What Does Amortization Mean for Signage?

Amortization concerns the compensation for a sign 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.

What has the Supreme Court Said about On-premise Signage?

Supreme Court cases that involve on-premise signage

The First Amendment

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the government for a redress of grievances.

The 14th Amendment

Section 1.

All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the state wherein they reside. No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any state deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.

As far back as 1923, in Meyer v. Nebraska, SCOTUS ruled that the 14th Amendment protects the rights of citizens to, among myriad things, “acquire useful knowledge” and, based on Virginia Pharmacy, can’t restrict speech based on who the speaker is (“equal protection”).

Unquestionably, the Reed v. Gilbert Supreme Court (SCOTUS) case from July 2015 was the most important court case for the sign industry of the 21st Century (see related story). But several other SCOTUS cases have established sign-code standards still in effect today.

Time, Place and Manner

In 1976, SCOTUS ruled that pharmacies were allowed to announce their prices for drugs in Virginia State Board of Pharmacy v. Virginia Citizen Consumer Council, Inc. Essentially, this case substantiated First Amendment freedom-of-speech protection for advertising messages. Most importantly, the case established the tent of “time, place and manner” for restricting the words on signs.

Virginia established that sign can’t arbitrarily restrict the time a sign can be displayed (“when”), place (“where”) or manner (“how”) a sign can be displayed. Any limitations on these three characteristics are permitted only if the restrictions are shown to be:

  • Justified without reference to the speech’s content
  • Serve a significant governmental interest, and
  • Allow ample alternatives for communicating the information.

Directly Advances, Narrowly Tailored

Four years later (1980), Central Hudson Gas & Electric Corp. v. Public Service Commission further strengthened Virginia’s tenets by adding that any restrictions, to withstand a constitutional challenge, also had to

  • Directly advance the governmental interest, and
  • Be narrowly tailored to achieve that interest.

Soon after Central Hudson, the SCOTUS case of Metromedia Inc. v. City of San Diego involved the allowance of on-premise signage, but the banning of off-premise outdoor advertising (billboards). Although five separate opinion emerged, a 6-3 vote declared the ordinance unconstitutional.

Advertising Bans
In 1996, in 44 Liquormart v. Rhode Island, the state tried to ban the advertising of liquor prices anywhere but at the actual stores. Essentially, SCOTUS upheld the right for merchants to advertise truthful, non-misleading commercial information. First Amendment protections superecede “vice” oriented restrictions.

The Fallacy of “Rational Basis Test” 
The above cases collectively negated the broad police powers that became known as the Rational Basis Test that followed Village of Euclid v. Amber Realty (1926). It basically allowed cities to enact legislation that promoted health, moral, safety and general welfare objectives. This is the basic rationale for virtually all sign codes. Cities only needed to show the regulation wasn’t arbitrary and could be rationally linked to a governmental objective.

Other First Amendment Cases
In 1977, the township of Willingboro, NJ, banned “for sale” signs on residential lawns in an attempt to prevent “white flight” from racially integrated neighborhoods. This also falls under the tenets of a “content neutrality” violation because it was based solely on the signs’ messages.  In Linmark Associates v. Township of Willingboro, SCOTUS ruled this to be unconstitutional because it unduly restricted the free flow of information. The defendants tried to use the “time, place and manner” defense, but it was overruled. The court ruled that the sign provides an immediate way to react.