The Religious Facility Appraisal – Part III
In our third segment of The Religious Facility Appraisal series we will take a look at the most common value approach used for religious facilities, The Cost Approach. Due to the fact that religious facilities are special-use properties, they are often appraised by the Cost Approach. In this approach, a replacement cost new is developed. Cost data can be found in valuation services or you can use actual cost information. From the replacement cost new, the appraiser then estimates accrued depreciation. Obtaining dependable depreciation information for religious facilities is required for a reliable value estimate.
The most dependable technique for finding accrued depreciation is to use market data. In this technique, the appraiser extracts the depreciation from comparable sales. Since new religious facilities sell infrequently, the available sales can be good indicators of accrued depreciation. For example, if you had a sale with an estimated cost of the improvements new of $150,000 and a current contributory value of the improvements of $90,000 this would represent $60,000 of physical depreciation. If the sale was 10 year olds it would represent a total depreciation of 40% and a depreciation rate of 4% per year. Extracting physical depreciation rates from several sales usually can provide an accurate yearly depreciation rate that can be applied to the subject. It may also be possible to use the age/life method of depreciation, which involves dividing the estimated effective age by the estimated economic life.
Other forms of depreciation to consider in this approach are functional and external obsolescence. Functional obsolescence is not usually found in religious facilities. These facilities are usually constructed for their intended use and their design meets the requirements of the membership. It is more common to have external obsolescence in a religious facility. External obsolescence in religious facilities can be caused by economic conditions, environmental concerns, and population demographics. Adding the functional and external obsolescence to the physical deterioration equals the total accrued depreciation.
When the total accrued depreciation is subtracted from the replacement cost new, the result is the depreciated value of the improvements. This denotes the contributory value of the improvements to the total property value. Finally, the land value estimate would be added to the depreciated value of the improvements to provide the value of the subject property.
Overall, the Cost Approach can be a reliable indicator of value for a religious facility. The Cost Approach eliminates a lot of the issues found in The Sales Comparison Approach including the variances in design, age, and quality. The next segment in this series will see if it is reasonable to use the Income Approach to value a Religious Facility.