Answer:
Actually Mahaney won the appeal because the Colorado Appeals Court determined that the city's ordinance did actually violate Mahaney's first amendment rights.
The court based its decision in the fact that the city's ordinance acts like a prior restraint to freedom of speech. According to the city ordinance, the city manager had the right to approve or disapprove murals. The city manager could freely decide which murals were appropriate and which were not. The court established that the city can impose restrictions to the size of signs, or some other regulations that apply to everyone and can be met by everyone.
In this specific case, the third violation regarding the maximum sign area could apply, but the other two regarding the prior permit or the city manager's approval do not hold.