Dan Isard
on
Figuring out what your cemetery could be worth on the open market is a good idea if you plan to retire in a few years. But your local commercial real estate appraiser might never have valued a cemetery in his life.
Cemetery Impossible
Figuring out what your cemetery is worth and how its sale can fund your retirement
Dear Cemetery Impossible,
I own a 60-year-old cemetery started by my parents. It was a farm before we established the cemetery. I have about 100 acres, of which 10 are fully sold out. Within the remaining 90 acres, six are plotted and the balance remain undeveloped.
I do about 200 sales a year with 150 interments. The cemetery is all ground interment with no above-ground options.
I am reaching retirement age and thinking about selling. I had it valued by a local real estate appraiser who told me I have a $100 million enterprise. I kind of think he is wrong.
My question is, how do I determine value and what can I do to try and increase the selling price?
Acres for Sale
Dear Acres for Sale,
There are many unqualified people doing cemetery valuations. Recently I saw an ad for a 40-acre “cemetery.” I put cemetery in quotes because there is only one interment—from the 1880s—on the property.
The appraiser surmised that there are 1,000 grave sites per acre. He assumed the market price of a grave was $1,000. Therefore, at $1,000 per grave and 40,000 graves, the property is worth $40 million. This sounds like the same logic your appraiser may have used.
Cemeteries are more akin to oil and gas reserves. Their value assumes garnering all of the reserves after the cost of working the well. The future value of the income stream might be $40 million.
However, there is a cost of operations to get oil out of the ground. If it costs 80 percent of revenue to work, the net profit is at best 20 percent of $40 million.
Don’t get me wrong, $8 million is still a large number. However, this money comes in over time, not all at once. The time involved is the time it takes to work every drop of oil out of the ground.
Time has a cost equal to the market value of the risk. Most cemeteries have a “discount rate” or “risk rate” of about 25 percent.
What is the value of getting $8 million, subject to a 25 percent discount over the time it takes to work this claim? We need to do a net present value computation to figure it out.
A net present value computation is a formula to reduce a future income stream to an equivalent lump sum value today. It computes this income over the lifespan of harvesting the oil and gas—or, in your case, the cemetery spaces. This is best completed on an HP12c financial calculator or with an Excel spreadsheet.
In the above case, you would first take the $40 million future income stream and subtract the cost of operations. The reduced number is $8 million ($40 million minus 80 percent of $40 million, as noted above).
Obviously, you would receive that $8 million not as a lump sum but in revenue received over the time it takes to sell off the cemetery.
The amount of time it takes to collect that revenue, and a financial risk factor, reduce the future stream of income. If you sell 200 interment rights a year, and we assume that will continue in the future, then it is going to take you more than 450 years to sell off every grave site on those 90 acres.
So, $8 million is a lot of money, but it doesn’t sound as good when you realize it translates to a net income of approximately $17,778 per year for 450 years.
The bottom line is that $17,778 per year, spread over 450 years, is not very valuable, especially with a 25 percent risk factor.
The analysis I am using is employed by insurance companies and others who buy installment-paying notes. It is used to estimate the attractiveness of an investment opportunity. If the value arrived at through such an analysis is higher than the current cost of the investment, the opportunity may be a good one.
You probably assume that the future value of $17,778 collected over the 100 years totals $1,778,000. However, we are not computing future value but rather net present value.
If someone offered you the opportunity to receive this $17,778 annual income stream for 100 years, you would not pay them $1,778,000 for it today. You would compute the net present value. Based on the risk factor of 25 percent, the present net value would only be about $71,000!
If someday cemeteries come into vogue again, greatly decreasing the risk of operating one, the net present value of $17,778 a year at 6 percent risk factor would rise to $177,000. The increase is due to the lowering of the risk.
In my experience, for a cemetery to get the maximum value in a sale, it should have at least 40 and up to 100 years of inventory. Anything more than 100 years of inventory is a wasting asset.
In addition, the inventory term has to be equal to the lending terms. I saw one cemetery that had about six years of inventory remaining and the lender was proposing a 15-year note. It should be obvious that makes no sense.
Increasing your cemetery’s value
Now I will address the second part of your question, about increasing value. The objective is to get more value either directly from the value of the cemetery or through other assets. That can come by increasing sales numbers, increasing revenue per sale or trimming overhead to increase profit.
The reality is, you have too much inventory. In your case, the “other assets” your cemetery has amounts to the value of that excess land. Since you probably cannot increase sales in a short period of time, the biggest way to increase value is to sell the undeveloped land.
Continuing with the above example, a 100-year inventory requires only 20 acres. (At 1,000 graves/acre and 200 sales a year, it takes five years to sell off 1 acre, so 20 acres would be a 100 years of inventory).
Since you have about six acres developed now, you might only need 14 of the 90 undeveloped acres to be included in the sale to provide 100 years of inventory. As I indicated earlier, anything over 100 years of inventory is excess.
You can work to exclude the other 76 acres and sell them for non-cemetery use. If you look at a nominal value per acre, such a sale would bring you more value than the sale of the cemetery itself.
You should know that it is complicated to take land out of a cemetery. There are legal and zoning issues. Depending on the surrounding development, it can be an uphill battle.
The first question is, “is this land within the cemetery master plan now?” If not, do not put it in the master plan. If it is included, you should consult with a zoning professional to determine what the process is to separate it from the rest of the cemetery, as well as your chances of success.
I have been an expert witness on the side of not releasing land from a master plan. In this high-profile case, the community built out around the land.
The cemeterian wanted to sell the land off for residential housing. This would have changed the area’s traffic, noise, sewer and utility needs, as well as the views from the bordering homes.
It was also argued that taking the property out of the master plan could damage the cemetery. The anticipated endowment care deposits from the sale of interment rights on the parcel would not occur if the land were sold to a developer instead.
Can you now understand that if your cemetery is in an urban area, the conversion of the land for another purpose could be complicated? Be sure to research all your options now so you’ll have the data you need to understand the pricing ramifications of putting your cemetery on the market.
If this proposed sale is funding your retirement, you may need to rethink your retirement age. It may come later than your local real estate appraiser surmised.