Am I Wrong About Churches?

[Eli]

The conundrum with churches is that if you have enough sales to extract and all forms of obsolescence, you probably can do a SCA...

The question is, how can it be a reliable cost approach without coming up with some market evidence for depreciation or obsolescence...that is why we do not do them...

The first part of that is getting a real.good grasp on land as if vacant. Then, the depreciated cost of improvements can be tackled in more than one way. H&B use of the land as improved and as if vacant is critical.

The easiest way by far is to extract depreciation from sales even if they are not very good comps. The key there is trying to find a sales that bracket the subject when extracting depreciation. That is relative to the cost approach.

 

[Terrel L. Shields]

the Cost overvalues these property types.

No, the appraiser is under estimating functional obsolescence. That evidence comes from sales. So cost and sales go hand in hand. Without sales then you will need a credible proxy with another property type. That could be a public building, masonic temple, and I've analyzed a number of sales recently where bank mergers resulted in vacant buildings. Locally we have 2 police departments who have moved into a former bank and one into a drug store that merged into Walgreens and yet another was a telephone office. All went "cheap" which means accrued depreciation is high, and much of that can be attributed to function which relates to the cost to modify same for a new use or loss of utility.

 

[Sid Holderly]

Most the sell in this area of the Midwest are Multi-Split-Level brick structures that do not adapt to an ADA use. They generally sell for about 1/3 of what the largest multi-story single family homes sell for. A few sell to other Church groups at above that rate and the rest are turned into multi-family or single family residential. The underlying lot values in small towns is minimal. I have worked on a few, but not for a long time.

On a newer growing Church the CG I worked for would use a Cap Rate or multiple of the weekly collection. I do not know where he got any data to compare it to. The Church conferences do have income data for different Church sizes and other demographic data. At least the Methodist comference I belong to does.

 

[Eli]

The conundrum with churches is that if you have enough sales to extract and all forms of obsolescence, you probably can do a SCA...

The question is, how can it be a reliable cost approach without coming up with some market evidence for depreciation or obsolescence...that is why we do not do them...

The first part of that is getting a real.good grasp on land as if vacant. Then, the depreciated cost of improvements can be tackled in more than one way. H&B use of the land as improved an as if vacant is critical.

Most the sell in this area of the Midwest are Multi-Split-Level brick structures that do not adapt to an ADA use. They generally sell for about 1/3 of what the largest multi-story single family homes sell for. A few sell to other Church groups at above that rate and the rest are turned into multi-family or single family residential. The underlying lot values in small towns is minimal. I have worked on a few, but not for a long time.

On a newer growing Church the CG I worked for would use a Cap Rate or multiple of the weekly collection. I do not know where he got any data to compare it to. The Church conferences do have income data for different Church sizes and other demographic data. At least the Methodist comference I belong to does.

I wouldn't do that collection thing and never did. That is along the line of business value vs real estate value. I never would go there. The income approach is basically not applicable, and in TN we prolly have as many churches as anybody.

If highest and best use is different from a church, then the income approach could be applicable to the real estate. Churches generally don't rent real estate unless it is in a strip center. Then, I could see doing an income approach.

 

[Tim The Enchanter]

No, the appraiser is under estimating functional obsolescence.

That first appraisal had a value for $900k, cost approach $1.1 Mil, and income $1.3 Mil if I recall right.
It seems to imply $200k in functional ob in the cost approach.
Income depends a lot on the preacher and Sunday morning, I'd guess.
These kind of numbers seem to imply pretty robust collection plates.

All I know is the church I grew up in, they built a second bigger sanctuary hall add on back in the day,
was sold to a new church some years ago. I only know this because that church has a web site.

A church with bars in the windows is a sad commentary.
A boarded up church is worse.
Pretty sure I am off topic now, and done.

 

[Howard Klahr]

Religious facilities by definition are special purpose properties. The most reliable valuation approach then becomes the cost approach. Transactions of religious facilities generally occur for only one of two reasons a) the group is in decline and the sale is then distressed or b) they have outgrown the capacity of the property to serve their needs which often results in a quick sale so as to re-deploy the funds into the new property. Neither scenario results in a true market value transaction and would need to be adjusted, although rarely addressed, for conditions of sale. Consequently, the sales comparison approach is most often only a secondary/supporting approach. As has already been previously pointed out, unless dealing with an abundance of rental data, the income approach would reflect a business value and not a real estate value.

In terms of functional obsolescence, the issue is one of building design. The more conforming the improvements are to an alternative use, the less obsolescence would applicable. This is especially true of those facilities that have considerable education facilities as opposed to being solely a sanctuary. None the less, functional obsolescence is directly related to the physical building design far more than the use of the facility. This concept applies similarly to all special purpose properties and there is no appropriate blanket response but rather will vary property by property.

 

[Elliott]

I've always dug up church sales out of multiple.

 

[Terrel L. Shields]

This is especially true of those facilities that have considerable education facilities as opposed to being solely a sanctuary.

(Two likes...)Or separate gym, youth or fellowship hall. So if you looked at the appraisals did anyone delve into say One where the sale in 2003 was barely one-third the appraised value, the buildings were 2 pieces built prior to 1995 but age given at 5 years? why did the value jump nigh 200% since some indeterminate time after 2003?

 

[Gobears81]

Religious facilities by definition are special purpose properties. The most reliable valuation approach then becomes the cost approach. Transactions of religious facilities generally occur for only one of two reasons a) the group is in decline and the sale is then distressed or b) they have outgrown the capacity of the property to serve their needs which often results in a quick sale so as to re-deploy the funds into the new property. Neither scenario results in a true market value transaction and would need to be adjusted, although rarely addressed, for conditions of sale. Consequently, the sales comparison approach is most often only a secondary/supporting approach. As has already been previously pointed out, unless dealing with an abundance of rental data, the income approach would reflect a business value and not a real estate value.

I understand the distressed aspect of some sales, but I do believe that there are church sales out there that fully reflect market value. Churches don't always have a huge market, but that is often a consideration of the market, rather than the sale itself. I have seen churches "move up" in size, though the marketing time is not always all that short. To me, that is as good of a sale as any (with exceptions, of course). In cases where the church is downsizing or outright closing, there may be atypical motivations, but much of the "discount" is often attributable to the lack of recent updating due to lack of funds.
I agree regarding the income approach. In regards to cost approach, there is an equally valid argument that for special use properties, the cost approach is the worst, rather than the best, method. I do not hold that argument in many appraisals, but also do not necessarily weight the cost approach over the SCA. There are some older churches in which I only do the sales comparison approach and have a high degree of confidence in my value. I've heard the assertion that the cost approach is the most reliable when depreciation is either very low or very high, but in practice, taking the cost new from $150 per square foot to a depreciated cost of say $15 per foot becomes arbitrary, regardless of how depreciation is determined.

 

[Stephen J. Vertin MAI]

I have not read the entire thread but I can only say there are so many sales of churches in the Chicago Metro area that I have found the only meaningful approach is sales comparison. I know the Appraisal of Real Estate clearly defines a church as a special use property (several times) so in theory cost approach would be significant. I think, as with many things, it depends on where you are and the type of data available.