When appraisers use income methods and certain sales comparison methods, it is important that they examine both the actual income level of the subject property and the market level of income for the same types of property. This is a particularly critical issue for billboards because actual income may differ significantly from the market. Also, since the term of tenancy for billboards is much shorter than for other types of real estate, income at the appraisal date could be substantially different from a few months earlier or a few months later. When analyzing billboard income the appraiser should consider historic income and market rates when available. Actual income without market evidence can be misleading.
Unlike the appraisal of some traditional types of real estate, actual income may not always represent the underlying earning power of a billboard. Billboard companies sometimes charge lower rates to major clients that rent large quantities of advertising space or sign long term contracts. For instance, some advertisers may pay a price of $2,000 or $2,500 per face for billboards that have a published price, or “Rate Card” of $3,000. Since this low price may last for only a few months before returning to higher market rates, the actual income on the date of the appraisal may be understated. Discounting has become more common due to the mergers of major media companies in the past several years. This is because the companies can sell advertisers a package of billboard advertising as well as spots on radio and TV in a bundled package. In order to sell the entire package to the advertiser, the price for one of the media types may be discounted. For example, the radio and TV components may be sold at published rates while the billboard component may be discounted. This kind of discounting will artificially lower the billboard’s actual income until the contract expires. During the contract, the billboards actual income would be well below Rate Card.
There are also instances when actual income is overstated. If an advertiser pays for a group of 10 signs at a published rate of $3,000 per face, the contract would total $30,000. However, if the billboard company included two additional “bonus faces” in the contract, this would artificially inflate the income attributable to the 10 displays. When the $30,000 contract is spread over a total of 12 signs, the price per face drops to $2,500. Consequently, the true income would be below the published Rate Card.
Actual billboard income can also be higher than published rates. Some signs are at such highly desirable locations that several advertisers may want to advertise on the same billboard and will pay a premium to secure them. In these situations, sign companies sometimes set a minimum price for the location and request sealed bids from all interested advertisers. The highest bid secures the location and may be well above published rates.
The best way to estimate the income level for a particular sign is to review legitimate contracts that show historic income, review actual contracts on similar signs in the area if possible, and review published rates for signs in the same market. If available, appraisers should review one or two years of actual income information and avoid relying on a short income periods that could be misleading. Since advertising contracts usually cover a short period of time and have multiple pricing influences, reliance on only a few such contracts can lead to an improper conclusion of value.