliance on the cost approach due to the
                      short-term nature of 3M's leasehold interest (13
                      months with no renewal option).
Minnesota (1989)      The State took 13 billboards from the respondent
                      under the Minnesota Outdoor Advertising Control
                      Act. The State appealed the trial court's award
                      based on a gross income multiplier, claiming
                      that "the method of valuation dictated by the
                      common law of eminent domain is the cost
                      approach." The appeals court affirmed the trial
                      court's ruling saying that the trial court's
                      judgment that Minnesota statutes permit
                      compensation for lost rental income was not
                      clearly erroneous."
Arkansas (1979)       The trial court admitted valuation testimony
                      based on income capitalization and rendered an
                      award verdict partially supported by said income
                      approach testimony. The State appealed, claiming
                      the income was business income rather than rental
                      income. The appeals court affirmed the trial
                      court's verdict.
Washington (1973)     The State appealed an order granting a new trial.
                      The order was based on: i) admission of the cost
                      approach without evidence of Obie's ability to
                      relocate the signs, ii) a jury instruction error
                      that precluded the jury from consideration of
                      income-based appraisal evidence, and iii) an
                      error in admitting cost approach testimony by
                      the State's expert witness. The appeals court
                      upheld the order for a new trial because the
                      jury instructions eliminating the income-based
                      valuation opinion were in error.