• Rothfelder on the PA Tax Decision

    The  Chichester School District, et al opinion from the Commonwealth Court of Pennsylvania reported in the January 4 edition of Billboard Insider illustrates the appraisal issues for billboards and the land on which they are situated in two different contexts, namely for ad valorem taxes vs condemnation.

    This Pennsylvania case essentially holds that the land upon which the billboard is located can be valued for ad valorem tax purposes by consideration of the ground rent paid by the  owner for maintaining his billboard on the land. In other words, land owned by a billboard lessor is likely to have a higher value due to ground rent paid by the billboard owner and lessee, as opposed to land without such rental income producing capability, so such land can be taxed accordingly under the case.  By contrast, one of the most significant cases we’ve read about in Billboard Insider and elsewhere in 2018 is Norton and Lamar vs Cincinnati, where a municipal tax on the billboard itself was held unconstitutional under the First Amendment. In addition to infringing on Free Speech rights, other cases have held that, for taxation purposes, the advertising revenue generated by the billboard should not be considered, because to do so includes intangible assets rendered nontaxable by statute, such as permits, advertising contracts, and message content. Thus, these cases demonstrate a tricky area of  law and appraisal,  which depend largely on the property interest to be  valued, and the purpose of the valuation.

    The Texas Supreme Court has addressed the same legal and appraisal issues in the context of condemnation. More specifically, the Court issued its opinions in Texas vs Central Expressway Sign Associates and Texas vs Clear Channel in 2009 and 2015, respectively (I handled both cases). In the Central case, the Court held that an easement and leasehold hosting a billboard could be valued in a condemnation case under an income approach using the of ground rent paid to the easement owner/lessor by the billboard owner/lessee (which was Viacom, nka Outfront). This ruling is analogous to the Pennsylvania’s Court’s holding in Chichester School District, both of which recognize the financial reality observed by the Central Court that “a property better suited to billboard advertising would presumably be able to command a higher rent.” And, since the land itself doesn’t confront the constitutional and statutory prohibitions applicable to billboards themselves, sign sites are often valued under an income approach for both condemnation and tax purposes.

    The Texas Supreme Court’s 2015 decision in Clear Channel, however, is more complicated. The State and other condemnors cite the case for the proposition that billboards, while interests in real property, may be valued only under the cost less depreciation approach. To include the billboard’s advertising revenue under an income approach, the government argues in interpreting the case, impermissibly includes values a business that can be relocated and continued elsewhere after the condemnation. Thus, analogous to the Cincinnati case, condemnors argue that under Clear Channel billboards can’t be valued by consideration of their advertising revenue in the condemnation context.

    The Clear Channel case addressed the rare situation where only the billboard structure remained for adjudication, as Clear Channel and the State settled on the value of the leasehold prior to trial. The opinion, therefore, leaves open the question of whether the entire bundle of condemned property rights-the sign structure, the leasehold, easement, or fee hosting the sign, and the permit-could be simultaneously valued with consideration of the advertising revenue. Further, since rendition of the Clear Channel case, the Texas Supreme Court let stand a Texas Court of Appeals decision that had permitted consideration of advertising revenue in the condemnation of a billboard in Texas vs Moore. The U.S. Supreme Court in Horne vs United States also recently ruled that personal property (i.e., raisins) as well as real property is protected by the Fifth Amendment, and the availability of government farm subsidies (arguably analogous to billboard relocation programs)  are not a substitute for the payment of constitutionally mandated just compensation for the taking of private property. Therefore, the  Clear Channel case will undoubtedly be subject to more interpretation and litigation, adding even more challenge to lawyers and appraisers on the valuation of billboards and the land on which they are situated, whether for tax versus condemnation purposes.

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