Printer Friendly

The appraisal of churches and religious facilities.

With the advent of the Federal Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), the valuation Of churches and religious facilities for financing purposes by federally insured institutions must include reference to a market value (value in exchange). This concept is contrary to typical church and religious facility valuation procedures, which have relied solely on the cost approach. In this article, a method for developing market value estimates for churches and religious facilities is presented.

The appraisal of religious facilities has evolved to account for the changing needs such facilities seek to fulfill. The old adage that churches and religious facilities are special-use properties and thus should be valued solely by the cost approach no longer applies. The focus of this discussion, therefore, is the three conventional approaches.

Individuals or congregations may require an appraisal of a church facility for new construction or additions, financing, a potential sale or purchase, insurance purposes, or asset valuation related to any number of financial decisions. While churches and religious facilities are not generally sold unless there is a compelling reason to do so, conditions such as changing neighborhoods, churches that have outgrown their facility, facilities whose physical life has generally ended, or facilities whose membership has deteriorated to the point that they can no longer be supported may make such a sale necessary. Usually, however, the appraisal of churches and religious facilities is influenced primarily by financing considerations. This factor becomes relevant as a result of an emerging valuation/feasibility approach that associates the income generated by a facility (or potentially generated) with the maximum loan available.

Churches, by definition, are special-use properties--built for a specific purpose, by a particular congregation, most often as a place of religious worship. Although in some cases alternative uses do exist, churches typically are used most efficiently when used for their intended purpose for their entire physical and economic lives. An alternative-use analysis is thus a critical component of a religious facility appraisal.

HIGHEST AND BEST USE

The highest and best use of a church is derived through consideration of, among other factors, the potential need for a church in a particular area, the parking and available fixed seating, and the neighborhood characteristics and per capita income trends. For an operating church, demand, the stability of leadership (capable pastor), the lay leadership, the governing body, and the ages and lifestyles of the members are significant considerations as well. The overall trends in the current church market indicate that churches are attempting to expand their functions to better serve their members. Often, this entails full-service community center facilities such as schools, day care centers, retirement facilities, and workout facilities, which are added to the traditional church premises in many cases.

VALUE IN USE VERSUS

VALUE IN EXCHANGE

Paramount to a discussion of highest and best use is the issue of value in use versus value in exchange. For most church facilities, these concepts are relatively intertwined. A value in exchange has been found to exist for many church facilities. The fact that a facility is a "going concern" and is operating economically tends to give credence to the concept that the facility fulfills a need in the community. Whether an alternative need for the facility exists or whether additional or different congregations could potentially use this facility are important factors in the appraisal of a church or religious facility on a value-in-exchange basis. Such alternative uses as centers for other religious groups, training facilities, museums, schools and colleges, and, in some cases, business offices do exist. Typically, however, the improvements are removed or altered, causing a different highest and best use to become apparent. In particular, churches nearing the end of their economic lives, located on expensive land or in desirable locations, and having other potential uses are frequently purchased for land value. As current FIRREA standards appear to be concerned only with a value in exchange, this article focuses on the development of such a value.

THE FACTOR OF DESIGN

Over the past few years, church design has moved away from an older, classical style to become more modern and functional. This apparent preference for modern facilities provides savings for congregations as well as being more in line with the needs of typical members. The new and more modern facilities frequently provide an incentive for congregations to increase in size. A relationship appears to exist between a facility's design and appeal and its membership or attendance rate, which is reasonable in light of the use of the facilities. The ability to seat the entire membership is a significant factor in a particular congregation's use or or need for a facility. This seating requirement tends to be one of the most limiting factors in the sale or valuation of most church facilities, and also tends to limits the growth potential of congregations. Currently, many churches must provide two and sometimes three Sunday morning (or other primary worship day) services to accommodate all congregants and guests.

Church officials would be imprudent to purchase a facility in which their entire congregation could not be seated for major holidays and events. Further, some excess capacity is frequently needed for guests. Typical suburban church faciities consist of a sanctuary, an administration area, and a classroom wing. Further, day care and school facilities are not uncommon. Research indicates that the ratio of square footage of total building area to fixed seating has expanded significantly over the past 10 to 30 years. The authors have found that a current ratio of 65 square feet to 75 square feet of building area per fixed seating is typical for a modern, full-service church, while in older or more typical churches the ratio is approximately 30 square feet to 40 square feet.

Valuation of fixtures such as built-in organs, sound systems, fixed seating, stained glass, faceted glass, domes, and baptisteries frequently becomes relevant in the appraisal of religious facilities. Other items frequently noted, but not typically appraised, include extensive removable kitchen equipment, television broadcasting equipment, significant amounts of personal property (e.g., office equipment), and other non-real estate related items. Because the values of these facilities are tied directly to the physical structures, a complete and careful examination of the improvements is necessary. Further, some improvements will add significantly to the value (in use) to one religious group, yet provide no value (in exchange) to another (e.g., baptistery, parsonage, arks).

THE COST APPROACH

Because churches and religious facilities are by definition special-use properties, they are typically appraised on the basis of the cost approach. In this approach, a replacement/reproduction cost estimate is developed for the facility as if new. Because these are generally nonprofit organizations, no entrepreneurial profit is included. Sources of cost new data include national cost services, building permit information, or actual cost. From the total cost new, appraisers then estimate accrued depreciation. Obviously, this is a crucial point in the appraisal of a special-use property such as a church or religious facility. Obtaining reliable depreciation data for religious facilities is necessary for the development of an accurate value estimate.

The most reliable method of developing an accrued depreciation factor is to extract it from the market. In this method, appraisers extract the depreciation from sales of similar facilities on a yearly basis. As new church and religious facilities rarely sell, the sales available (usually older buildings) normally indicate a good cross section of accrued depreciation. This is reasonable, because a congregation is clearly unlikely to build a special-use facility for a given purpose and then immediately sell it. The total depreciation on a yearly basis when applied to the subject property's age tends to provide the most reliable estimate of total accrued depreciation. This method--a function of actual participants in the market--is preferred.

Other methods can be used, however, including the age/life or a modified age/life method. The age/life methods appear most reliable when used to differentiate physical depreciation from the total accrued depreciation derived through the extraction method. It is important to extract the physical depreciation based on physical age rather than economic age. Any variance between the total, market-extracted depreciation and the quantifiable, curable and incurable physical deterioration is technically attributable to either functional or external obsolescence.

Functional obsolescence is relatively rare in churches and religious facilities. Typically, these facilities are built for their intended use and thus their design is consistent with the needs of the congregation. Further, while additions to existing facilities are generally the rule rather than the exception, they are designed to fulfill a particular need and do not normally appear to represent functional obsolescence. Some measurable external obsolescence does exist in many cases, however. External obsolescence in churches and religious facilities can be caused by economic factors, environmental factors, and neighborhood demographic factors, among others. Table 1 illustrates a method of extracting total depreciation from a typical church sale.
TABLE 1 Extracting Total Depreciation from a Church Sale
Sale price $100,000
Less land value $ 20,000
Contributory value of improvements $ 80,000
Estimated cost new of improvements $130,000
Total depreciation $ 50,000
Total depreciation as a percent 38.46%
Age in years 15
Total depreciation per year 2.56%
Physical deterioration 20.0% (*)
Functional obsolescence 0.0% (**)
Indicated external obsolescence 18.46% (38.46% - 20.0%)
Indicated total economic life 39 years (+)
 (*) Assuming a 10-year effective physical age a 50-year
physical life
 (**) Assuming no functional obsolescence exists
 (+) 100%/2.56% depreciation per year


When an analysis similar to that presented in Table 1 is developed for each of the sales, an analysis of the depreciation in a particular market can be developed. In this analysis, the physical facilities appear to be depreciating (in total) at a rate of approximately 2.56% per year, or 38.46% in total. If the physical facility were ten years old (effective physical age), this sale would thus indicate physical depreciation of 20%. Therefore, the amount attributable to physical deterioration would be a function of the effective physical age and the estimated total physical life. This method lends itself well to a spreadsheet analysis when prepared for several sales.

When the total accrued depreciation is subtracted from the cost estimate new, the resulting figure is the depreciated value of the improvements. This should represent the contributory value of the improvements, in total, to the overall property value. To the depreciated value of the improvements, the land value estimate as developed by typical methods is added. In the appraisal of a site, it is important to consider zoning, deed restrictions, and the potential for alternative uses. In addition, a site should be valued at its highest and best use, which is use as a special-use property (such as a church) if the improvements are deemed an adequate expression of the highest and best use.

It is not unusual for a site value to approach or surpass the value of the property as improved in total, as occurs with some downtown or central business district churches. Such an analysis should be carefully studied to determine whether the improvements are an adequate expression of the highest and best use. Assuming the site's highest and best use is as a church or religious facility, the site value is then added to the depreciated value of the improvements. The resulting figure is a market value estimate derived by the cost approach. It should be noted, however, that several potential deficiencies exist within the cost approach that tend to hinder its reliability. These deficiencies primarily concern the difficulty in accurately estimating depreciation from sales data.

SALES COMPARISON

APPROACH

To demonstrate use of the sales comparison approach, sales of similar church properties have been developed. Because church properties are relatively scarce, their sales are difficult to find. Nonetheless, especially in the larger cities, a relatively well-organized market for the purchase and sale of churches does exist. Further, the verification of sales is typically reliable and easy to obtain because church facilities are nonprofit organizations. In active markets, similar church sales can be compared on a feature-by-feature basis, using fixed seating, stained glass, special features (e.g., baptistery, prayer rooms, arks), and other attributes. Usually, however, features of churches cannot be compared because of the wide variety of their uses, design, and quality.

Relatively consistent prices have been found on a per-seat basis when the support facilities are similar. That is, when the ratios of fixed seating to total building area are similar, seat prices for religious facilities can be compared (given similar quality, size, age, and conditions). The vast amount of peripheral space within many church facilities makes using the price per seat as a basis for comparison difficult. Therefore, it is easier to rely on a sale price per square foot. Adjustments for the conditions of sale, financing, and market conditions are based on generally accepted methods. Further, to extract the land value estimate from each sale is also helpful, both because it is necessary for the extracted depreciation method and because it eliminates the need for land-to-building ratio adjustments and location adjustments (assuming that the variances in site values account for locational characteristics.)

It should be remembered that adjustments for quality or features on an item-by-item basis are possible only in active markets. Further, congregations have a desire for certain levels of quality and
TABLE 2 Adjustments for Quality and Features
 Qualifying Cost New
 Features per Square Cost New Indicated
Sale Rating Foot Subject Difference Adjustment
1 Good $80.00 $50.00 $30.00 -37.5%
2 Average $50.00 $50.00 -0- 0%
3 Fair $35.00 $ 5.00 $15.00 +42.9%


features. The quality and features of a facility thus reflect a particular congregation to some extent. As such, values vary with the quality and features of a facility. To develop a percentage adjustment for quality and features, the estimated cost new of the sales has been paired with the estimated cost new of the subject (in total), accounting for both characteristics, as shown in Table 2.

The accurate estimation of the cost new is imperative to the use of this technique, which is less subjective than some other methods, and accounts for both the quality of the facility and the features in total.

Typically, churches are built for a particular use with a long-term intended use. When sales of large church facilities take place, the following events have thus generally occurred.

* The church has outgrown the facility or site;

* The land values and neighborhood characteristics have changed, causing a change in the highest and best use;

* The facility has deteriorated to an extent that prevents it from fulfilling its intended use; or
TABLE 3 Adjustments for Condition and Age
 Indicated Total Estimated Depreciation Indicated
Sale Depreciation--Sales Subject--Total Adjustment
1 40% 20% +20% (*)
2 20% 20% -0-
3 10% 20% -10%
 (*) Because the sale has depreciated more than the subject
(40% versus 20%), a positive adjustment
of 20% to the sale is indicated. This adjustment takes into
account all forms of depreciation, and
as such, no additional adjustments for curable physical or
external obsolescence are
necessary.


* The demand for the facility has waned (i.e., the congregation has dissipated).

Sales of newer, functional church facilities are relatively rare. This is reasonable because to construct a new facility for a specific utility (special-use property) and attempt to sell the property shortly after construction would be imprudent. Therefore, many of the sales typically available are of older facilities, and it is common to require adjustments for age and condition. By pairing the estimated total depreciation for each sale (derived from the extracted depreciation sections) with the estimated total depreciation for the subject (as developed in the cost approach), adjustments for condition and age can be extracted as shown in Table 3.

Appraisers have noted that few data are typically available to indicate a size adjustment. This is supported by the concept that a particular purchaser needs only a certain amount of building area and that excess space would not add to the utility of the property involved. While many adjustments might be necessary, the method developed in this section tends to delineate the primary factors that influence sale prices or values.

FEASIBILITY APPROACH--TEST

OF REASONABLENESS

Although churches and religious facilities do occasionally lease, it is relatively rare and usually on a short-term or interim basis. Further, churches and religious facilities are not considered income-producing or investment-grade properties, and a typical income capitalization approach thus is not applicable. A final and somewhat unique valuation technique for church facilities appears to be evolving, however. This is the feasibility analysis or test of reasonableness. Because churches and religious groups generate income only to meet their expenses, it is obvious that the income stream is not available for valuation. Appraisers have therefore considered the potential financing of a church facility a possible method of analyzing its feasibility.

This method requires appraisers to first attempt to isolate the total nondiscretionary income (i.e., general fund income) that a particular church could or does generate on a stabilized basis. While most lenders do not include discretionary income in those funds available for debt service, a potential mortgage loan amount can be estimated by applying the market requirements to this income stream. The market dictates typical financing conditions, and an approximate loan amount thus generally can be determined. Appraisers have found that current underwriting criteria require a maximum mortgage payment of 33% of total non-discretionay income. Rates vary and approximate commercial real estate long-term loan rates. Loan-to-value ratios between 60% and 70% and now indicated, which is down from 70% to 80% in the recent past. When this loan amount is compared to the typical loan-to-value ratios required by lenders and underwriters, a potential value estimate can be determined.

It should be noted that this is not a value estimate, but is rather a feasibility test or test of reasonableness for the values developed in the other two approaches. Current market information is available in most areas on the approximate amount of tithes or contributions made by congregations as well as the members' income levels. Thus, reasonableness can be checked with respect to the income levels, and the resulting value estimate should support the value estimates derived through both the cost approach and the sales comparison approach (assuming stabilized occupancy and use).

Appraisers find it helpful to use several years' income to calculate a value for each of the years with this analysis. To track trends in the growth or decline in membership and correlate such trends with the income is also useful, and can indicate any changes that may be occurring in income or membership. A value estimated using this analysis should be tempered with an analysis of the deferred maintenance, reserves for replacement, and the overall maintenance program of the facility. This type of analysis is of particular interest to lenders, and is typically how the feasibility of making a loan to a church or religious group is analyzed.

CONCLUSION

Three approaches to value are generally applicable to the appraisal of many churches and religious facilities. Paramount to the valuation of a facility is the need for comparison sales. A search for data beyond the typical market area is frequently necessary, which in the case of larger facilities may extend to a nationwide search. The proposed income/feasibility technique should act as a test of reasonableness, which is particularly appropriate for potential lenders.

As churches attempt to become more involve in the day-to-day lives of their members, church and religious facility design is dictating membership type to some degree. Accordingly, the traditional use of a church solely as a place of worship is being expanded. Expanded uses include support facilities such as workout facilities, social halls, gymnasiums, counseling centers, day care centers, and schools. As the peripheral space to provide such services expands, the design of church facilities is changing to include significantly more multipurpose space in relation to the actual worship or sanctuary facility. Currently, the ratio of square feet (i.e., size) to total seating is expanding. While a traditional suburban church with a sanctuary, administrative area, and classrooms is prevalent and adequate for meeting the needs of typical congregations, the trend toward more full-service facilities will probably continue. With this evolution to larger, full-service facilities, appraisers will need to be flexible in their approach to valuing these special-use properties.

Martin H. Aaron, SRA, is a principal in Aaron & Wright, Inc., a real estate appraising and consulting firm in Houston, Texas. He received a BS in business administration from the University of Missouri. Mr. Aaron specializes in the appraisal of special-use properties, including religious facilities, and is currently a candidate for the MAI designation of the Appraisal Institute.

John H. Wright Jr., MAI, is also a principal in Aaron & Wright Inc., in Houston, Texas, and received a BS in business administration from Southwest Texas State University. Throughout his career Mr. Wright has appraised all types of commercial real estate as well as functioning as an appraisal reviewer and a consultant.
COPYRIGHT 1992 The Appraisal Institute
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Aaron, Martin H.; Wright, John H., Jr.
Publication:Appraisal Journal
Date:Jan 1, 1992
Words:3500
Previous Article:Appropriate uses of economic characteristics in the sales comparison approach.
Next Article:Appraising wetlands.
Topics:


Related Articles
Meeting at the crossroads; what kinds of meetings and conventions are coming to Indiana?
The USPAP Competency Provision and the appraisal of healthcare/retirement facilities.
Humanism and unitarian universalism.
Religion, Hospitals And The Public Good.
Advanced research techniques of the Lum Library (1).
Senate rejects effort to add religion aid to stimulus package.
In good faith.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters