amortization explained - sign research foundation · ©the signage foundation, inc. 2012 2...

AMORTIZATION EXPLAINED When state or local codes change, sign end users may find themselves no longer in compliance. The associated government entity may use amortization to force the sign’s removal without compensating the sign owner. While amortization is designed to wait until the sign’s construction value has been recouped, it fails to consider the continuing advertising benefits of signs. This document includes case studies detailing the value of signs and offers an overview of the legalities of amortization.

©The Signage Foundation, Inc. 2012

2 AMORTIZATION EXPLAINED

About The Signage Foundation, Inc.

The Signage Foundation, Inc., is a not-for-profit, non-partisan organization dedicated to fulfilling the educational, research, and philanthropic purposes of on-premise signage. SFI was established in 2002 as a 501(c) (3) public foundation through its supporting organizational alignment with the International Sign Association. The Foundation is governed by a board of directors representing the diversity and professional depth within the large community of individuals that believe in the social and economic value of on-premise signage.

The Signage Foundation, Inc. affirms signage as a fundamental component of today’s communication system and as a necessity for the development of a visually pleasing, economically healthy, and diverse community. The Signage Foundation promotes intelligent and productive use of on-premise signage and storefronts that benefits every sector of the U.S. economy.

The Signage Foundation, Inc., is committed to expanding the knowledge base on the use and benefits of signage products through peer-reviewed research to facilitate the operation within the marketplace by manufacturers, suppliers, and individuals in their efforts to design, build, and sell innovative products. Each fall, The Signage Foundation hosts the National Signage Research and Education Conference in conjunction with the University of Cincinnati’s Colleges of Design, Architecture, Art, and Planning, and Business.

While SFI commissions original research and publishes the results as original treatises, in the interest of promoting signage information to a broader audience, it also condenses and republishes (with permission) existing articles and studies.

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Contents Overview ....................................................................................................................................................... 4

The Legalities of Amortization ...................................................................................................................... 4

Alternatives to Amortization ................................................................................................................. 6

Economic Value of On-Premise Signs ........................................................................................................... 7

Florida: An Upcoming Test Case ........................................................................................................... 8

Amortization Examples ................................................................................................................................. 8

Caddy’s Case Study ............................................................................................................................... 8

Best Buy Case Study .............................................................................................................................. 9

Michaels Craft Store Case Study ......................................................................................................... 10

Terry Shulman’s Case Study ................................................................................................................ 11

Appendix ..................................................................................................................................................... 15

To Learn More ..................................................................................................................................... 15



Overview Signs have value, as evidenced by several research initiatives launched by The Signage Foundation, Inc.

Case studies and projects continue to show that the end result of signage is a more robust business

environment and a stronger tax base.

But complications can arise when city ordinances are updated and changed; long-standing businesses

may suddenly discover that their signs, no matter how beneficial, are no longer in compliance. Sign end

users may be required to remove or alter signs to meet the new requirements.

If the sign’s owner is forced to immediately change the sign, it could be considered a “taking” under the

Fifth Amendment, requiring the government agency to offer compensation. In most cases, the sign will

simply be considered “nonconforming,” for a set period of time. The idea is to allow owners to recoup

the cost of the sign and then force the removal. With nothing taken, compensation is not required. This

is called the “amortization period.”

But amortization is not without controversy, largely due to the fact that the value of on-premise signage

extends well beyond the actual cost of installation.

The Signage Foundation, Inc., offers this publication to help further understanding of the issues related

to amortization. It has done so by pulling together work from experts in the field.. All articles are used

with permission from their copyright holders.

The Legalities of Amortization The following material is adapted from an article written by the late attorney David K. Jones. The article

originally was included in the 1997 “Economic Value of On-Premise Signage,” published by the California

Sign Association (formerly the California Electric Sign Association) and the International Sign Association.

Nonconforming signs are caught in a legal and political tug-of-war between competing public policies.

On one hand, people should be able to rely on existing laws when investing in business and business

property. The U.S. Supreme Court has given legal recognition to such investment-backed expectations.1

Without such protection, people would naturally be reluctant to invest in business and property, an

action that would have a stifling effect on the community (and national) economy.

On the other hand, some people believe there is legitimate public interest in a consistent, predictable

visual environment. When laws affect signage change, they reason, people should comply; existing

businesses should not have an unfair advantage over new businesses. Therefore, public policy favors the

eventual elimination of nonconformities,2 including nonconforming signs. The delicate balance between

these competing policies varies with time and from state to state.

1 See Penn Central Transportation Co. v. New York City, 438 U.S. 104, 124 (1978).

2 See, e.g., Off Shore Restaurant Corp. v. Linden, 282 N.E., 2d 299 (NY 1972).



Legal authorities are split on the validity of amortization as a solution. Many states have held

amortization valid.3 Others have rejected amortization on the basis that it conflicts with requirements to

pay just compensation;4 that it is unauthorized by state law;5 or that it conflicts with other laws

protecting nonconforming issues.6

Where amortization has been permitted, courts generally have required the amortization period to be

“reasonable.”7 Most amortization codes require nonconforming signs to be removed within a fixed

period, sometimes dated from when the code becomes effective, others from when a sign was erected.

The problem with the first approach is that it does not relate to the age of the sign, and hence unfairly

places the investment in newer signs at a disadvantage of older signs. The problem with the second

approach is that it is difficult to administer because local authorities must inventory and fix a date for

each nonconforming sign.

Both types of codes suffer from the risk of an unreasonable amortization period. After all, if it is too

short and the owners have not recovered their investment in the sign, the theory behind amortization

disappears and the threat of compensation arises.

Ideally, a case-by-case analysis would be required and would consider the age of the sign, the type of

construction and materials, the amount of the investment, and other factors. To avoid the expense of

this analysis, many municipalities have set blanket amortization periods. Although a blanket one-year

period has been held unreasonable in several cases,8 periods of three,9 five,10 and 10 years11 have been

upheld. Of course, a blanket time period may be unreasonable when applied to an individual sign.

One interesting approach to amortization has been the use of federal tax code as the standard for the

amortization period. The tax code permits tax deductions for depreciation of certain business assets

according to an amortization schedule.12 A sign’s amortization period depends on its “useful life,” which

must consider the type of construction and the rate of deterioration.

Under this analysis, a metal-and-masonry freestanding sign may be an improvement to real property

that could be amortized over 19 years13 or more, while a painted wood sign in a harsh environment

might have a shorter useful life. The advantage of this approach is that a municipality may claim that

3 See, e.g., Georgia Outdoor v. City of Waynesville, 900 F. 2d 783 (4

th Cir. 1990); New Castle v. Rollins Outdoor

Advertising, 475 A 2d 356 (DE 1984); Northern Ohio Sign Contractors Ass’n v. City of Lakewood, 513 N.E. 2d 324 (OH 1987). 4 Battaglini v. Town of Red River, 669 P. 2d 1082 (NM 1983), Root Outdoor Advertising v. Fort Collins, 759 P. 2d 59.

5 State v. Bates, 305 N.W. 2d 426 (IA 1981); City of Scottsdale v. Scottsdale Associated Merchants, 583 P. 2d. 891

(1978). 6 City of Paducah v. Johnson, 522 S.W. 3d 447 (KY 1975); James J.F. Loughlin Agency v. West Hanford, 348 A. 2d 675

(CT 1974). 7 See, e.g., Modjeska Sign Studios v. Berle, 373 N.E. 2d 255 (1977).

8 See, e.g, National Advertising Co. v. County of Monterey, 464 P. 2d 33 (CA 1970).

9 Naegele Outdoor Advertising Co. v. Vilalge of Minnetonka, 162 N.W. 2d 206 (MN 1968).

10 Art Neon Co. v. City & County, 488 F. 2d 118 (10

th Cir. 1973).

11 Lamar Advertising Assoc. v. Daytona Beach, 450 So. 2d 1145 (Fl App. 1984).

12 Internal Revenue Code, Section 167 (a).

13 I.R.C. Section 168 (b)(2)(A)(i); Rev. Proc. 86-14, 1986-1 C.B. 304; rev. Proc. 72-10.



federal, not local, standards are used and that they establish a reasonable means for investment

recovery. The sign owner’s tax records may be used to demonstrate the rate of depreciation.

There is some legitimate concern that amortization is inadequate to apply to on-premise signs. Most

reported amortization cases concern billboards. A billboard is itself a business as it brings income, and

the investment in the billboard structure is easy to determine. The income flow from the billboard can

be sufficiently predicted to determine whether the amortization period is long enough.

An on-premise sign, however, is more complicated. While the investment in the sign may be relatively

low, the sign is integral to business. Without the sign, the business may fail and the investment in the

business would be lost. Examples include highway-oriented restaurants, service stations, or motels

forced to remove signage critical to highway visibility. What investment is protected: the sign only, or

the investment in the business itself?

The answer is uncertain. On June 29, 1992, the Supreme Court issued an opinion holding that

compensation is required when a regulation deprives property of all economically beneficial use.14 This

is not an amortization case, but the principle may extend to cases in which forced removal of a sign

would destroy a business’ viability.

A long line of court decisions has attempted to balance the public benefits of land-use regulations with

the rights of the business or property owner. In the case just cited, the Supreme Court said that, “When

the owner of real property has been called upon to sacrifice all economically beneficial uses in the name

of the common good, that is, to leave his property economically idle, he has suffered a taking.”

Other issues suggest that amortization is not an appropriate way to deal with nonconforming signs. The

availability of signs plays an important role in determining whether to establish a business in a given

location. The threat of a future change in the sign code that would leave the business insufficient

identification may place an owner at too much risk to obtain financing or to invest in that location,

which would have a general negative effect on the local economy.

Likewise, business owners that are threatened with the removal of their signs in years to come may be

discouraged from maintaining those signs. This would contribute to an appearance of deterioration in

their community. Those effects are contrary to the beneficial economic and aesthetic benefits that a

sign code should encourage.

Alternatives to Amortization

Officials should look at alternatives before considering the drastic measure of amortization. First, they

should explore their sign code to see if it discourages business owners from voluntarily replacing

nonconforming signs. Many communities require a nonconforming sign to be made conforming if it is

replaced or renovated. Faced with potential loss of visibility, some business owners elect to keep the old

signs.

14

Lucas v. South Carolina Coastal Council, 1992 Westlaw 142517 (US Sup. Ct.)



One alternative is to permit replacement where the nonconformity is reduced, but not entirely lost. The

community achieves a reduction and a better-looking sign, while the owner maintains some advantages

of the old, nonconforming sign.

Another approach is to create incentives for removing or reducing nonconformities. These may take the

form of a development bonus or an enhancement of other signs on the property in some non-

objectionable aspect.

Amortization is not the ideal solution to the problem of nonconforming signs. Although courts in many

states have upheld it, amortization tends to penalize property owners who have complied in good faith

with previous laws. Amortization also may stifle business investment in a community.

Business signs are so strongly related to a business that amortization provisions may be unreasonable if

the owner’s investment in the business itself is threatened along with the sign. If removal of a

nonconforming sign destroys the economic viability of the property, local government even could be

liable for monetary damages.

In light of these concerns and of the Supreme Court’s decisions, local governments seriously should

consider other methods to achieve voluntary removal or upgrading of nonconforming signs.

David K. Jones, 1997

Economic Value of On-Premise Signs First, it’s important to understand the value that signs bring to a business—well beyond the cost of

installing the physical structure. SFI has conducted significant research into this area. In 1997, the

California Sign Association, the International Sign Association, the Sign Users Council of California, the

Business Identity Council of America, and the University of San Diego School of Business Administration,

supported and funded “Economic Value of On-Premise Signage.” Highlights from that study include:

* Researchers studied one fast-food outlet with 162 locations in Southern California. Analyzing the

annual sales and the region’s demographic data, the researchers found that one additional sign could

lead to substantial increases in sales in several measurements. All types of signs surveyed showed an

impact on the number of transactions, ranging from a 15.6 percent increase for a 144-square-foot pole

sign to a 1.3 percent boost for a 36-square-foot building sign.

* Researchers also analyzed data from Pier 1 Imports to determine the effects of signage on dollar

revenue for about 100 of the chain’s 500 retail sites. The data showed a new building sign, a new pole

sign, or a freestanding multi-tenant sign added 5 percent to 15 percent to a site’s sales revenues.

A 2012 study of the same name further considered the topic, enhancing understanding of the value of

signs to businesses—and communities. That study also found that sign changes had a positive impact on

sales, with 65 percent of businesses reporting increases of about 12 percent. Sign changes resulted in

increased transactions, profits, and employment. Four case studies—a national lodging chain, a national



banker, a specialty retailer, and a small car dealership—all showed the direct impact that signage had on

businesses.

Both studies are available from The Signage Foundation, Inc. (www.thesignagefoundation.org).

Florida: An Upcoming Test Case

Much of the amortization case law has occurred when communities restrict off-premise signage, also

known as billboards. Court cases concerning on-premise signage are rare. However, rulings related to

off-premise advertising are applied to on-premise signage as well.

Florida enacted a law in 2010 that banned amortization periods when billboards were removed. If local

communities want billboards removed, they must pay the owners rather than enact an amortization

period, appraiser Richard Bass explained.

“If the sign goes away, the value goes away,” Bass said. “There is a cost to a modern pole sign, but the

value goes well beyond that.”

He cited the recent sale of a permit with a lease to erect a billboard along the heavily traveled Interstate

95 on Florida’s east coast. Even though no structure was on the site, the lease and permit sold for $1

million. “The overall value of that billboard is the advertising income, a structure, and a site on which it

is built.”

The intrinsic value of signage—whether on-premise or off-premise—extends well beyond the cost of

installation of the sign. That’s where amortization often falls short of truly compensating the sign’s

owner for the value of the sign.

Bass anticipates litigation in the coming years to settle conflicts between the state and local laws.

Charlotte County, in Florida’s west coast, passed an ordinance in 2001 requiring all billboards to be

removed after an amortization period. The state law, Chapter 70.20 Florida Statues, requires that

billboard owners be compensated even with an amortization period; that law is written to be retroactive

to include the Charlotte County billboard ban.

Bass believes there likely will be litigation over the conflicting state and local laws, perhaps resulting in a

ruling that further enhances the understanding of the value of signage.

Amortization Examples The three following case studies are adapted from articles that appeared in September and October

1998 Signs of the Times, written by Dr. R. James Claus and attorney Richard Bass. They are reprinted

with permission. They detail the impact on businesses when local ordinances require sign changes.

Caddy’s Case Study

Caddy’s is a multiplex that housed five mini nightclubs in Cincinnati, Ohio. It was known for its distinctive

signage, which was highly visible from a nearby highway. It also included 3,000-square-foot wall murals

and large roof signs. When the city of Cincinnati condemned the building to make room for a new



stadium for the Cincinnati Bengals football team, the tax assessor valued the building, land, and

contents at $1.3 million. The signage was not attributed any direct value.

Caddy’s had a unique challenge in rebuilding. A recent sign code change would prevent the murals and

roof signs from its design, though that was a distinctive feature at its previous location. The proposed

relocation sites offered by the city also did not offer the visibility to major roads that Caddy’s had

enjoyed at its previous location.

The company would have to supplement its marketing budget with additional forms of communication,

given that it lacked the prominent location and distinctive signage in its new location.

Caddy’s sued the city, arguing that its signage had significant value to its business operations. A jury trial

and visiting judge heard the case.

A sign valuation expert determined that the lost visibility accounted for $180,000 per year—

approximately how much the signs would have rented for had they been off-premise signage instead of

on-premise signage.

The jury found that the signs retained value even after depreciation and awarded the owners $1.8

million for the value of the lost on-premise signage. The jury also awarded $1.3 million for the property,

building, and contents—the same figure the tax assessor had determined.

The company’s distinctive signage, placed in a visible location, was worth more than the business assets

themselves.

Best Buy Case Study

The Best Buy store in San Antonio, Texas, was due to open on August 18, 1995. According to its lease

agreement, the shopping center owner would erect two double-faced pylon signs no later than June 1—

more than two months before the store’s opening. The signs would feature the company’s distinctive

logo.

One of the two signs did not become fully operational until the day before the store’s opening. The

other sign was completed about two weeks after the store opened. Best Buy sued the landlord for

restitution due to the lost exposure to its business by lack of signage.

A signage valuation expert was hired to assess the impact on the business by the landlord’s failure to

install the signs by the agreed upon dates. The value to the business was estimated at slightly more

than $227,000.

The case was settled out of court and its terms were confidential, though one of the company’s

attorneys reported it had received a sizable rebate on its rents.

This case demonstrates the impact of signage well before a business opens, and that signage in multiple

locations—specifically in a large shopping center—can be extremely valuable.



Michaels Craft Store Case Study

The Michaels store in Richfield, Minnesota, enjoyed a sign with wide exposure to traffic on I-494, a large

corridor that leads to the Mall of America, which draws more than 35 million visitors each year. The

billboard-style, on-premise roof sign offered significant advertising benefits for this retail store. It had

been erected in the 1950s.

In 1987, the city prohibited both outdoor advertising signs and on-premise signs such as roof signs.

Businesses had a 10-year grace period to comply, a deadline that was extended to 1998. The city refused

to grant Michaels’ request to again extend the deadline.

Michaels filed suit, claiming:

Violation of equal protection requirements for the Fourteenth Amendment;

Violation of due process requirements of the Fourteenth Amendment;

Violation of free speech protections of the First Amendment; and

Violation of right to just compensation under the federal Highway Beautification Act.

The company’s attorneys hired a noted sign valuation expert to determine the advertising value of the

sign in such a prominent location. The sign itself was nothing spectacular, merely mentioning the

company’s name and its three main areas of business: frames, floral, and crafts. But the location—and

the highly motivated shoppers traveling nearby—made the sign worth $750,000.

The city eventually settled with Michaels and allowed the sign to remain throughout the terms of the

store’s lease.

This case showed that a sign—which was more than 40 years old at the time of the case—had value far

beyond the dollars involved in manufacturing and installing the sign.



Terry Shulman’s Case Study

The article “Death of a Retailer” also is reprinted from Signs of the Times with permission. It originally

appeared in March 1996. While this case is not an amortization case, it does explain the process of

determining a sign’s value and the importance of signage to retailers.



Appendix

To Learn More

Those wanting to learn more about the economic value of signs, or signs in general, may find the

following publications useful. All are available through The Signage Foundation, Inc.

“The Economic Value of On-Premise Signage, 2012”

“The Economic Value of On-Premise Signage, 1997”

“Signs and Federal Protection”

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