What Does Amortization Mean for Signage?

Amortization concerns the compensation for a┬ásign that is no longer in compliance when a sign code changes. The theory is that, if a sign is allowed to exist for a certain period of time, the owner of it will recoup their investment before the sign has to be removed, which is a way of circumventing the “just compensation” portion of the 14th Amendment. The fallacy of this is explained in the following article, written by certified planner Richard Bass, that appears in The Signage Foundation website’s Research Library. http://www.thesignagefoundation.org/Portals/0/SFI%20Amortization%20Explained.pdf

An example of appropriate argument for just compensation occurred in Richfield, Michigan with regard to a Michael’s crafts store. Its rooftop on-premise sign, which functioned like a billboard, had been built in the 1950s by the prior tenant. In 1987, Richfield banned rooftop signs. A 10-year amortization was included in the sign ordinance, and the Michael’s sign was ordered to be removed in 1998.

For “just compensation,” three valuation methods were used: cost of replacement, the income approach and a market comparison. Estimates were that Michael’s would need to spend $825,000 annually to replace the advertising value of its rooftop sign. Factoring in a 10% annual return on investment, this would mean the cost of replacing the sign’s advertising value would be $8.25 million.

As for income, the sign was calculated to account for 20-30% of the store’s sales. Conversely, the loss of the sign would mean a 20-30% decrease in sales. This would account for $200,000 less profit annually. Given the additional loss of investment income, the potential loss was calculated at $2 million.

As for replacement cost, based on a square-foot lease rate for a different use, the loss was calculated to be $56,000 annually. With a 10% investment revenue, this would mean a los of $560,000. Faced with this evidence, the court determined Richfield would have to pay cash compensation. A settlement occurred out of court. A full report on these proceedings appeared in the December 1998 issue of Signs of the Times magazine.

Conversely, others have failed to show an economic loss due to amortization. One instance occurred in Ridgeland, Mississippi in 1999. The city passed a sign ordinance that restricted ground signs to 50 square feet and a height of 12 feet, with exceptions for signs located within 300 feet of the Interstate highway. The ordinance included a five-year amortization period, which meant that legally erected signs, which would now become illegal with the passing of the sign ordinance, could stay up for another five years. But then they would have to be taken down, and that time period would suffice as just compensation.

Five years later, numerous businesses — Shoney’s, Midas Muffler, Red Roof Inns — filed an appeal to keep their signs. They invoked the precedent case of Lamar Adv. of South Georgia v. City of Albany (1990). The appeal process lasted three years, but the sign ordinance was upheld. The appellants erred in not documenting the economic ramifications of their signs being taken down, which is something Lamar had done when it won its appeal. This case is detailed in the June 1999 issue of Signs of the Times magazine.

As of November 2016, exactly half of the U.S. states (and the District of Columbia) recognize amortization as a legitimate form of just compensation, and the other 25 do not.

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