Dan Isard
on
Owning a fully subscribed cemetery is not a good thing. In fact, no one wants to be the owner of a fully subscribed cemetery! City and state planners, being what they are, have made many mistakes when it comes to cemeteries. Crazy how that cemetery, which was planned to be on the farthest reaches of the city a century ago, now is located practically in downtown! How does that happen?
Well, cemeteries are not mobile, of course. Once that land is consecrated, it is fixed. The city’s growth must grow around the cemetery, short of disinterring the cemetery. In my experience, managing what is now an “urban” cemetery is a great problem to manage. But the bigger issue is when that cemetery becomes fully subscribed and there are no interment rights to sell.
State regulators planning for a cemetery usually make one huge problem. That problem is the amount of the contribution of principal into the Perpetual or Endowment Care Trust (PECT). Whether your state rule is a percentage of the sale price of the interment right or a flat dollar amount per grave/niche or crypt, the problem is this is a stipulated amount and not a realistic one.
Ongoing Costs
Let me walk you through the annual budget of a fully subscribed cemetery. What? You did not think there was an annual budget once a property is sold out? Of course, there is! You will have a nominal cost for staffing. There are still phones to be answered and maintenance to be provided. There are repairs that must be made. You will want to have casualty insurance in place. Water from your wells or from the city continues to have some cost. There is no cost for marketing or salespeople, but all that I have laid out will come to about $150,000 for a modest property and more than that for larger sites.
How much do you need to have in the trust to provide for this overhead? If your trust earns 10%, then you need $1,500,000 or more in principal. But most people do not get a 10% return on their investment. At 5% return, that takes $3,000,000 or more.
For the past decade, we have seen returns on trusts at about 1%. In that case, your trust balance should be $15,000,000! As your state regulators determined your trusting requirement, they did not look at the expected overhead in the future, nor did they estimate the low returns that guaranteed investments are providing.
What if the PECT has not been contributed properly or invested prudently? The best solution is to do two things: first, if given enough planning time, there are changes to the master plan that could repurpose land and postpone the date of being fully subscribed. This includes:
- Adding interment walls where fences now exist.
- Recapturing roadways in the oldest sections and creating upright interment options (mausoleums and columbaria) where the old roads existed.
- Building a second or third level to older garden type mausoleums.
- If you have a large pond, build high-end Estate Islands within the pond.
If your recordkeeping is up to date, try a buy-back program from lot holders that may not have used their interment rights. Another option is to try to claim the unused interment rights as abandoned property.
A third option is to do a hypothetical plan today, assuming the grounds are going to be consumed at some point in the future. You might need to not charge the minimum mandated PECT contribution, but more than the minimum might be required.
Let us assume that you have $1,000,000 and you want to be prepared to meet this annual supervision budget of $150,000 a year, in 40 years of remaining lifetime. If you want to have $10,000,000 and assume a 2% return each year, with the remaining sales, you must assess a premium. If the remaining sales generate an additional $2,000,000, then you must make up the difference with a PECT premium of $X. Assuming over the next 40 years you will have 250 sales a year, that is 10,000 sales. That would require an additional contribution of about $700 per sale to go into the PECT.
If the mathematically computed added sale price is too much to ask, then we need to be a bit creative. Maybe we do not take out all the earnings from the PECT? We can compute the amount of the consumer contribution and management amended withdrawals. But we must do this now! Each year, the problem gets more difficult to deal with and requires a larger contribution from consumers or deferral from management.
Lending to cemeteries is difficult in most states. If that cemetery has less than 40 years of inventory, that loan becomes even more difficult to obtain. We did not include loan principal payment or interest in that quick computation of an overhead when the property is fully subscribed.
This entire problem is even worse for city cemeteries or for religious/not-for-profit cemeteries. Both city and religious properties are usually exempt from the state requirement of funding a PECT. When their property is fully subscribed, they must go into the operating budget and come up with the cost of maintenance.
Plan for the Worst
I strongly recommend every single cemetery perform this hypothetical analysis:
- Step 1. Compute the line items of overhead you will be required to continue after being fully subscribed.
- Step 2. Assess the cost of continuing these minimum services into the future.
- Step 3. Estimate the term between now and when this day will come.
- Step 4. Review the investment plan for the current PECT and estimate what its value will be when the day all sales run out.
- Step 5. Understand the shortfall and work on a methodology for knowing what to do now and until the property is fully subscribed.
Not an Option
Please note one thing that I did not mention as an option. I did not mention trying to get a higher return on the invested principal. I have seen too many cemetery trusts (and funeral pre-need trusts) try to play the market. This is not your money. If you want to learn why investment analysts are called “brokers,” do it with your own money. This is a sacred trust you have the stewardship of.
If you are a state regulator, this is hypercritical for you. If the owner defaults on the cemetery, the problem becomes yours. This hypothetical evacuation plan will protect you from needing to provide care and management. Your state budget cannot handle the budget hit!