Adams Outdoor Advertising vs. City of Madison
Wisconsin Circuit Court Branch 20 – December 31, 2004
Case No. 03CV777 – Maryann Sumi, Judge
A billboard permit is inextricably intertwined with the billboard structure, and taxation of the permit is included in the valuation for property tax purposes.
Adams Outdoor Advertising owns and operates approximately 336 billboard faces in and around Madison, Wisconsin, which are classified as personal property. From 1991 to 1993, the assessed value of the signs in Madison was $1.3 to $2 million. In an inverse condemnation action in 1993 (arising from restrictions placed on billboards), Adams’ expert appraised the billboards at $5 million. In 1994, the assessed value by Madison rose to $4 million, and by 2002, it was $6 million based on the Income Method of appraisal. In 2004, Adams challenged this method of determining value for property tax, and submitted values of $300,000 to $400,000 based on the physical structures alone. Adams claimed that the higher value under the Income Method was for eminent domain (real property), and that method does not apply for personal property tax.
The City Assessor countered that the hierarchy of appraisal methods is: 1) recent sales of the subject property; 2) recent sales of reasonably comparable property; 3) cost; and 4) income. Without recent sales of the subject or any reasonably comparable property sales, and with cost data deemed not applicable, the Assessor selected the Income Method as the best approach. He argued that under the Cost Method, it is almost impossible to determine the cost to put billboards into productive use because of such factors as site procurement expenses, entrepreneurial profit, and so forth. Adams Outdoor disagreed with use of the Income Method, and the case went to trial for three days in July 2004.
Sign company expert Donald Sutte testified that the proper approach in a situation like this is to isolate the value of the structure alone for property tax purposes. When isolated, the Income Method does not apply because it erroneously includes leasehold value (which is a real property interest, not personal property).
Sign company expert Rudolfo J. Aguilar testified that the Cost Method is best for personal property tax purposes. According to Aguilar, the income approach erroneously includes the value of the permit, which is an intangible personal property asset that cannot be taxed under Wisconsin law.
Sign company expert Mark Ulmer, an attorney and contributing author of Nichols on Eminent Domain, testified that a distinction exists between valuation for eminent domain purposes and valuation for property tax purposes. Eminent domain determines the value of the leasehold, improved with a billboard structure under the ‘bundle of rights’ concept in real estate appraisal. On the other hand, for property tax purposes the value of the structure alone is proper because the leasehold interest is real property and the permit is an intangible property. Since the real estate is taxed through ad valorem real estate taxes and intangibles are not taxable, only the billboard structure should be taxed for personal property purposes.
The court agreed with part of this argument: “The selected property tax valuation method must also avoid assessment and taxation of real estate value.”
The City Assessor applied the Income method by eliminating the portions of income attributable to the real estate and to the business enterprise value.
Example of City Assessor Approach
(For demonstration only, not actual numbers.)
|Assumed Effective Gross Income (EGI)||$ 100,000|
|Less: Lease Expense (removes real estate value)||– 25,000|
|Less: Operating Expenses (removes business value)||– 50,000|
|Income to billboard||25,000|
|Capitalization Rate||÷ 0.14|
|Value of Billboard for Personal Property Tax Assessment||$178,571|
The Assessor testified that one of Adam’s experts, Donald Sutte, had stated in the past that this Income Method was appropriate for the purpose of property tax assessment. According to the court, Sutte could not clearly recall taking that position. The Assessor produced notes made during a prior meeting and a conversation with Sutte. The court stated that Sutte “hedges on the ultimate issue, which is whether City Assessor Kurth applied the appropriate methodology to Adams’ billboards.”
Expert Aguilar testified that billboards have three components of value for property tax purposes: the ‘bonus value’ of the lease, the cost of the structure, and the value of the permit. A permit is not normally taxed because it is intangible property. Aguilar testified that the permit is the vehicle that provides the income.
To gain additional perspective, the court looked at the valuation of shopping malls. Market value is usually greater than cost due to location, which is “a transferable value that is inextricably intertwined with the land.” The court also noted that the same is true for landfills: the inherent value of an approved and licensed site would pass to a new owner upon sale. The written opinion states that there are other examples where business value is inextricably intertwined with real estate, and the income would survive a transfer of the real estate. The same is true for a billboard: “its value is a function of its permit and its location.” The income-generating capacity is based on the permit and the billboard structure together at a specific location.
The permit value is inseparable from the structure, and therefore is taxable. It is not the permit that is taxed, but the value represented by the permit as part of the billboard.
“… the court determines that the City of Madison correctly utilized the income approach to value Adam’s billboards and that the application of the income approach properly subtracted value unrelated to the billboards themselves.”
It can be argued that the permit is more connected to the land than the structure because a permit is usually site-specific: permits are normally issued for a particular street address or highway location. That could be an argument that the intangible value of the permit would be connected to the land. However, rarely is the owner of the land also the owner of the permit. In most cases, the billboard company owns the structure and the permit. This ownership structure links the permit more closely with the structure than the land, supporting the notion that the permit value is intertwined with the structure.
Another argument that the permit is part of the billboard structure is based on the cost approach. The cost of obtaining the permit must be incurred before the asset can be put to productive use. This is consistent with the definition of the cost of an asset or property.
The cost of just the physical billboard structure erected at a site is rather easy to determine through a quote from a steel fabrication and erection company. The total cost of obtaining a permit is more difficult to determine because it can include many hours of research, legal representation, filing fees, various regulatory approvals, and property owner approvals. When permits are bought and sold, the prices can be substantial. Actual prices for permits might be from a few thousand dollars to $50,000, and even higher in some cases. Permits have been sold in conjunction with signed leases at prices exceeding $100,000 for the combination.
The implications of this case could be important for condemnation purposes. If a permit is part of a billboard structure, and the structure is determined to be personal property, could that part of value be excluded in an eminent domain taking? The only remaining value to billboard companies would be the possible ‘bonus value’ of the leasehold interest.