Naegele Outdoor Advertising v. City of Durham

Citations: 803 F. Supp. 1068; 1992 U.S. Dist. LEXIS 15763; 1992 WL 240530Docket: C-85-722-D

Court: District Court, M.D. North Carolina; August 24, 1992; Federal District Court

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The case of Naegele Outdoor Advertising, Inc. v. City of Durham revolves around the legality of a 1984 ordinance that restricts commercial, off-premises advertising signs, allowing only those along interstate or federally aided highways after a 5½-year grace period. The plaintiff, Naegele, argued that this ordinance constituted a Fifth Amendment takings violation by depriving it of just compensation for the loss of billboard properties necessary for its business.

Initially, the district court granted summary judgment in favor of the City on both First and Fifth Amendment claims. However, the Fourth Circuit affirmed the First Amendment ruling but remanded the Fifth Amendment claim for further factual investigation, referencing the need for a case-specific analysis in takings cases as outlined in prior Supreme Court rulings.

On appeal, Naegele contended that the ordinance's impact would adversely affect its business model, which relies on a percentage exposure system for billboard rentals. The Fourth Circuit indicated that the determination of a taking hinges on whether the ordinance deprived Naegele of economically viable use of its property. The remand requires the district court to define the appropriate unit of Naegele's property impacted by the ordinance and conduct a thorough examination of various factors that would contribute to assessing the economic harm, including the number of billboards affected, their market and salvage value, lease terms, and overall impact on Naegele's business operations.

The court has conducted three non-evidentiary hearings regarding Fifth Amendment issues and, after extensive discovery and discussions between the parties, has received comprehensive factual stipulations that resolve disputes and allow the court to concentrate on legal matters. Despite the court of appeals emphasizing the need for an evidentiary hearing, the court believes that the thoroughness of the discovery and stipulations may permit a summary judgment because there are no genuine issues of material fact remaining. The court will identify the specific property unit affected by the ordinance and assess whether it denies Naegele economically viable use based on the Penn Central factors: economic impact, interference with investment-backed expectations, and the character of the governmental action. Additionally, the court must evaluate if Naegele's claim is premature, referencing prior case law where a claim was deemed premature due to lack of a variance request or state compensation procedures. A subsequent case clarified that a plaintiff could incur concrete injury from a zoning ordinance, supporting the examination of Naegele’s claim.

The court determined that the ordinance enacted caused substantial interference with the primary use of Naegele's property, impacting investment-backed expectations and resulting in concrete injury. Unlike the Williamson County case, the Raleigh ordinance lacked variance or compensation procedures for sign owners, making Naegele's claim ripe for judicial review. Even if Naegele sought just compensation, it would likely be denied under North Carolina General Statute 40A-51, which allows inverse condemnation claims, as precedent shows no compensation is owed when an ordinance includes an amortization period. Thus, pursuing state procedures would not change Naegele's position, leading the court to find that addressing the Fifth Amendment claim directly was more efficient.

Next, the court aimed to establish the unit of property affected by the ordinance. The parties agreed on key facts: Naegele leases land for each sign under separate contracts, with each sign treated as an individual structure subject to distinct permitting and taxation. Naegele's advertising is primarily sold on a "showing" basis, with only 1.7% of sales occurring on an individual sign basis between 1986 and 1989. A significant majority, 65.86%, of sign faces sold during that period were for Durham-only showings, indicating a concentrated market focus.

The Supreme Court's ruling in Penn Central establishes that "taking" jurisprudence focuses on the overall interference with property rights rather than dividing a parcel into segments. In this case, the Durham ordinance impacts multiple properties owned by Naegele, which argues that the relevant unit of property is its leasehold interest in individual signs. The City contends that the proper unit of analysis is the broader Raleigh/Durham operating division or, at the smallest, the Durham metro market, as Naegele's advertising sales typically involve combinations of signs in that market. The court agrees with the City, determining that the relevant unit for takings purposes is the combined group of signs in the Durham area, rather than individual billboards. This aligns with established takings law, which indicates that the complete "bundle" of property rights must be assessed collectively, meaning that interference with one aspect does not constitute a taking.

Following this, the court will evaluate whether the ordinance's interference with Naegele's property constitutes a taking by examining: 1) the economic impact of the ordinance on Naegele; 2) how the ordinance affects Naegele's investment-backed expectations; and 3) the character of the governmental action. Additionally, referencing the Supreme Court's decision in Lucas, if the ordinance deprives Naegele of all economically beneficial use of its property, the government can avoid compensation only if it can show that the restricted use was never part of Naegele's property rights. Consequently, Naegele's motion for summary judgment is denied, while the City's motion regarding the unit of property is granted.

The court will first assess the record based on stipulated facts before applying the Penn Central analysis or the Lucas test concerning the takings inquiry identified in Naegele. Non-commercial advertising on billboards generates minimal revenue, totaling $148,587.10 from 1984 to 1989, yet no viable market exists for such advertising on structures that must be removed per the ordinance. All affected billboard structures (105 or 106 sign faces) are deemed economically useless, with no potential for commercial or non-commercial use and no salvage value.

The stipulations also reveal leasing details for the disputed signs, showing an average maximum lease term of 8.6 years and an average remaining lease time of 5.9 years as of September 1984, with an annual lease payment of $200. Naegele can reduce, stop, or cancel rent payments if government regulations limit use, while lessors can terminate leases for development purposes. Naegele does not own any land for these billboards, relying solely on leased sites for advertising.

The court is uncertain about the definition of "cost" used by the court of appeals, but outlines various costs related to the signs, including a tax value of $126,420 as of 1990. The estimated original cost of the signs is approximately $130,435, with removal costs totaling $84,677.31 and replacement costs at $428,136. There are no ongoing carrying costs for unusable signs due to lease termination rights.

In terms of depreciation, Naegele's predecessor used a fifteen-year period for accounting, while Naegele employs a twenty-year period for accounting and a five-year period for tax purposes. The life expectancy of the signs exceeds the depreciation periods, with wooden signs lasting over twenty years and steel signs over forty years. As of September 1990, the average age of the disputed faces was 15.2 years, with a breakdown of eighty-two steel and twenty-one wooden signs.

The stipulated revenue earned from the disputed signs from January 1, 1984, to December 31, 1989, amounted to $1,707,759.18, with total revenues of $4,882,367.21 in the Durham zoning jurisdiction and $5,741,222.78 in the Durham metro area. The cost of removing unusable billboards exceeds the average salvage value of their parts, rendering them without salvage value due to impracticality in usage and high costs associated with shipping. The value of remaining signs is reportedly decreased by the ordinance affecting Naegele's market coverage, yet no evidence of the specific dollar amount of this decrease has been provided. The fair market value (FMV) of Naegele's signs was initially stipulated at four times their annual revenue in 1984, decreasing to 3.5 times by 1990, indicating a consistent multiplier regardless of the number of signs affected. The ordinance has resulted in reduced advertising availability, with Naegele selling 3,662 faces in larger contracts that included signs outside the metro area, generating $862,465.33, and 7,064 faces exclusively in Durham, totaling $1,551,687.44 over the same period. An estimation of lost sharing revenue due to the ordinance is calculated at $256,583.44. The ordinance's impact is measured against the 1984 face count of 123 affected signs out of 270 total in the Durham metro area, down to 105 disputed signs out of 231 total currently, maintaining a consistent percentage of affected signs. Overall, the ordinance has reduced the total number of signs in the Durham metro market by 45.5%. Revenue generation serves as a measure of value, with the total revenue from disputed signs from 1984 to 1989 being $1,707,759.18.

Naegele's Durham metro area is projected to lose 29.75% of its annual revenue when the new ordinance becomes effective. In 1984, the fair market value (FMV) of the disputed signs was assessed at $998,849.04, representing 46.25% of the non-disputed signs' value of $2,159,853.92 and 31.62% of the total value of all signs in the area, which totaled $3,158,702.96. By 1990, the FMV for the disputed signs decreased to $965,525.00, constituting 37.59% of the non-disputed signs valued at $2,568,925.00, and 27.32% of the total FMV of $3,534,450.00.

The document discusses the role of an amortization period in zoning ordinances, allowing property owners to recover part or all of their property's value before non-conforming use is prohibited. Amortization periods can serve as an alternative to eminent domain proceedings and can mitigate potential takings. The validity of an ordinance is not determined solely by the presence or absence of such a period. For an amortization period to be deemed reasonable, it should allow property owners to recoup or minimize losses by its conclusion, considering factors such as initial investment, depreciation, remaining useful life, replacement cost, salvage value, alternative uses, revenue loss, and the percentage of affected signs. Naegele earned $1,707,559.18 from the disputed signs during the amortization period and continued to benefit financially during the litigation process, with earnings from 1984 to 1989 significantly exceeding the original construction cost of $130,435.00, removal cost of $84,677.31, and replacement cost of $428,136.00.

Naegele has received nearly double the fair market value (FMV) of the disputed signs from 1984 during the amortization period. The leases include a termination clause, ensuring Naegele does not face losses from ongoing lease liabilities. While some signs remain depreciated with useful lives after the amortization period, the amortization's reasonableness does not hinge on recovering all property value within its duration. The court will assess if the ordinance denies Naegele economically viable use of its property, recognizing the balance between government regulation for public good and private property rights. The ordinance affects 106 out of 232 signs, eliminating their economically beneficial use at the end of the amortization period, potentially reducing Naegele's revenue by 29.75% in the Durham area. However, this alone does not determine a taking. The ordinance's impact must consider Naegele's overall property interests; it retains 54% of its signs. The revenue earned during the amortization period, exceeding $1.7 million, including an estimated $256,583.44 in sharing revenue, mitigates the potential financial burden from the regulation. Naegele has not claimed that its business will become unviable due to the ordinance and has recovered nearly twice the FMV of the disputed signs. Furthermore, when Morris Communications Corporation acquired Naegele's predecessor, the purchase price of $400 million did not reflect a reduced value of the Durham signs due to the ordinance.

No downward adjustment was made because Morris anticipated that Naegele would receive fair market value for any signs that needed removal. This expectation differs from the significant investment made to enhance property prior to knowledge of governmental limitations, suggesting that Morris expected either continued use of the signs or compensation for their removal. However, this expectation appears illogical given the takings jurisprudence as of 1985 and the historical context of outdoor advertising litigation under the Fifth Amendment. A purchaser aware of statutory barriers to development cannot claim substantial investment-backed expectations that qualify as constitutionally protected property rights. The state is not responsible for covering investment risks taken in light of existing regulations. Property owners must reasonably anticipate possible restrictions by the state under its police power, particularly concerning personal property like signs.

The signs in question had an average age of 9.2 years as of September 4, 1984, with remaining useful lives of approximately 11 years for wooden signs and 31 years for steel signs. However, the leases for these signs averaged only 8.6 years remaining, indicating that the amortization period allowed for continued use aligned with the remaining lease terms. This information was accessible to Morris at the time of his purchase in 1985.

The character of government action is crucial in determining whether a "taking" has occurred; physical invasions by the government are more likely to be deemed takings compared to regulatory actions aimed at adjusting economic life for public benefit. The Durham ordinance, which regulates for aesthetic purposes, does not constitute a physical invasion and is considered a legitimate exercise of police power. Although Naegele has experienced a significant loss in economic value, such regulatory losses do not typically fall under the takings clause unless they are excessive. Consequently, the court concludes that the Durham ordinance does not exceed acceptable limits, as Naegele has not faced a physical invasion or loss of all viable economic use of its property interests.

The court emphasizes that inferior federal courts must adhere to current law to ensure equal justice, despite trends favoring private property rights. It concludes that the Durham ordinance does not eliminate Naegele's economically viable use of its property, thus it does not constitute a taking; the court grants the City's motion for summary judgment concerning Naegele's Fifth Amendment claim. The court establishes the relevant unit of property for the takings analysis by applying the three-factor Penn Central test, focusing specifically on Naegele's outdoor advertising business in the Durham metro area, rather than aggregating unrelated property interests. Additionally, the court clarifies that while the amortization period is relevant, the specific facts of this case and the nature of the business are pivotal in determining the unit of property. The average age of the sign faces is noted, and the court addresses discrepancies in data regarding sign structures and faces. The court also acknowledges the implications of its determination that individual signs do not represent separate units of property, which could influence the Lucas inquiry regarding Naegele's title.