Rev. of The Appraisal of Religious Facilities

The Appraisal of Religious Facilities

by Martin Aaron, MAI and John Wright, Jr., MAI
Published by the Appraisal Institute, 1997

Review by Stephen Traub, ASA

[Bookcover]

Intended for appraisers, architects, lenders, and religious group administrators and managers, this book outlines the basis from which value permeates in religious facilities. Both the Cost and Comparable Sales Approach are discussed and case studies are shown.

Although required with less frequency, appraisals on religious facilities are necessary from time to time. Religious groups may need to know the value of a facility if selling, buying, or refinancing. A value is also required for insurance purposes. Initially, religious facilities purely were for worship services. Over time, the role expanded to include schooling, feeding the hungry, celebrating, and lodging for priests, rabbis, nuns, etc. After WWII, religious facilities began to sprout up in the suburbs. Often, suburban campus-like settings included room for expansion, while a new and sometimes ethnic congregation often bought the existing urban facility.

Most facilities operate locally, so local characteristics that influence a facility should be analyzed. Knowing the makeup of the population can help determine demand. USPAP Advisory Opinion 16 states: "If the appraiser can identify the market behavior of the religious members and relate the behavior to the assignment, the appraiser is not in violation of USPAP."

In the US, 345,000 religious facilities exist. Most new demand comes from growth areas such as FL, CA, and TX. Texas leads the country with 25,038 facilities, CA is second with 23,312, and PA is third with 16,696. In Metro areas, LA was first, NYC second, and Houston third.

Seek & Find

The most important and expensive feature is the sanctuary. It must be large enough to seat the entire congregation in no more than two seatings (even if only a couple of times a year). Therefore, find out what the legal maximum seating is. Most sanctuaries have aesthetically pleasing elements that may include high-beamed ceilings, stained glass, carvings, and extensive overhead and specialty lighting. A clear span also is common.

The ratio of sanctuary to total area is significant. The more activities the facility supports, the lower the ratio of sanctuary to total area will be. Today, 60 SF per sanctuary seat is common. Specialty items such as stained glass may need a separate analysis (usually on a SF basis). Built-in organs also might require a separate investigation. Some have been estimated to be worth more than $1 million. Other items include sound systems, rest rooms (one men's and women's room fixture, per 100 seats are recommended), and parking.

Uniform Building Code requires one parking space for every four seats. Dense population areas, however, may have a high degree of walk-in traffic. The question is, does the existing parking adequately fulfill the needs of the congregation at periods of maximum use?

With regard to land valuation, a religious facility will compete with other users of sites. Site values, therefore, are consistent with other similarly zoned and/or located parcels. One advantage a religious facility has, however, is that it can be constructed in many different zones, so it may not have to compete with commercial entities for premium priced land.

What's It Worth?

Historically, the cost approach has been the principal valuation technique. But it should be completed in a proper and reasonable manner considering function, design, and demand using market-supported depreciation factors. When determining super-adequate items, remember that part of the purpose of the facility is to inspire, so don't go overboard.

Actual costs and actual costs of comparables are usually the best basis from which to develop a cost new estimate. Costs must be recent, however, and must not include a significant amount of donated labor or material. Also cost services can be used. Ceiling heights, the ratio of sanctuary to other space, and the quality and extent of extra features must be considered. In diverse facilities with classrooms, day care, and apartments, etc., you may need to cost subsections independently.

The Ten Commandments
of Appraising Religious Facilities

When estimating depreciation, estimate and apply physical deterioration, but don't stop there. Also identify any functional and external obsolescence. Functional obsolescence (the inability of the facility to properly fulfill the needs of a typical user/buyer) at used religious facilities usually exists in the eyes of potential buyers. Parking may be inadequate and the interior in part may have to be redesigned. So buyers most often pay a discounted price reflecting the costs they will incur to make it functional to fulfill their needs. Functionally incurable items are harder to quantity, however.

External obsolescence also may exist as a result of a local or neighborhood economic downturn or in a location near adverse influences. The author recommends extracting depreciation from the market. He includes a grid. In it, he deducts land value estimates from sales, leaving the indicated improvement value. Each sale also has a cost new estimate that is compared to the (contributory) market value of the improvements. From this comparison, a percent-good estimate is extracted from the market and applied to the subject property's cost new. Also the overall depreciation is compared to a physical-only deprecation estimate to see what separate penalty the market is applying for functional or external factors. In an inactive market, depreciation in excess of physical depreciation is common. This brings the demand side into the equation. The estimate should parallel market participant's perceptions and reactions

Comparable Sales Approach

To a lesser extent, the comparable sales approach can be relied on directly. Sources of data include sale services, bankers active in religious facility lending, church financiers and broker-dealers, contractors, and religious administrators.

Compare sanctuary quality, seating capacities, square footage or cubic footage, neighborhood desirability, and the reasons for the sale and for the purchase. With regard to quality, it is the appraiser's job to determine at what point a typical buyer would pay no more for more quality. A case study based on sale price per SF of building (without land) is included with adjustment grids.

The Final Chapter

The final chapter discusses financing. Here, the author points out that the income approach is irrelevant. The income to the congregation, however, should set the ceiling that should be spent on a facility. Some lenders view a loan on a religious facility as a business loan, although from a regulatory standpoint, most religious facility loans must be classified as real estate loans. Rules of thumb are that 1) debt-service should not exceed one-third of the annual income of a group; 2) loan-to-value ratios range from 65% to 80%; and 3) total loans should not exceed two and one-half to three times the group's annual receipts.

The book is briefer than I would have liked. Moreover, it contained no index, no glossary, no bibliography, and ends abruptly. Still, it covered the major points. So think of it as the Ten Commandments on the Appraisal of Religious Facilities, rather than The Bible.

The book above, The Appraisal of Religious Facilities, is available on-line at Amazon Books.

Stephen Traub, ASA, the reviewer, is chief commercial appraiser for Property Valuation Advisors, 63 Hill St., Newburyport, MA 01950. He is a certified general appraiser in NH, ME, and MA.

To contact the author of this review, e-mail to: straub@shore.net or contact him at the address above, or call 978-462-4347.