A Hotel Freeway Sign

When a motel has used a sign rent-free for four years, how much should it have to pay the sign’s landowner?

Before 1990, one person owned two adjoining pieces of property in Decatur, GA, which is located just outside of Atlanta in DeKalb County. A Days Inn motel was built in 1970 on one piece of property, and a Clairmont Lodge was built later on the other. However, the electronic-message-center sign that identified the Days Inn was built on the Clairmont Lodge property, where it had full visibility to motorists traveling in both directions on I-85.

The approximately 625-square-foot sign included a 195-square-foot electronic message center. Although the sign’s height reached 115 feet, its elevation above I-85 peaked at 65 feet.

The Clairmont Lodge property was subsequently sold, but it still granted the 238-room Days Inn an easement for continued use of the sign. In May 1991, however, Parian Lodge, Inc. acquired the 4.8-acre Clairmont Lodge property by foreclosure of a 1972 mortgage. This extinguished the easement.

In late August 1991, Parian sent its first "notification letter" to Days Inn management, stating that continued use of the Days Inn sign would require compensation. The sign remained up, without any compensation, until it was removed Aug. 31, 1995, by court order. Days Inn paid the Clairmont Lodge no compensation for use of the original sign. That same month, the Days Inn owners placed a similar sign on their own property that nearly replicated the I-85 exposure.

Subsequent changes of ownership have occurred. For the record, the plaintiff is Massey Assoc. Ltd., and the defendant is Whitehorse Inns of Georgia.

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At issue is: How much does the defendant owe the plaintiff for the four years’ use of the sign? The valuation arguments that follow will consider the advertising value the sign provided during that span, as opposed to the value of the physical sign. These arguments were presented by noted Oregon appraiser Dr. R. James Claus; the bulk of the text here is a paraphrase of his efforts. The defendant filed a motion in limine to prevent Claus’ testimony from being heard by the jury, but the judge ruled that his 20 pages of evidence are worthy of presentation.

Unless it’s settled out of court, the case probably will be heard in May in DeKalb County Superior Court. It’s expected that the defendants will admit to owing as much as $60,000. An outdoor-advertising expert is expected to testify that he would have charged approximately $400,000 for the exposure, and, as will be shown, Claus cites three values ranging from $1.2 to $1.6 million.

Documenting Value

Crucial to the following arguments is the nondescript appearance of the two sites in question. As noted, I-85 is situated approximately 50 feet higher than the ground on which the Days Inn was built. Take away the signs, and the motel practically disappears from the motoring public.

This topography is so compelling, Claus explains, that no amount of newspaper, television, radio or direct-mail could compensate for the loss of a sign. Without a sign, the facility simply could not function as a value-oriented motel. The only solution would be an alternative use.

Financial data was subsequently obtained from tax records, real-estate brokers, outdoor-advertising companies, hotel-management specialists and various published reports. Current and prior owners and users of the property were interviewed. The local economic climate was inspected and described. Days Inn’s performance was analyzed during the period the sign was in use.

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Under normal conditions, a valuation could be conducted in three ways:

• A comparable sales or lease approach would look at what someone would be willing to pay for a similar subject property.

• The income approach would seek to determine how much income the subject property would generate in the future.

• The cost approach would consider the cost to replace or reconstruct an existing real-estate structure.

For market comparisons, signs have little resale value because they are custom products. Consequently, traditional market sales data isn’t relevant. However, other comparisons are valid by showing the direct correlations between street visibility (exposure) and the rent price per square foot. This method also can determine the value of the sign in promoting and preserving the site’s originally intended use.

The income approach uses a capitalization rate that’s based on the estimated income generated by customers who were attracted to the business because of the sign. This method relies on documentation of the interaction and interdependence of the signage, customer behavior and revenue.

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The replacement approach considers what other commercial speech devices would be needed to replace the communication value of the sign. On-premise business signs are accessory land uses, with the primary use in this case being the service of providing lodging. In this case, the accessory use is essential to the success of the primary use. The replacement approach seeks to determine how essential it is.

This measurement, typically called "exposure," is generally measured in an advertising standard called "cost per thousand." It’s considered the best way to compare the advertising value of television, radio, print ads, billboards, etc.

For an on-premise sign, the "audience" is measured by the number of vehicles that would drive past it for a given time period. Such "traffic flow maps" would be tabulated over the course of a year, 24 hours a day, to account for daily, monthly and seasonal traffic fluctuations.

This number then must be adjusted to eliminate non-potential customers, i.e., a commuter isn’t likely to stop at a home-improvement store on the way to work. The new number must be further adjusted for the number of passengers in the average vehicle.

Eventually, gross rating points are calculated. These are defined as the percentage of the population reached by a specific medium for a single insertion, i.e., one radio spot or one print ad. For comparison, an on-premise sign counts as one 24-hour insertion.

For a value-oriented motel, "impulse" customers are the lifeblood. Thus, the on-premise sign is absolutely essential for guiding the motorist off the highway to the motel. To ensure that more motorists are looking for the on-premise sign, Days Inn also has billboards for each side of I-85 that alert motorists to the upcoming Days Inn facility.

Days Inn states that more than 50 percent of its customers do not have advance reservations. Claus’ research indicates that, after all the above calculations are made, the daily number of exposures to the Days Inn sign in 1995 was 280,000. He determined that replacing these exposures through other means would be cost-prohibitive and would not meet the tests of being:

1. Legally permissible,

2. Financially feasible,

3. Physically possible, or

4. Maximally productive.

Pricing Methods

The comparison method

The closest alternative to the on-premise sign was outdoor advertising (billboards). Claus consulted with an outdoor-advertising expert, who noted that demand for billboard space in the Atlanta area exceeds supply.

In that region, representative rates for two to 12-month showings range from $4,500 to $3,200 per month. For a premium "rotary" plan of five ads that rotates the copy around a captive-market area, the price would be $6,500 per month, if it were possible at all.

Consequently, the replacement cost for a premium outdoor-advertising campaign would be:

$6,500 x 5 faces x 49 months = $1,592,500.
For these five billboards, two must be placed close to the motel to function as on-premise signs. This also assumes the illuminated billboard structures are available on I-85 within a half mile of the Days Inn exit.

As another scenario, Claus considered replacing the exposure with a billboard that included an electronic message center, such as existed on the Days Inn sign. The following rates were offered by Cable Advertising of Metro Atlanta (CAMA) for 10-second intervals at either four or eight times an hour. The sign operates 19 hours a day, from 5 a.m. until midnight. The best rate available is for a 12-week period, at 80 seconds an hour, for 19 hours a day, seven days a week, for a total of 10,640 seconds per week. At a rate of 2 cents per second, the weekly cost would be $214.

But if the billboard were to operate continually, 19 hours a day, like the on-premise sign, there would be 3,600 seconds per hour (478,800 a week) which would balloon the cost to $9,576 per week at the 2 cents/second rate. To continue this for 209 weeks (the length of time for the "rent-free" Days Inn sign), the cost would skyrocket to $2,001,384. Assuming an additional 20-percent discount for exclusive use of the message center, the more logical price would be $1,601,107.

Even so, this would be for one double-faced electronic message center, which means that one face would be after the Days Inn exit, and scarcely as valuable as the one located before the exit.

Because traditional outdoor advertising is more feasible than the electronic-message-center outdoor advertising, the best replacment cost estimate is $1,593,000.

The income method

Days Inn provided income and expense information for the period of Aug. 21, 1991, to Aug. 31, 1995. Income for the time period was $8,463,183. The value attributed to the on-premise sign, a conservative 25 percent, reduces the sign-attributable income to $2,115,797. This figure is then cut in half to account for the 50 percent of the customers who didn’t have advance reservations, meaning the sign attracted them. The figure then becomes $1,057,900. Adding in 10 percent interest on these monies increases the income-approach value of the sign to a still-conservative $1,221,567 — only 12.5 percent of the total income.

The Days Inn owners have acknowledged that the loss of the freeway-oriented sign caused "a severe impact on the revenues being earned at that place of business," and "there [was] a substantial negative impact on the business due to the loss of revenue caused by no longer having this advertising medium."

All told, the income-approach value of the sign is estimated at $1,222,000.

The market approach

For this scenario, it’s assumed that, without the high-rise sign, the motel could not survive. So what alternative businesses could there be? The most likely option would seem to be utility apartments, which is what the neighboring Clairmont Lodge offers. In fact, Days Inn had inquired about purchasing the Clairmont Lodge for $17,000 per unit and continuing to use it as utility apartments. However, when Days Inn was formally appraised in July 1995, its units were valued at $31,765 each, prior to renovation. The difference was based on lack of visibility from I-85 and the inability to upgrade the property beyond utility apartments.

Even if the per-apartment value is raised to $25,000, the difference in value for the motel-unit versus the apartment-unit is $6,765, and based on 238 units, the net difference in uses would be $1,610,000. Consequently, the reconciled value of the sign, based on this market approach is $1,610,000.

Conclusion

Three separate approaches have been used to determine the value of the high-rise, electronic message center to the motel. All three approaches follow accepted appraisal procedures. To reiterate, the cost of replacing the lost exposures would be $1,593,000. The amount of income attributable to the sign would be $1,222,000. If the sign were lost, and continued functioning as a motel wasn’t feasible, the next-best highest use would result in an income drop of $1,610,000. The reconciled estimate for the value received by Days Inn for use of the high-rise, electronic message center is $1.6 million.

In the past couple years, ST has published several similar articles about the value of signs. When faced with Claus’ testimony, most opponents have agreed to settle out of court for substantially higher amounts than they would have been willing to pay prior to such testimony. We wouldn’t be surprised to see this settled out of court prior to a trial as well. We’ll update you on future developments.