Billboard Controversy in Los Angeles

California passed State Outdoor Advertising Act SB 919 in August 2001, which requires billboard developers to obtain local permits before erecting signs on property such as that of the Metropolitan Transit Authority (MTA). The law became effective January 1, 2002.

STI/Outdoor LLC, a subsidiary of Viacom (Outdoor Systems), had an agreement to erect billboards and kiosks on MTA property in exchange for installing toilets in MTA restrooms and sharing advertising profits of at least $23 million. Believing that local permits were not required prior to January 1, 2002 under the terms of the agreement, STI/Outdoor began construction of new billboards at several locations just hours before the deadline. The sign company believes that local approval was not part of their original contract, but was adopted separately by the MTA board as a resolution after the contract was signed. STI/Outdoor indicates that the MTA did not have the right to add the restriction.

Construction crews raced to erect billboard structures on New Year’s Eve, just before the new state law took affect. The Los Angeles Times reported that two code compliance officers and a sheriff’s deputy were dispatched to one of the construction sites to stop the sign company’s work crew. The sheriff’s deputy reportedly had to threaten the workers with arrest before they would stop erecting the structures, according to City Manager Paul Arevalo.

City Attorney Rocky Delgadillo went to court on January 3, 2002 to obtain a restraining order to stop further construction activity at the sites. A hearing was set in Los Angeles Superior Court to consider arguments by the sign company and city officials.

At a press conference, Delgadillo stated “Behind us stands an illegal billboard that Viacom tried to erect in the shadows, over the holidays when they thought no one was looking.” He said, “These illegal tactics will not stand. We will do everything in our power to tear down these billboards and make this company pay for its actions.”

County Supervisor Zev Yarosiavsky, who serves on the MTA board, stated that “They had a deal, a legally binding deal, that in exchange for their right to put up billboards, they had to first get the permission of the local jurisdiction where the billboard was going to be erected.” Yarosiavsky believes “They knowingly tried to breach, and did breach, a contract. So, aside from the restraining order…they now find themselves, in the opinion of the MTA and its lawyers, in breach of contract.”

The Los Angeles Times reported that Viacom reconsidered the matter and decided to dismantle the work that had been done. However, the hearing was still scheduled to determine if the stop-work order should be lifted.

This confrontation is not the only thorny issue concerning billboards in Los Angeles. On January 16, 2002, the City Council voted to conduct a survey of illegal billboards to gain better information about the nature and magnitude of billboard issues in the city. They also are planning to hire more investigators to police illegal signs. Councilwoman Cindy Miscikowski declared that she plans to renew a proposal that will ban all new billboards. She will also fight a proposal to allow 70 new billboards to be erected along freeways in exchange for removing about 1,400 signs in other parts of town. Miscikowski also proposed a voter initiative to tax billboard firms to pay for enforcement of regulations. Some City Council members believe it may cost more than $2 million annually to closely monitor and control billboards.

On January 30, 2002, the heat was turned up at the City Council meeting. Criticism of billboards rose to a fever pitch and it appears that the addition of new members on the Council will provide the majority of votes in favor of stricter controls. Councilman Jack Weiss proposed a measure along the lines of Councilwoman Miscikowski’s that would police signs more closely and charge sign owners a fee to cover the City’s cost of tighter control.

June – October 2000

The Federal Highway Administration’s Office of Real Estate Services sponsored a survey coordinated by the National Alliance of Highway Beautification Agencies and conducted by Jack Faucett Associates, Inc. (JFA) of Bethesda, Maryland. The national survey was sent to 47 states and the District of Columbia to determine the types of outdoor advertising data collected, the collection method, and how that data is maintained and used. 39 survey responses were collected between June and October 2000 through JFA’s web site. Some of the results of the survey are summarized below.

1. 27 states (69%) reported that they permit signs by location rather than by sign face.
2. 30 states (77%) reported that they conduct regularly scheduled sign inventories.
   Nearly half the 30 states (14) that conduct scheduled inventories, complete the work annually. 8 states are on a 2-year schedule, 4 are done twice each year, and 4 conduct the survey quarterly.
3. Only 14 states (36%) reported that their state laws are more restrictive than their federal/state agreement.
4. 29 states (74%) reported that they could create an inventory of all signs.
5. 31 states (79%) reported that they could create an inventory of all non-conforming signs.
6. 19 states (49%) reported that they could create an inventory of all illegal signs.
7. 27 states (69%) reported that their inventory system does not identify non-conforming signs that were part of a right-of-way acquisition.
8. 30 states (77%) reported that their inventory system does not identify why a particular sign is non-conforming.
9. Nearly all states (37) reported that their inventory system tracks illegal signs throughout the legal process.
10. 20 states (51%) reported that they did not spend federal dollars to acquire signs.

For a complete copy of the study go to:
FHWA Outdoor Advertising Survey Results

From Outdoor Outlook, January 7, 2002 (The Outdoor Advertising Association of America).

The Georgia Supreme Court has issued an opinion upholding the constitutionality of Georgia’s vegetation control law. The Georgia statute permits the trimming of trees and other vegetation growing on state highway rights-of-way that obscure outdoor advertising signs. In the decision in Garden Club of Georgia v. Shackelford, the court held that the Georgia Legislature properly predicated the statute on a finding that it is in the public interest for outdoor advertising signs to be visible in order to provide information to the general public. The Court found that the Georgia statute, which is regarded as a model state law, did not provide an unconstitutional gratuity and was based on a valid statutory scheme because the law imposes a fee on the owner of the sign that benefits from the vegetation control activity.

While affirming the validity of the state law, the decision did invalidate the specific fee imposed by the Georgia DOT regulation implementing the law, which was based on the timber value of a tree that is removed, rather than its value as a “living resource”. In the case before the Court, the timber valuation would have been $22, as compared with a resource valuation of $536.

The national economic recession is causing a sharp drop in advertising expenditures in 2001. In this economy we assume to see effects in all sectors but billboard companies are holding up better than other media. SEO Heroes Bangkok, a leading provider of strategic advertising and marketing, reports that total ad spending for the first three quarters of 2001 was $68.8 billion, down about 7.9% from the same period of 2000. Television took the biggest hit with network ads down 8% and spot ads down 18%. Those reductions were due in part to the non-stop news coverage following September 11, 2001. But lower ad spending is largely the result of the economic recession. National newspapers saw advertising revenue fall by 21% in the first three quarters of this year. Of the two media segments that posted increases in this period, outdoor advertising was the best performer. Cable television ad revenue rose 2.1% in the first nine months of the year and outdoor advertising rose 2.6%. Part of the reason for better performance in the outdoor segment is the consistency of demand for highway directional signs. Many motels and restaurants that advertise to highway travelers cannot afford to pull their ads during tight economic times. These outdoor customers tend to renew their ads even if there is an increase in cost.

The Outdoor Advertising Association of America (OAAA) reports that the outlook for ad spending in the industry during 2002 is also better than other media segments. OAAA estimates that outdoor ad spending will increase by 4% in 2002. This estimate is based on research from other sources that resulted in a wide range of opinions. The national publication Jack Myers Report predicts that outdoor spending will be down 1% when final figures are in for 2001, and the same percentage decline will occur in 2002. Global Entertainment and Media Outdoor Report by the international consulting firm of PriceWaterhouseCoopers (PWC) forecasts that ad spending in the outdoor segment will rise 11.1% in 2002. The same organization estimates that full-year 2001 results will show an increase of 3.2%. PWC expects outdoor advertising to be much more vital than other media forms because of improving technology, better accountability to advertisers, and new outdoor formats. The third estimate of ad growth for outdoor comes from the consulting firm Veronis Suhler. This source predicts that outdoor ad revenue will increase 7.6% in 2002, due in large part to the increased amount of time that consumers spend in their automobiles. As advertisers intensify their focus on reaching consumers, they will place ads in outdoor venues.

All forecasts are based partly on the outlook for the national economy. Most predictions are for the current recession to end by the second or third quarter of 2002. However, there is reason to believe that this recession may be longer than most and will last beyond next summer. The end of the recession will be determined by renewed consumer spending, which accounts for about two thirds of the entire U.S. economy. But consumers are not flush with spending cash. During the late 1990s, when the stock market was rising at unprecedented rates year after year, many Americans assumed that stocks were a substitute for savings. They came to believe that rising stock prices would create their wealth, so savings was not important. Consequently, the personal savings rate dropped steadily for several years to a record post-war low of nearly zero in 2000. It will now be difficult for consumers to begin building their savings again and increase their spending at the same time. The situation is made more difficult because more people are losing their job almost every month. If consumer spending does not come back strong in the first or second quarter of 2002, the recession could drag on for many months. Under this scenario, advertisers will have less and less to spend in any medium.

With the addition of new data received on billboard purchases during the past few years we have updated our chart of pricing multiples. The new information shows that prices of billboards and billboard companies were higher than previously recorded from 1997 through 2001. The new data comes from transactions that occurred during that time period, but were not available until recently.

Transactions in the database show that buyers paid between five and six times effective gross income for billboards each year from 1997 through 2001. The Effective Gross Income Multiple (EGIM) is the commonly used measure by buyers and sellers in determining market prices.

The average annual multiples from 1997 through 2001 are more than twice as high as the 2.3X average multiple for 1992. That low point in the last 25 years followed the bottom of the economic recession that ended in 1991.

The higher multiples today are the result of two major driving forces: the growing scarcity of billboards, and the level of required returns on investment. The inventory of sign faces throughout the nation is not growing at a significant rate due to widespread restrictions on new permits. Consequently, buyers are willing to pay higher and higher prices to acquire the signs that are remaining. They know that it is becoming more difficult every year to find expansion opportunities. Thus, scarcity is pushing prices upward. The higher multiples also reflect changes in the rates of return on investments, which can be seen in interest rates. An examination of short-term investment yields would not appear to support the higher multiples today. Short-term interest rates on 90-day Treasury Bills are unchanged today from the 3% in 1992. However, investors are more interested in long-term rates than short-term rates. An examination of long-term rates demonstrates why billboard multiples are up over the last decade. The 30-year Treasury Bond was yielding about 8% in 1992, but it is down to 5% at the end of 2001. Lower long-term interest rates correspond with lower discount rates and capitalization rates. It follows that lower cap rates result in higher values. When lower cap rates are combined with increasing scarcity of inventory, the inescapable result is higher prices of assets.

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Updated Multiples Chart