Daily Development for Monday, August 31, 2009
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

EMINENT DOMAIN; DAMAGES; BILLBOARDS; ADVERTISING REVENUES: When making the determination of adequate compensation after the state condemns an easement used for billboard advertisements, expert testimony assessing the market value of the easement should not include the advertising revenues generated from the use of the easement.

Texas v. Central Expressway Sign Assoc., ___ S.W.3d _, 2009 Westlaw 1817305  (Tex. 2009).

The State condemned a 3,950-square foot parcel of land in Dallas in order to improve a highway interchange. Within this land was most of a 1,801-square foot easement held by Central Expressway Sign Associates ("CESA") for the operation of a billboard. This easement was leased to Viacom Outdoor, Inc. ("Viacom"), who, in turn, sold advertising on the billboard. The billboard generated $168,000 per year in advertising revenue. The State settled with Viacom by agreeing to pay for its relocation. In its suit against CESA, the State called an expert witness who used the "income approach" in his valuation of the property, estimating future rental income generated by the property and applying a capitalization rate. Under the calculation, the estimated fair market value of the easement was $359,817. The trial court found this testimony unreliable and excluded it because the appraisal did not include the advertising revenues from the billboard. CESA's principals included the figure of such

revenues in their estimates and concluded the easement was worth $2,500,000. The jury found the value to be $1,850,000 and judgment was entered in that amount. The State challenged the exclusion of its expert and the Texas Court of Appeals affirmed the jury's judgment.

On appeal to the Texas Supreme Court, the court began by outlining the three recognized methods for determining market value of condemned property in Texas, all designed to approximate the amount a buyer would pay a seller for the property. The comparable sales method is preferred, but where (as here) comparable sales figures are not available, the cost or income approaches or the income approach are acceptable. The cost approach takes the cost of replacing the condemned property and subtracts depreciation. The income approach, which was used in this case, values the property according to the rental income it generates.

In Herndon v. Housing Authority, 261 S.W.2d 221 (Tex. Ct. App. 1953), the Texas Court of Appeals held that generally, adequate compensation does not include profits generated by a business located on condemned land. However, Texas courts have recognized some exceptions to this general rule. Specifically, income from a business operated on the property can be considered into the calculation in a condemnation proceeding if (1) the taking, damaging or destruction of property causes a substantial interference with the access to one's property, or (2) when only part of the land has been taken, so that lost profits may demonstrate the effect on the market value of the remaining land and improvements.

While the taking here did not fall into either of the foregoing two exception categories, the Herndon court (after stating the general rule) cited several cases from other states and noted that evidence of "rents and profits derived from the intrinsic nature of the real estate itself" would be admissible in an action to determine a condemnation award. Based on the qualification in the Herndon case, CESA argued that the advertising income was derived from the intrinsic value of the land and should, therefore, be treated like rental income. In examining case law from other jurisdictions, the court discussed a split, with those jurisdictions not allowing evidence of business income holding that the revenues are too speculative to be properly included in the estimation and that revenues attributable to the sign's location can be reflected in the fair rental value. The court also noted that in similar Texas cases involving various other business ventures, courts have not recognized the

 exception for considering business profits "derived from the intrinsic nature of the real estate."

Here, the court held that the exception should not be created in this case, as there was nothing to indicate that a billboard's location is more significant to business than location was in any of the other cases in which Texas courts declined to recognize the exception. Additionally, the rent CESA charged for the space was significantly less than the amount of profit being generated through advertising sales, implying that the profit was particularly high because of business skill exercised by Viacom rather than the location of the billboard. Had the profit been entirely due to the location, CESA could have charged rent much closer to the level of profit. Even if CESA were, in fact, undercharging for rent, the appraisal of the State's expert still would not undervalue to property because it adds the "bonus value" of the lease to rental income. Bonus value is the value of the leasehold's use and occupancy for the remainder of the tenant's term, plus the value of any renewal right,

 less the agreed rent. The State's expert, deciding that Viacom was paying rent comparable to what it would at a similar property, calculated this value as zero.

CESA further argued that the expert's appraisal violated the "undivided-fee rule," which mandates that the property be valued as if owned by a single party rather than as the sum of the interests of different parties. CESA argued that, because the expert assigned Viacom's leasehold no value, he had impermissibly divided the whole into parts while making his calculation. The court held that this argument misinterpreted the rule, which the appraisal did not violate. The purpose of the rule is to ensure that the approximation is for what the entire property would sell for in a market transaction, not to guarantee that all individual interests are assigned a value greater than zero. The appraisal here did not overlook the value of the property as a billboard location and valued the easement as put to its highest and best use. Therefore, the testimony of the State's expert used an acceptable method to appraise the value of the easement and should not have been excluded.

Ultimately, the court held in reversing the court of appeals' holding that CESA's principals should not have been allowed to include evidence based on advertising income in their valuations, but would be allowed to offer general estimates of a price for which the property could sell given its potential use as a billboard site.

Comment: This decision seems correct.  The owner of the easement was receiving considerably less than the advertising revenues, and the court properly concluded that the value of the billboard space to the owner of the land was the billboard lease rentals, and not the value of revenues earned by the billboard lessee.  The highways are full of billboards advertising “lease this space.”  The advertising value of a billboard location is certainly real, but it is reflected in the lease, not in the revenues. 

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