The Nevada Supreme Court recently addressed several fundamental billboard appraisal issues in the case known as National Advertising Co. v. State Department of Transportation, 116 Nev. Adv. Op. No. 10, issued on February 2, 2000. This case arose when the Nevada Department of Transportation (NDOT) removed billboards for a highway construction project south of Reno. A total of four signs were owned and operated by National Advertising Company and by Donrey of Nevada on leased land. The local jurisdiction, Washoe County, restricts the placement of new billboards, and the companies were unable to find suitable replacement locations. The companies therefore sought compensation for the removal of their property. The case went to the Nevada Supreme Court after National Advertising Company appealed the original decision by Judge Mills Lane of the Second Judicial District Court, Washoe County. The Supreme Court’s decision provides useful insight concerning the valuation of off-premise signs taken under imminent domain. For this article we have reviewed four key questions that were answered by the court:
Do billboards generate “business income” that is not compensable in condemnation takings?
The District Court concluded that advertising income to the billboard companies was “business income” and, therefore, not pertinent to this case. However, the Supreme Court reversed this conclusion and stated, “The income generated from the billboards should have been considered in determining the value of the Advertising Companies’ leasehold interests.” The following footnote was added, which calls for consideration of the business income under the income capitalization approach:
The Advertising Companies are not entitled, nor do they seek, to recover lost intangible business income. In order to determine the value of the leasehold interests, however, the advertising rental income must be considered under the income capitalization approach, which adjusts the anticipated net income to present value through the capitalization process. 8A Nichols on Eminent Domain Sec. 23.04 [b] at 5d (3d ed. 1997, 1998).
Are billboards real property that should receive compensation, or personal property that should not be compensated?
The second point addressed by this recent decision deals with the long-argued characterization of billboards as either real property or personal property. Since most items that are categorized as personal property can be removed at will by the owner, personal property is not normally compensable in right of way condemnation cases. Billboard companies usually claim that signs are personal property for taxation, although they sometimes characterize signs as real property in condemnation proceedings. While this has been important for separate legal reasons, the distinction did not matter to the Supreme Court of Nevada. The court addressed this issue in some detail:
[S]ome courts focus on whether a billboard is characterized as personalty or realty, as does NDOT, in determining whether advertising income should be considered in assessing the value of leasehold interests, or in determining whether a billboard owner is entitled to compensation at all. Those courts conclude that if a billboard is characterized as a trade fixture or personalty, then either it is improper to consider the advertising income it generates, or the owner is not entitled to compensation at all. (Citations omitted.) Other courts conclude that the characterization of a billboard as either realty or personalty is an arbitrary distinction, and that advertising income generated from billboards that cannot be relocated should be considered in valuing leasehold interests so that owners will be justly compensated. (Citations omitted.) We conclude that this latter approach is the better means of awarding just compensation for condemned leasehold interests when billboards cannot be relocated to comparable income-generating site[s].
In other words, the court ruled that if an income-producing asset that is location-dependant is taken in an eminent domain action, the fair market value of the asset should be the basis of just compensation whether or not it is strictly real property.
Does the “bonus value” method result in the proper estimate of compensation?
Next, the decision addressed the issue of the “bonus Value” method. In its earlier decision, the District Court adopted the “bonus value” approach used by NDOT. Under this method, the billboard companies are entitled only to the value of any benefit inherent in ground leases that are below market rates. The Supreme Court reversed the District Court stating in part, “[w]e conclude that the district court erred when it awarded the bonus value of the Advertising Companies’ ground leases and did not consider the advertising income generated by these billboards in calculating the value of their leasehold interests.”
In a footnote the court explained that part of its position was based on the fact that the signs could not be relocated.
Because we conclude that the subject billboards cannot be relocated, we need not reach the issue of whether the district court erred in finding that the billboards were removable trade fixtures as a matter of law. As demonstrated above, we believe the threshold issue is whether the billboards can be relocated to a comparable site within the market area such that the Advertising Companies can replace their lost advertising rental income. If the billboards cannot be relocated to a comparable site, as is the case here, then the state must compensate the billboard owners for the valuable interests taken, that is, the value of their leasehold interests, taking into account the irreplaceable, lost rental income.
With this footnote, the court recognizes that the value of most billboards is inextricably bound to its location.
What are logical and accepted methods of appraisal?
The fourth point is important for billboard companies, condemning agencies and sign appraisers because it concerns appraisal methodology. Throughout this decision, the Nevada Supreme Court supports the comparable sales approach and the income approach. Both of the sign companies’ appraisers used the Gross Income Multiplier method (comparable sales) and the Capitalized Income method (Direct Capitalization). The court stated that “Under the circumstances of this case, we believe that either the comparable sales method or the income capitalization method would be a better means than the bonus value method of appraising the market value of the Advertising Companies’ lost interest.”