Delays and Damages

Best Buy Co., Inc., the rapidly growing discount retailer of electronics and appliances, held the grand opening at its San Antonio, TX, store on Aug. 18, 1995. By contract, the store was to be identified at that date by two double-faced pylon signs proximate to an interstate highway, I-410. Actually, these illuminated signs, Sign A (45 ft. high and 297 sq. ft. per face) and Sign B (60 ft. high with 207 sq. ft. per face), were contractually slated for installation no later than June 1, 1995. $image1

Sign A, located away from the store and adjacent to the interstate’s frontage road, became fully operational the day before the grand opening. Sign B, located in front of the 46,520-sq.-ft. store, wasn’t fully operational with the appropriate logo until Sept. 4, 1995. Consequently, Best Buy was deprived of Sign A for 78 days, and Sign B for 96 days.

Best Buy hired Dr. R. James Claus, a licensed Oregon appraiser, to assess the damages the real estate suffered due to the loss of promised public exposure. In preparing his report, Claus emphasized: "This evaluation does not focus upon the value of the physical sign structures themselves, but instead upon the value of the visibility or communication function that the signs perform."

The first step was to consider alternative signage. The setback of the store precluded any wall or fascia signs. Roof signs were possible, but the local sign code would not permit signs large enough to have copy that could meet the minimum legibility standards of the federal Manual of Uniform Traffic Control Devices (MUTCD). Outdoor advertising in the area is at a premium due to a moratorium on new construction, and likewise was not an option.

To assess property valuation (and the signage is indeed part of this value), three standard options are available:

• Market comparison
• Income capitalization
• Cost of replacement (substitution)

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For this case, Claus used both of the last two methods. Claus explains, "For purposes of this study, the valuator must determine what it would cost to replace the lost exposures caused by the lessor’s delay in installing the two signs." This methodology is coupled with a "highest and best use analysis." This latter analysis considers the best possible signage use under four conditions. The use must be 1) physically possible, 2) legally permissible, 3) financially feasible and 4) maximally productive. This highest use means the sign must be seen and must communicate as intended.

Cost of replacement. The first step is determining the signs’ exposure rate. Based on Traffic Audit Bureau (TAB) statistics, the daily effective circulation for the signs is 99,000 per face per day. In 78 days, Sign A missed 15.4 million exposures. In 96 days, Sign B missed 19 million exposures. Roughly, this calculates to three million exposures per month per sign face.

To attain similar exposure, Claus writes, "would minimally require one mid-week [200,000 exposures for $7,258] and one Sunday newspaper insert advertisement [345,000 exposures for $12,520], plus saturation television exposure [2.5 million exposures for $16,926], at a total cost of $36,704 per face per month, or $146,816 per month. Claus explains that only visual advertising could begin to replace the lost exposures, based on the signs’ distinctive "ticket" logos.

By prorating the one-month replacement cost over the 78- and 96-day ranges, the replacement cost becomes $424,767. However, Claus acknowledges that alternative advertising mixes conceivably could help recapture those lost exposures, and he very conservatively split the replacement cost to $213,000.

Income capitalization. Next, Claus investigated the positive direct effects of the signs from a consumer standpoint. Claus created a survey that subsequently included 120 customers over a two-week period. Among respondents, 30 customers (25%) said they first became aware of the store because of the signs. An additional 38 (32%) said the signs were "useful in locating the store." Another 22 people (18%) said they did not rely on the signs to find the store, and the other 30 people didn’t answer the question.

This suggests that 25% of the store’s business was directly attributable to the signs. History suggests that a sign’s direct impact on sales ranges from 10% to 50%, with fast-food restaurants at the high end. For its first year of operation, the Best Buy store averaged $308,687 in sales each month. By taking the 25% figure, the Best Buy signs generated an additional $77,172 in sales each month in the first year. For the 78- and 96-day periods, this figure then becomes $224,000 in sales directly attributable to the signs.

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Best Buy pays monthly rent for its store of $34,626 (approximately 75 cents per square foot) or $1,154.20 per day. Local industrial buildings that don’t require retail signage pay approximately 40 cents per square foot. A comparable sign-less building would pay $620.27 per day. Consequently, the estimated rent for a retailer with signage is an extra $533.94 per day. If 25% of sales is directly attributable to signs, then the rent directly related to the signs becomes $133.49 per day. Coupled with the 19 days without signage, this would amount to a $2,536 rebate in rent.

In the final analysis, Claus estimated the total damages from the lost exposures at $227,536. Did Best Buy receive damages for that amount? No. However, Mark Wisser (Robins, Kaplan, Miller & Ciresi L.L.P., Minneapolis, MN), the attorney who handled the case for Best Buy, observed, "As required by the Federal Rules of Civil Procedure, Dr. Claus compiled his findings in an expert report, which was produced to the attorneys for Fiesta Hills [the lessor]. Under intense questioning by Fiesta Trails’ lead attorney at the deposition, Dr. Claus successfully explained and defended his findings and methodology. In particular, Dr. Claus explained that the location and conspicuity of the Best Buy signs made the signs so valuable that Best Buy’s damages from 2 and 1/2 months of lost exposure exceeded the amount of Best Buy’s total rent for the same period.

"Once Fiesta Trails’ attorney recognized the strong logic behind Dr. Claus’ opinion, the case was settled within a matter of days — on the same terms Best Buy had proposed and the landlord had flatly rejected before Dr. Claus became involved in the case."

Although terms of the settlement were not announced, and the amount was less than Claus’ estimated damages, Best Buy did receive compensation in the form of rebated rent.

Wisser concluded, "With Dr. Claus’ assistance, Best Buy was able to show in this case that there is substantial dollar value connected to the repeated exposure of Best Buy’s well-recognized trademark ticket signs to actual and potential customers."