Appraising A Church

[NachoPerito]

I am appraising a church that is essentially new construction.

I was wondering what discounts you normally see comparing the cost approach to the value from the sales comparison approach. (the church I am doing is a former fitness center so is not unique in architecture, and location is typical commercial secondary location)

Also, what is a range you have put for entrepreneurial incentive in the cost approach.

thanks,
Nacho

 

[Terrel L. Shields]

If the typical church is built in a residential area (often allowed by zoning) the land value is important. But sounds like yours is in a commercial area. And it is a modification of the existing building. So I would look for similar construction for the building as the basic Cost Approach for a guide to cost and add the necessary items to make the conversion. As for the sales approach, we've had a number of box buildings converted to a church - red iron steel frame. One was a bowling alley, one a theatre, and one was a furniture store. A new church was built which is indistinguishable from the structures of those. It has exposed red iron beams (painted) and exposed CHA ducts. I know because I attended a funeral there last Friday...sadly...18 yr. old. Drugs. I digress.

The issue may be to find similar buildings, not necessarily similar churches. And to see what the investment (cost) is compared to what it would be if the built from the ground up new.

i.e.- as a test, subtract land $ from transaction price, estimate EA, then adjust total of Improvements to zero age. That would be the investment cost as if new. Add the planned dollars for a total. Now from the cost book do the RCN for a completely new building and see if there is a significant difference.... (say $100 per SF v. $130/SF suggests that $30 of the RCN is deducted for functional obsolescence.)

 

[Gobears81]

I have stopped using entrepreneurial incentive for churches. Construction of churches often has nominal consideration of supply and demand and there is no economic motivation, especially since the value typically is not at construction cost and they usually know that.

A lot of churches seem to prefer converting an old pole barn or an alternative use to buying older, high quality buildings that were constructed as churches anymore. There are usually some savings to conversion of this type of building versus constructing new, but the effective age may not be zero.

 

[JTip]

Had a local Value City (discount clothing store) sell to a church then sold again to a 24 hour gym, all within a 5 year span. FWIW

 

[Eli]

I am appraising a church that is essentially new construction.

I was wondering what discounts you normally see comparing the cost approach to the value from the sales comparison approach. (the church I am doing is a former fitness center so is not unique in architecture, and location is typical commercial secondary location)

Also, what is a range you have put for entrepreneurial incentive in the cost approach.

thanks,
Nacho

If you have or can find a local or regional broker who sells primarily places of worship, they can be a big help on some questions like what you are asking. Sometimes a commercial type RE agent specializes in places of worship and that is practically all they sell. The RE agent might also be able to point you to a commercial appraiser who has specialized as well in the same area that the RE agent works.

 

[Elliott]

Nancho said

I am appraising a church that is essentially new construction.

the church I am doing is a former fitness center so is not unique in architecture, and location is typical commercial secondary location

So which is it? Doesn't sound like you've got a "dedicated" church. I'm sure a case can be made for the CA, but I'd wonder why the valuation isn't closer to a retail space. The churches I've done were dedicated uses, but some had also transitioned in and out of different uses. I've had to go into the Portland market (or in your case, the Seattle market) to find some sales. Though there's probably going to be a lot more retail spaces more similar to a church, then actual churches.

 

[NachoPerito]

Nancho said

I am appraising a church that is essentially new construction.

the church I am doing is a former fitness center so is not unique in architecture, and location is typical commercial secondary location

So which is it? Doesn't sound like you've got a "dedicated" church. I'm sure a case can be made for the CA, but I'd wonder why the valuation isn't closer to a retail space. The churches I've done were dedicated uses, but some had also transitioned in and out of different uses. I've had to go into the Portland market (or in your case, the Seattle market) to find some sales. Though there's probably going to be a lot more retail spaces more similar to a church, then actual churches.

It is essentially new construction because it is a major renovation down to the bones, but there will be no steeples on this church. The box will have the potential for other uses. So far those uses appear to be churches, community centers, and private schools. Probably not enough retail exposure for another gym, but it is possible depending on who is entering the market.

 

[leasedfee]

In my market, there was a 20% to 30% decline, external obsolescence, after the 2008 bubble popping, though it is now recovering. This, though, is due to a market cycle, and not a functional or inherent problem with it in the marketplace. I've used an entrepreneurial incentive of 5% reflecting that there is a hurdle rate of assembling a development team led by the pastor, volunteer services by the congregation (these volunteers would include a people with a background in finance, law, construction who guide the process). If we say there is 0% e.i., then it means that new construction is actually easier, not harder to do, than buying. This has reconciled with the sales comparison approach in my market. Granted, I recognize that in some markets building a new church results in a loss at the get-go but I'd attribute that ever-present e.o.

 

[Gobears81]

In my market, there was a 20% to 30% decline, external obsolescence, after the 2008 bubble popping, though it is now recovering. This, though, is due to a market cycle, and not a functional or inherent problem with it in the marketplace. I've used an entrepreneurial incentive of 5% reflecting that there is a hurdle rate of assembling a development team led by the pastor, volunteer services by the congregation (these volunteers would include a people with a background in finance, law, construction who guide the process). If we say there is 0% e.i., then it means that new construction is actually easier, not harder to do, than buying. This has reconciled with the sales comparison approach in my market. Granted, I recognize that in some markets building a new church results in a loss at the get-go but I'd attribute that ever-present e.o.

I've found that churches demonstrate a huge preference towards building new, rather than buying, often much more than the physically and functionally depreciated cost would suggest. Sometimes I have wondered - if some of the churches who are planning to build new find a nice, newer church available for sale that suits them perfectly, would they still opt to build new? I am thinking that yes, many still would. I think that sometimes they view the additional work related to construction as a something unifying their congregation towards a specific goal (i.e. furthering the church). So I would argue that no entrepreneurial incentive is still appropriate. But, churches are a different beast and perhaps there are different communities or parts of the country in which entrepreneurial incentive would be appropriate.