Blog Multi Author

In our fourth and final segment of The Religious Facility Appraisal series we will look at the reliability of using the Income Approach in the valuation of Religious Facilities. Religious facilities are not frequently leased on the open market, making it difficult to retrieve accurate income data. Additionally, religious facil­ities are not usually purchased as income-producing properties; therefore, the Income Capitalization Approach is not typically used in finding the market value of a religious facility. Although the Income Approach is not usually used to find the market value of a religious facility, it is possible to use the Income Approach as a test of feasibility/reasonableness. Religious facilities produce income from their membership in order to cover their expenses. This income stream can be used to help determine financing for a lending institution.

A possible mortgage loan amount can be es­timated analyzing this income stream based on the current market conditions. Financ­ing is based on the ongoing market conditions, which can be applied to the religious facilities current or proposed income stream in order to estimate a reasonable loan amount. The appraiser can then use current loan-to-value ratios to determine a probable value estimate. It is important not to consider this an actual value estimate, but instead a check for values determined in the Sales Comparison and Cost Approaches. Additionally, this method can be helpful for lenders hoping to determine a suitable loan amount.

This series on The Religious Facility Appraisal has shown that all three of value approaches can be applicable to religious facil­ities. Due to the special-use characteristics of the religious facility the Cost Approach is often time the most reliable indicator of value. Additionally, the Sales Comparison Approach is a viable value approach but can have some weaknesses due to the wide variance in characteristics of religious facilities. The Sale Comparison Approach requires well thought out and market supported adjustments to account for commonly found differences in the age/condition and quality/features of religious facilities. Finally, it is uncommon to be able to use The Income Approach to produce a reliable value for a Religious Facility but the approach can sometimes be used as additional support for the other two approaches.  The Income approach may also be used to help a lending institution determine a loan amount. This concludes our series on Religious Facilities.  For more explanation of appraisal methodology, visit our website at www.commercial-appraisers.com.

Individuals and congregations have many reasons why they may need an appraisal of a religious facility including new construction, financing, a potential sale or purchase, insurance purposes, or asset valuation tied to a number of financial decisions. While religious facilities may not sell on the open market as often as other property types, there are still a number reasons that can lead to the sale of a religious facility including a changing neighborhood, a growing or shrinking membership, or facilities whose physical life has generally ended. These factors indicate the need for the appraisals of religious facilities.  However, the appraiser has to answer some important questions when appraising this unique property type.

In the highest and best use analysis of a religious facility, factors such as the need for a church in an area, available parking, fixed seating, and neighborhood characteristics all must be considered by an appraiser. Furthermore, church leadership and members are important factors when considering the highest and best use of a currently operating religious facility. Depending on these factors, the highest and best use of the facility could be the continued use of a religious facility or an alternative use that is better suited for the surrounding area.

Religious facilities are typically considered a special-use property built for a specific purpose. While sometimes alternative uses do exist, religious facilities are typically most efficient when fulfilling their intended use. Due to the special-use characteristic of religious facilities, often times a value-in-use may be required by the client. However, if the intended use of the appraisal is related to financing purposes for a federally-insured transaction, the appraiser must include a market value. In this case, factoring in alternative uses may become a critical part of the appraisal. It is important for the appraiser to ensure the type of value is consistent with the intended use of the appraisal.

The difference between value-in-use and market value is key when looking at a religious facility’s highest and best use. In fact, examining the value-in-use often helps in determining the financial feasibility of a religious facility. If the value-in-use shows that the religious facility is operating economically, the appraiser has shown that the religious facility is a financially-viable option.   If the use as a religious facility is the highest and best use conclusion, the appraiser will have to take into account the unique characteristics of religious facilities in the property valuation. In the next post we will take a look at how a religious facility can be valued in each of the valuation approaches.