VALUACION DE CEMENTERIOS

1. FEATURES Even though many cemeteries and mortuaries are operated on an integrated basis, they are still vastly different enterprises that deal with the same product. Cemeteries1 require large tracts and specialized improvements that are prepared for occupancy in advance of need. They are one of few businesses that require investment in their inventory of product, which may take decades to market and absorb. Mortuaries,2 on the other hand, are service businesses that can operate in leased premises, although most do not, and, in their typical configuration, can be subject to a significant degree of obsolescence. These factors, and others, will be examined in this article. The term deathcare industry refers to the array of providers of funeral and burial goods and services, such as funeral directors, cemeterians, and third-party sellers. Historically, the industry has been fragmented, with limited overlap among various segments of the funeral and burial industries. Funeral homes (mortuaries) and funeral directors sold funeral merchandise and services. Cemeterians and monument/memorial dealers sold monuments and memorials. A funeral home or cemetery generally arranged cremation services, and independent florists sold flowers. Today, cemeteries and mortuaries are complex enterprises that combine a variety of physical assets, including land; land improvements; buildings; furniture, fixtures, and equipment; and inventory. The intangible aspect of the business or goodwill includes the name, reputation, continuing ability to attract patronage, and quality of management. The Valuation of Cemeteries and Mortuaries by Arthur E. Gimmy, MAI abstract Cemeteries and mortuaries are unique properties, but they can be segmented, quantified, and appraised on the basis of traditional valuation approaches. Cemeteries and mortuaries are the key components of the deathcare industry, which involve a wide range of assets. They are typically owner-operated and purchased and sold on the basis of their current incomeproducing potential. There is limited market data, requiring the analyst to research competitive facilities, interview market participants, and create a financial capitalization model that can provide a valuation of the real property and business, if necessary. 1. Modern cemeteries provide a wide variety of interment options. They include mausoleums, where the entire body is stored in a vault, and columbariums, where cremated ashes are stored, typically in spaces referred to as niches, which can vary substantially in size. Some cemeteries provide scattering services. 2. The terms mortuary and funeral home are used interchangeably by the public and in the industry. 328 The Appraisal Journal, Fall 2008 The Valuation of Cemeteries and Mortuaries The Industry Today Currently in the United States, there are about 15,000 mortuaries, over 5,000 operating cemeteries, over 1,200 crematories, and an estimated 300 casket stores, which are neither mortuaries nor cemeteries. As an alternative to traditional interment by burial, cremation is provided at a much lower cost. Cremation caskets can vary greatly in price (from $300 to $2,000), but they can be substantially less than burial caskets, which can exceed $20,000 for one made of bronze, with double-wall construction and velvet interior. As the public has become more accustomed to cremation, mortuary revenues have declined. For example, a standard $5,000 burial package can be reduced to $2,500 if the customer decides on cremation instead of burial. Table 1 shows the differences between burial and cremation services. Increase in Cremation Rates The number of cremations has increased over the past decade, while the number of traditional funeral and burial arrangements has remained relatively constant. According to an industry source,3 consumers mainly choose cremation because it saves money (25%); saves land (17%); is simpler (13%); and prevents the body from being in the earth (11%). Increased awareness of the fragility of the environment has promoted the popularity of cremation. Nationally, cremations are involved in over 25% of total deaths. Cremation rates vary significantly by state (see Figure 1), ranging from 61% (Hawaii) to 7% (Mississippi and West Virginia). Regionally, western states have the highest cremation rates and southeastern states (the exception being Florida) have the lowest. As the number of cremations has increased, there has been greater competition for cremation services among the segments of the deathcare industry. Also, the number of crematories has grown. Many crematories have begun to market their services independent of cemeteries and mortuaries. The cemetery segment has responded to the increase in the number of cremations with the creation of scattering gardens. Increase in Preneed Arrangements The preneed concept was originated by burial organizations that sold burial certificate plans in the 1930s.4 During the 1950s, funeral directors began selling prearrangements. Selling cemetery lots ahead of time is a long-standing tradition, but the preneed funeral market has increased significantly in the last 15 years due to the consolidation of businesses with greater financial resources and the ability to market on a large-scale basis. The increase in sales of preneed goods and services has been influenced by the active promotion of preneed arrangements by chains, overcapacity of funeral homes, and concern for Medicaid eligibility5 (sheltering appropriate assets for funeral expenses). Billions of dollars are involved in trust funds held pursuant to preneed agreements, and other funding mechanisms, such as warehousing, surety bonds, and insurance policies. Consolidation of Deathcare Industry and Increase in Large Chains Like many other industries, the deathcare industry has experienced attempts to increase the profitability 3. International Cemetery and Funeral Association, Study of American Attitudes Toward Ritualization and Memorialization (September 1995). 4. Conning and Company, Preneed Insurance: A Business to Die For? (Hartford: Conning and Company, 1998). 5. Federal law requires individuals to deplete their financial assets before they qualify for medical assistance (i.e., Medicaid). With increased longevity and dramatic growth in nursing home costs, individuals have begun to use preneed agreements to meet one of the exemptions for Medicaid eligibility. A large percentage of these prearranged funeral agreements are structured as irrevocable contracts. The Valuation of Cemeteries and Mortuaries The Appraisal Journal, Fall 2008 329 Table 1 B urial and Cremation Services Provided by Mortuaries Burial Services C remation Services Basic services of the funeral director and staff Funeral director and staff services Embalming Use of equipment and staff for a memorial service in the mortuary chapel, church, or outside facility Sanitary car and dressing of unembalmed remains Transfer of remains to a columbarium Cosmetology and hairdressing Use of facilities and staff for the funeral ceremony in the mortuary chapel Funeral coach 􀀣􀁒􀁅􀁍􀁁􀁔􀁉􀁏􀁎􀁓 􀀀􀀀􀀀􀀀􀀀􀀀􀀀􀀀􀀓􀀕􀀅􀀀􀁔􀁏􀀀􀀗􀀐􀀅􀀀􀀈􀀑􀀕􀀀􀀳􀁔􀁁􀁔􀁅􀁓􀀉􀀀 􀀀􀀀􀀀􀀀􀀀􀀀􀀀 􀀀􀀀􀀀􀀀􀀀􀀀􀀀􀀀􀀒􀀕􀀅􀀀􀁔􀁏􀀀􀀓􀀔􀀅􀀀􀀈􀀖􀀀􀀳􀁔􀁁􀁔􀁅􀁓􀀉􀀀 􀀀􀀀􀀀􀀀􀀀􀀀 􀀀􀀀􀀀􀀀􀀀􀀀􀀀􀀀􀀑􀀙􀀅􀀀􀁔􀁏􀀀􀀒􀀔􀀅􀀀􀀈􀀙􀀀􀀳􀁔􀁁􀁔􀁅􀁓􀀉􀀀 􀀀􀀀􀀀􀀀􀀀􀀀􀀀 􀀀􀀀􀀀􀀀􀀀􀀀􀀀􀀀􀀑􀀖􀀅􀀀􀁔􀁏􀀀􀀑􀀘􀀅􀀀􀀈􀀕􀀀􀀳􀁔􀁁􀁔􀁅􀁓􀀉 􀀀􀀀􀀀􀀀􀀀􀀀􀀀􀀀􀀀􀀀􀀗􀀅􀀀􀁔􀁏􀀀􀀑􀀕􀀅􀀀􀀈􀀑􀀕􀀀􀀳􀁔􀁁􀁔􀁅􀁓􀀉􀀀 Figure 1 C remations as a Percent of Total Deaths, by State (2000)* • Projected Source: Cremation Association of North America Prepared by AARP Public Policy Institute of corporate ownership of properties through the use of economies of scale, such as sharing personnel and equipment among properties, and reducing the cost of goods sold through negotiated discounts for large purchasers. Corporate chains have attempted to dominate the deathcare market. The 2002 Economic Census shows that the largest firms also have the highest amount of revenue on a unit basis. Also, this report revealed that the four largest operators of cemeteries and crematories account for 18.3% of all establishments and the eight largest operators account for 36.5%. The corresponding figures for revenue are 36.8% and 42.8%, respectively. The four largest funeral home chains account for 14.4% of all establishments in the United States and the eight largest account for 15.4%. The corresponding figures for revenue are 19.4% and 21.4%, respectively. Diminishing Distinction between For-Profit and Nonprofit Most funeral homes are for-profit businesses. Most cemeteries are nonprofit, including military, religious, municipal, and fraternal cemeteries. Many nonprofit cemeteries are small or inactive. The distinction between for-profit and nonprofit is increasingly blurred. Many for-profit businesses have arrangements or affiliations with nonprofit cemeteries. Some chains have established a nonprofit corporation as the titular owner of the cemetery to meet statutory requirements.6 For example, in Oklahoma, all cemeteries are required to be nonprofit, but many are owned by a for-profit chain.7 Federal and State Oversight Federal Oversight. The Federal Trade Commission’s (FTC) Funeral Industry Practices Trade Regulation Rule (funeral rule) requires disclosure of price information by businesses that provide both funeral goods and services. If a business sells only services (cremations, for example) or only goods (such as caskets or grave markers), it is not covered by the FTC funeral rule. There are no federal minimum standards for preneed funeral and burial contracts, nor is there a federal requirement for full disclosure of preneed contract terms and conditions. 6. Lisa Carlson, Caring for the Dead: Your Final Act of Love (Vermont: Upper Access Books, 1998). 7. FAMSA-Funeral Consumers Alliance, Inc. (Comments of the Funeral and Memorial Societies of America on the Commission’s Review of the funeral rule, May 1999), 18. 330 The Appraisal Journal, Fall 2008 The Valuation of Cemeteries and Mortuaries The FTC has been reviewing the funeral rule. In light of the diminishing distinctions between the funeral and burial industries, as well as the increase in third-party sellers, the FTC has been considering the application of the funeral rule to cemeteries and third-party sellers. State Oversight. Because of the traditional industry segmentation, state regulation of the deathcare industry is a patchwork of various laws with responsibility for enforcement spread across multiple state agencies, commissions, and boards. As the distinctions among industry segments have eroded and concerns about regulatory gaps have increased, some states have attempted to coordinate or merge the regulations of various departments that regulate funeral homes, cemeteries, third-party sellers, and preneed goods. Eighteen states (Arizona, Florida, Georgia, Maine, Minnesota, Nevada, New Jersey, North Dakota, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, and Wisconsin) have adopted the federal funeral rule in whole or in part, either by reference or verbatim.8 In addition to adopting the funeral rule, states have addressed issues including the disclosure of the ownership on advertisements for funeral and burial services; assurance of income for perpetual care of cemeteries; provision of adequate authority and funds for state enforcement agencies to do periodic audits and investigation of complaints; and prohibition of unfair fees by cemeteries associated with the purchasing of goods from third-party sellers. Moreover, the mobility of society and the increase in preneed agreements have caused states to examine the issue of portability; that is, whether merchandise and services can be delivered to or provided in a different location from the point of the initial purchase. Although most individuals will still have a funeral service and burial in only one place, individuals may choose to transport the body or cremains to another state. Some state laws do not protect consumers who purchase a preneed contract and want to transfer the contract to a funeral home in another state. States’ preneed regulations generally address licensure requirements for sellers of preneed goods and services; requirements for placing funds in trust; contract provisions and cancellation requirements; and consumer protection recovery funds. These regulations vary in scope, approach, and requirements.9 Market Trends The biggest trend affecting the deathcare industry is the country’s declining death rate, which has put a damper on revenue. The average life expectancy in the United States continues to increase, rising from 68.2 years in 1950 to 77.8 years in 2004 (the most recent data released). It is inevitable, however, that America’s massive, graying baby boom generation will lead to an upward trend in the death rate. When one considers the baby boom generation, which includes 78 million Americans born between 1946 and 1965 and represents close to 30% of the total U.S. population, it is clear that the needs and wishes of this group cannot be ignored. As they have done in other parts of their lives, the baby boom generation is unlikely to choose off-theshelf options when it comes to funerals, preferring customized products and services instead. Though they are more likely to opt for less expensive cremations than previous generations, the baby boom generation will call on funeral homes to provide additional services. For example, they may wish to add to their memorial service music and videos, a performance or exhibit, or elements that are inclusive of children. Funeral homes are responding to the demands of the baby boom generation by ensuring that funeral services are as smooth as possible. Funeral homes offer an expanded array of personalized comfort services, such as memorials conducted over the Internet, grief counseling, estate-planning assistance, and discounted airline tickets for funeral participants who must travel by air in order to attend the service. Some funeral homes even provide a greater range of cost-competitive products, such as discounted floral arrangements. The Director, the official publication of the National Funeral Directors Association (NFDA), featured in its September 2001 issue the burgeoning trend of preplanning funeral arrangements. Preplanning a funeral allows individuals to choose the type of service to best fit their beliefs and needs. Preplanning also helps ensure that an individual’s preferences are met whether they involve church services or a simple memorial at the funeral home; an open or closed casket; or a burial or cremation. 8. Ibid., 5. 9. Sharon Hermanson, “Preneed Funeral and Burial Agreements” (fact sheet, AARP Public Policy Institute, June 1999). The Valuation of Cemeteries and Mortuaries The Appraisal Journal, Fall 2008 331 Many individuals also make the choice to preplan in order to take the burden away from their family and friends. The NFDA noted that the target market for preplanned services is primarily seniors, especially women age 50 or older. However, younger audiences are becoming more open to talk about deathcare and funeral preplanning. With the breadth of funeral support options on the rise, it remains to be seen whether profits for businesses in the deathcare industry will also rise despite the current slowdown in actual deaths. Moreover, with funeral support options on the rise, it is difficult to project the outlook for profits in the deathcare industry. The death rate will be increasing after falling for the past decade, thus increasing the demand for services and products. Cremations will continue to increase, along with nontraditional services held outside a mortuary, thus decreasing business revenues. Valuation Issues The appraisal methodology for cemeteries has been a contentious issue, especially when condemnation has been involved.10 While it is not the intent of this article to examine the theories espoused over decades in various valuation texts and publications, the informed appraiser should be familiar with concepts of the profit-seeking cemetery versus nonprofit cemetery; differences in the handling of developed and unsold plots; sold interment space; undeveloped, but entitled land; rates of utilization of burial plots and mausoleum/columbarium units; and operating expenses and development costs for land and improvements. Further, it is necessary to identify and quantify the intangible asset contribution of the business. Mortuaries are not as nearly complicated as cemeteries when determining an opinion of value, but they do involve specialized expertise. Mortuaries can be appraised by all three approaches to value, but there are numerous difficulties. The cost approach will generally involve all forms of depreciation. External obsolescence will necessitate serious research into past and future loss of revenue due to changes in the industry. The sales comparison approach may be limited due to a lack of transactions, which is especially likely in small markets. Many sales of mortuaries are motivated by unique factors (retirement of business owner, external problems related to revenue downturn, and change in highest and best use of the land are common examples) and require complicated adjustments such as those for differences in capacity, revenue per service, cultural allegiances, and excess competition. The income capitalization approach is the best indicator, but it requires comparative operating statistical data that is highly proprietary. In addition, the income capitalization approach requires an allowance for the contribution of personal property/equipment and the intangible asset contribution of the business, if any. Characteristics of a Cemetery During the past century, older cemeteries with elaborately carved headstones or monuments have given way to large, lawn-type memorial parks on level to rolling topography with gravestones set flush to the ground, handsomely groomed landscaping, and a variety of services available to the public. For example, a complete, efficient cemetery complex may contain a mortuary, chapel(s), crematory, mausoleum, columbarium, sales offices, florist shop, maintenance facilities, and business offices on 50 or more acres. Cemeteries may be separated into groupings to allow for family members to be buried in close proximity to one another, and, in the same way, a religious, social, or cultural group may similarly establish and operate a cemetery. The investment in such a property can be tens of millions of dollars, including numerous items of equipment and vehicles. Interment areas are developed in phases to correspond with projected absorption rates. An example of the inventory of a major urban cemetery and its current unit price differentials could include all or part of the items shown in Table 2. There is a vast difference between retail value and market value since it will take many years to sell off the inventory. Valuation of a Cemetery The income capitalization approach is the preferred technique for appraising certain portions of profit-oriented cemeteries. This approach may also be considered appropriate for portions of a nonprofit cemetery. Reference is made to certain portions because plots or niches that are occupied no longer produce revenue. 10. Samuel C. Warwick, “Appraising the Cemetery in Condemnation,” The Real Estate Appraiser (May 1966): 25. 332 The Appraisal Journal, Fall 2008 The Valuation of Cemeteries and Mortuaries Table 2 Example of Inventory of an Urban Cemetery Avg. Retail Price $15,000 $50,000 $10,000 $5,000 $500 $1,000 $11,138 Total Retail Value $45,000,000 $15,000,000 $10,000,000 $1,000,000 $600,000 $800,000 $72,400,000 No. of Units 3,000 300 1,000 200 1,200 800 6,500 Type Lots Crypts Niches Lawn Crypts Urn Gardens Scatter Gardens Totals Therefore, plots and niches may be considered a liability, in an accounting sense, since the premises must be maintained in perpetuity in most cases. In his article, “Appraising the Cemetery in Condemnation,” Warwick points out, “A cemetery, almost completely sold out, would have little market value for purpose of sale. Yet, if condemned, the value could be very high because of the interests of those who had purchased sites.”11 While this article does not deal with the very complicated valuation issues involved in a condemnation, virtually all of which are partial takings, the specific ownership interests to be appraised can be categorized as preneed buyers who have yet to occupy the purchased site, occupied spaces, and the cemetery owners of unsold sites and improvements to the land. If a taking involves one or more of the three categories, recognition of the cost to relocate interred remains and to replace plots (sold or unsold) must be made and should include a combination of the cost approach estimate and the discounted cash 11. Ibid. Table 3 Revenue and Expense Categories, 100-Acre Cemetery Revenue/Cost of Goods Sold Categories Preneed/At-Need Family Estate Crypts Niches Urn Gardens At-Need Lots Crypts Niches Urn Gardens Service Fees Casket Sales Other Major Expense Categories Salaries & Benefits Commissions Bonuses Insurance Transportation Advertising Community Relations Office Supplies Utilities & Telephone Maintenance & Repair Taxes Professional Services Other flow (DCF) procedure. The DCF analysis should incorporate all components of income, including absorption of interment plots, preneed and at-need sales income, and deduction of major expense categories. The projected sell-out period is probably the most difficult estimate the appraiser will make because of the many revenue categories associated with a cemetery that occur over a long period. Appraisers may consider other critical questions such as the discount rate employed and the reversion at the end of the holding period. Similar to the valuation of a business-intensive piece of real estate, the discount rate used should reflect the nature of a cemetery business and the earnings before interest, taxes, depreciation, and amortization (EBITDA) ratios available for similar operations. The income capitalization approach may be applied by direct capitalization or a discounted cash flow procedure. Since cemeteries are not rental-type properties, but business enterprises, the gamut of revenue and expense categories must be considered. The Valuation of Cemeteries and Mortuaries The Appraisal Journal, Fall 2008 333 12. Data on cemeteries and crematories is reported under the North American Industry Classification System (NAICS) as code 812220 and Standard Industrial Classification System codes 6531, 6533, and 7281. 13. Calculated from separate tables: Table 10.1 Estimated Revenue for Employer Firms shows total revenue of $2.695 billion, and Table 10.4 Estimated Total Expenses for Employee Firms shows total expenses of $2.313 billion. Table 3 is an example of income and expense categories for a profitable 100-acre cemetery in a suburban environment in a midsized city. Appraisers can find industry data for comparative purposes by looking at a company’s SEC Form 10-Q. Most publicly owned entities such as Service Corporation International and Stewart Enterprises, Inc., post their information online. The Annual Statement Studies published by the Risk Management Association (RMA) is another source for industry data.12 Table 4 summarizes the revenue and expense data from the 2007–2008 edition of the Annual Statement Studies. The table shows data for cemeteries with assets from $2 million to $10 million, and data for all sizes of cemeteries (a total of 51). Based on this data, the estimate of profit before taxes and depreciation (a figure approximating EBITDA) would be 11.7% for the $2 million to $10 million asset category and 12.6% for all 51 cemeteries in the RMA’s 2007–2008 report. According to the U.S. Census Bureau Annual Survey in 2006, the mean profit ratio for cemeteries was 14.2%.13 Pricing and Competition Cemetery sales representatives typically will provide a number of handouts including price sheets. The majority just do burials and cremation, with funeral services arranged with a local mortuary. The pricing is similar in competitive locations, but aggressive consumers can usually get a discount. Ground burial prices are determined by location factors within the cemetery, just as they are in residential housing, with the best views and centralized locations enjoying the highest prices. On the grave site, one may select a flat plaque or an upright monument, depending on individual cemetery policy. For crypts, prices will depend on location in the mausoleum, with eye-level slots being the most desirable and highest priced. Prices also depend on whether the finish is marble or granite, as well as the amount of decoration. Niche prices also depend on location either inside the mausoleum/columbarium or outside in a garden setting. Cemeteries have been effectively marketed by promoting sales to ethnic and religious groups as well as by promoting the gravesites of noted persons. For example, Mountain View Cemetery in Oakland, California, has a brochure with a guide to the graves of 47 persons, including the writer Frank Norris, architect Bernard Maybeck, and educator Joseph LeConte, and to the mausoleum crypts of persons such as industrialist Henry J. Kaiser, engineer Steven Bechtel, Chinese notable T. A. Soong, and politician William Knowland. Examples of cemetery pricing are shown in Table 5. Revenue Estimate The recent history of unit sales by category, combined with an analysis of information obtained from a study of competition, should be more than adequate to project total revenue. Insurance (if sold) should be treated on a commission basis as in a normal brokerage business. Many cemetery operations assist clients by selling life insurance to fund the cost of prearranged funerals, but prefer to avoid collecting premiums and servicing the related policies. Endowment care funds are moneys collected from cemetery property purchases and placed in trust for the maintenance and upkeep of the cemetery. An agency will monitor the fund and establish the minimum amount that must be collected; however, the cemetery is permitted to collect more than the minimum to build the fund. Only the inter- All Cemeteries 100.0% 85.1% 2.8% 12.1% 2.3% 9.8% Table 4 Revenue and Expense Data for Cemeteries, by Category* Cemeteries with Assets $2 million–$10 million 100.0% 86.7% 2.3% 11.0% 1.6% 9.4% Category Net Sales Cost of Sales and Operating Expenses Depreciation Operating Profit All Other Expenses Profit Before Taxes *Mean data 334 The Appraisal Journal, Fall 2008 The Valuation of Cemeteries and Mortuaries Table 5 C emetery Price Survey, October 2007 Cemetery No. 1 •Niches: $2,750–$8,250 •Ground Burials (all services): $11,333–$13,596 •Forwarding remains to another funeral home: $2,295 •Receiving remains from another funeral home: $1,295 •Immediate burial: $1,650 and up •Disinterment: $1,595 •Direct cremation with container: $1,890–$2,590 •Direct cremation with container provided by purchaser: $1,595 •Metal caskets (solid bronze and solid copper): $5,500–$25,000 •Metal caskets (stainless steel): $3,995–$4,495 •Metal caskets (regular steel): $1,995–$3,395 •Hardwood traditional caskets: $2,995–$10,250 •Cremation caskets: $1,495–$3,495 •Alternative containers (for direct cremation): $295–$895 •Infants’ and children’s caskets: $158–$1,150 Cemetery No. 2 •Grave selection: $2,000–$4,800 •Endowment care: $275–$375 •Opening and closing: $800 •Recording fee: $225 •Standard protective vault: $2,400 •Basic protective vault: $1,725 •Minimum protective vault: $1,450 •Premium vault: $4,600 and up •Double-depth grave package: $6,025 and up •Mausoleum: a. Single Crypt: $6,200 and up b. Companion Crypts (2): $20,000 and up c. Tandem (end to end) (2): $10,000 and up •Crypts: a. Single Crypt: $4,200 and up b. Tandem (end to end) (2): $6,700 and up •Inurnment of cremated remains: a. Ground inurnment: $1,135 and up b. Niche inurnment: •Indoor: $2,085 and up •Outdoor: $1,760 and up Cemetery No. 3 Ground Burial Crypt Cremation Land $8,795 $6,695 $2,000 Endow Care 85 110 35 Open/Close 1,295 1,150 495 Vault 1,594 614 395 Memorial 1,375 450 150 Foundation 325 85 375 Installation 275 -- -- Processing 95 95 95 Tax 244 94 44 Totals $14,083 $9,293 $3,589 •Funeral Service: $1,875 •Cremation: $2,470 •Complete service with viewing, cremation following: $5,350 The Valuation of Cemeteries and Mortuaries The Appraisal Journal, Fall 2008 335 est earned by such funds may be used for the care, maintenance, and embellishment of the cemetery. Cost of Sales and Services Costs of sales and services (inventory and direct expenses associated with sales and services consisting of operating salaries and incidental direct costs) are deducted before operating expenses are considered. Typical ratios are between 15% and 23%. Gross profit is the difference between revenue and costs of sales and services. Operating Expenses and Cash Flow Operating expenses and cash flow are generally categorized as selling, general, and administrative expenses, and can be allocated into line items for preneed, at-need, funeral home, general and administrative, maintenance and miscellaneous. Typical ratios are high, as profitability ratios tend to be low, due to administrative and maintenance requirements. Book depreciation needs to be analyzed, but excluded since many cemetery businesses, especially chain acquisitions, are capitalized on a cash flow or EBITDA basis. Income Available for Capitalization Depending on the yield rate information available for analysis, traditional net income with an allowance for reserves for replacement or EBITDA may be used. However, EBITDA appears to be in common usage. As noted, the RMA reports average income before taxes and depreciation of 12.6% for 51 cemeteries in the 2007–2008 fiscal year. Such a profitability ratio is considered a good performance since smaller cemeteries would not appear to have benefits of scale, and some large chains, based on a review of publicly traded corporations, have lower EBITDAs or ratios of profitability, perhaps because they are saddled with many underperforming properties ac- 14. Service Corporation International (SCI) entered into a contract on April 3, 2006, to purchase Alderwoods, a funeral service and cemetery operator who also owned Mayflower National Life Insurance Company. The deal was closed on November 28, 2006, for a reported consideration of $813.5 million cash. The reported price earnings ratio was 24.5, with a premium of 17.7%, and a price to book of 2.7. This indicates that Alderwoods had after tax earnings of $33.2 million, or 4.45% of total revenue of $746.8 million. The acquisition of Alderwoods allowed SCI to serve a number of new, complementary areas, while enabling it to capitalize on significant synergies and operating efficiencies. Several areas where cost-saving synergies were quickly realized included the elimination of duplicate information technology systems, infrastructure, accounting, finance, legal and other systems, management and executive, and public company costs. SCI also began to realize synergies in funeral and cemetery operations, including improved purchasing, leverage, and revenue enhancements. Subsequent to the purchase, SCI, as required by the Federal Trade Commission, divested 50 properties for a total net price of $193.7 million (this was out of a total of 55 properties they were ordered to divest, of which 35 went to StoneMor, a full-service cemetery and funeral home corporation) and sold Mayflower National Life Insurance Company for $67.5 million. All of these transactions were between the date of sale and July 2007. The net result of this is that Alderwoods added 81,864 funeral services to SCI in the first half of 2007, contributed $217.1 million in funeral service revenue, and $90.5 million in cemetery revenue in the same time period. quired in large transactions. The example in Table 6 represents a highly successful, but relatively small unit of an integrated operation. Yield Rates As operating businesses within a unique competitive environment that can vary greatly in profitability, one would expect that yield rates for cemeteries and mortuaries would be relatively high. This does not appear to be true due to a variety of factors. Cemeteries are not being developed, or the supply remains stable or decreasing. Many cemeteries recognize that an increasing part of their demand is for the lower-priced cremation activity. Other factors that influence yield rates include competition for acquisitions by corporate chains; recognition by industry experts that the inventory of the businesses or the product that the business sells has already been acquired; and that the underlying land tends to be increasing in value. While no yield rate market data is provided since there are so many variables, current transactional information for desirable properties indicates capitalization and discount rates that are closely similar to those of commercial properties in the same market. However, this finding was made prior to the current credit crisis and may no longer be true. Appraisers are cautioned to research the availability of debt financing as a factor that could influence buyer behavior. The motivation for market penetration and economies of scale may result in chain transactions at low yield rates.14 Other Valuation Approaches to Cemeteries The sales comparison approach does not help much in valuing cemeteries, except to derive financial ratios, multipliers, and other valuation indicators (such as price) to revenue. There are few sales of individual cemeteries, and enough variables are involved to cast doubt on any point estimate based The Appraisal Jour 336 nal, Fall 2008 The Valuation of Cemeteries and Mortuaries on some type of per-unit conclusion. Transactional data converted to a per-service basis is employed in the appraisal of mortuaries where the highest and best use is for the continuance of the business. The cost approach is another matter. If one feels it is necessary or required to use the cost approach due to the value of the assignment, the appraiser is forewarned that the process is quite unique and complicated. The assistance of outside experts may be needed. Rather than going through a cost approach procedure, step-by-step, the following criteria need to be considered: 1. Land valuation appears to be a speculative undertaking. Where does one find comparable transactions involving land with similar cemetery entitlements? 2. Land that has been utilized for interment no longer has income-producing potential, indeed it is a liability because it still has to be maintained, which involves roads, utilities, etc. 3. Land that has been prepared for preneed sales must have its future income-producing potential discounted for absorption. The same is true for mausoleum spaces and columbarium niches. 4. There is the looming presence of external obsolescence in the form of net present value of an inventory of interment options, which may take decades to sell out. 5. Of equal importance to many is the problem of estimating the replacement cost of uniquely designed structures. 6. The fact that the cost approach does not deal with the business, and may be only useful for providing an allocation into the asset categories of “real estate” and “other.” Table 6 Example of Income Capitalization Approach, Cemetery with Mortuary ($000 omitted) Categories Sales Revenue Preneed At-Need Funeral home Total Cost of Goods/Sales Preneed At-Need Funeral home Total Gross Profit Preneed At-Need Funeral home Total Operating Expenses Preneed At-Need Funeral home General & admin. Maintenance Other Total Total Operating Income Other Categories (+ and -) Interest and trust income Other income (expense) Management Reserves Total EBITDA Note: Based on actual data for 2007. Reserve estimated by the author. Interest income from Endowment Care and Trust Funds is net of the expense of administration and reporting. Percent 30.9 26.4 42.7 100.0 4.9 3.9 8.1 16.9 26.0 22.4 34.6 83.0 16.1 0.9 13.7 10.5 10.9 1.1 53.2 29.8 10.4 (0.3) (16.0) 5.0 (10.9) 18.9 Actual $1,076 918 1,487 $3,482 $169 137 283 $590 $907 781 1,204 $2,892 $562 30 477 366 380 38 $1,853 $1,039 $362 (9) (559) (174) ($380) $660 The Valuation of Cemeteries and Mortuaries The Appraisal Journal, Fall 2008 337 Table 7 Allocation of Assets for Cemeteries and Crematories Category Allocation Fixed Assets 82.6%–88.5% Intangibles 11.5%–17.4% Allocation to Components The Uniform Standards of Professional Appraisal Practice requires an enterprise valuation, with some exceptions, to be allocated to its various asset components. Due to the cost approach limitations, an alternate method may be to use data from the RMA. The statistics from 2003–2004 and 2006–2007 on the allocation of assets for cemeteries and crematories are shown in Table 7. With exceptions, the business component of a successfully operated cemetery enterprise would be expected to be relatively modest, from 10% to 20%, due to the huge investment in real property resources. Valuation of Mortuaries Stand-alone mortuaries are few in relative number, but unlike cemeteries, they produce far more appraisal assignments. Furthermore, the valuation process is more traditional, with all three approaches to value commonly employed. In the local deathcare business, ranking for mortuaries is based on their volume in terms of number of annual services. Like cemeteries, they tend to have an ethnic or religious orientation to their clientele, and the name of the mortuary may be carried on for decades after the passing of the original owner. Business is customarily derived on a referral basis, meaning there is a potential for goodwill due to the ability to obtain and retain future clientele. Mortuary improvements are specialized and typically include the chapel, viewing room, casket room, multipurpose room, administrative and sales offices, prep room, storage/utility rooms, and garage, mostly ranging in size from 5,000 to 15,000 square feet. Some older funeral homes provide an apartment for one or more staff members to respond to clients’ needs on a 24-hour basis. Large mortuaries may have multiple chapels and gathering rooms, and may provide the latest technological advances in video screening of the departed’s life at a memorial service. Costs of such facilities have soared in recent years, propelled by building material shortages and more innovative and expensive architectural features. Highest and Best Use Changes in public preferences, as previously noted in this article, have reduced the inventory of mor- 15. Marshall and Swift, Marshall Valuation Service (Los Angeles: Marshall and Swift, 2000), 26. Excellent quality, Class C or D adjusted 20% for typical Midwestern metropolitan area. tuaries. Freestanding and much smaller and more efficient crematory facilities have also cut into the market. These factors combined with the consolidation trend in the industry have slightly reduced the number of mortuaries to about 15,000. Few are being built. At the same time, the relatively large sites of mortuaries with parking lots have attracted developers who have offered prices supported by alternative, high-density, commercial, and multiresidential projects that are substantially in excess of the income-producing capability of a traditional funeral home. The appraiser needs to pay close attention to increasing land values that will absorb improvement costs; design obsolescence in older funeral homes; business trends in terms of number of services and average revenue per service; the business and exit plan of the owner; and changes in the neighborhood that result in the loss of traditional sources of patronage. Appraisers should remember that mortuaries are a local business. Driving time is becoming a major factor in the choice of a mortuary by the deceased’s survivor. Zip code and related demographic and statistical data can be of great assistance in assessing the future potential of the business. Cost Approach Land value is derived from transactions involving property with similar legal uses, approximately adjusted. Improvement costs for mortuaries can be derived from cost services such as the Marshall Valuation Service, with input from industry sources, if possible. Depreciation estimates are complicated, with external obsolescence overriding all other categories. An accurate cost approach, including the personal property, can be the best way to allocate a total enterprise value. Typical costs in today’s market, with its rapidly escalating materials costs, are about $200 per square foot or more.15 The Appraisal Jour 338 nal, Fall 2008 The Valuation of Cemeteries and Mortuaries The Valuation of Cemeteries and Mortuaries The Appraisal Journal, Fall 2008 339 Table 8 C omparable Mortuary Sales Summary Chart Location Crippen & Flynn Funeral Chapel 1101 Alameda de las Pulgas Belmont, CA 94002 APN #045-081-350 Fehrensen Mortuary 966 Broadway Sonoma, CA 94547 APN #128-082-009 Eggen & Lance Mortuary 1540 Mendocino Ave. Santa Rosa, CA 94505 APN #180-460-013, -016, -018 Eggen & Lance Mortuary 1540 Mendocino Ave. Santa Rosa, CA 94505 APN #180-460-013, -016, -018 Bryant & Moore 1386 Galindo Street Concord, CA 94520 APN #126-133-009, -013 #125-164-052 Grissom’s Chapel & Mortuary 249-267 E. Lewelling Blvd. San Lorenzo, CA 94580 APN #413-0063-011-01 Sales data from public records and CoStar Information, Inc., confirmed by Arthur Gimmy, International Date Sale Price 11/12/2004 $1,500,000 6/10/2002 $1,050,000 5/31/2002 $1,880,000 11/2/2005 $1,545,000 $1,445,000 (adj. price) 1/21/2005 $1,428,000 1/26/2006 $1,200,000 $1,500,000 Bldg. Sq. Ft. Land Sq. Ft. 3,400 25,546 4,770 36,500 7,018 44,520 7,018 44,250 7,363 45,467 6,428 13,504 Price/ Square Foot $441.18 $220.13 $267.88 $220.15 $205.90 (adj. price) $193.94 $186.68 $233.35 Year Built 2004 1965 1953 1953 1948 1968 Comments Not on market at time of sale. Property was under construction at time of sale due to a fire 2 years prior. It was purchased asis. They added new floor and fixtures. No estimate of costs were provided. Purchased mortuary for land value. Intention was to S/D land into 8 SFR. Property had been rezoned prior to sale, however, a tentative map had not been approved. Market driven sale. This is a sale of the same property as below. The price dropped $335K from 5/31/02 to 11/1/05. This represents an 18% drop over a 3.5-year period. Owner user buyer for both transactions. The $1.545M included business. Business worth $100K per Laura Necias. Buyer approached by seller. Ms. Necias did not know why SCI sold at a loss and does not know why there was a drop in value. Property was purchased for buy and hold. Tenant on month-to-month lease. Building had outlived its economic life according to owner. Just burned in December 2006. Market-driven sale. Purchase was for real estate only. Buyer purchased the business in 1991. The purchase agreement had option to buy for $1.2M in 2006. Appraised at $1.5M (real estate only). Doc. # 223761 912736 84526 163128 23006 28114 Table 9 Revenue and Expense Categories, Mortuaries Revenue Categories Expense Categories Basic Services of Funeral Director and Staff Cost of Caskets & Urns Sold Embalming Salaries and Wages Other Preparation of the Body Repairs and Maintenance Use of Facilities Bad Debts Use of Equipment Rents Transportation Taxes and Licenses Cremation Advertising Sale of Caskets & Urns Employee Benefits Other Other In situations involving an eminent domain action, the likely outcome is that the owner will not rebuild in a new location. The costs and risks are too high. In some cases involving a full taking, the owner may be able to renovate and reuse a variety of commercial-type structures with large parking lots that are considered to be lower on the ladder of commercial uses. Sales Comparison Approach The sales comparison approach is difficult to employ with mortuaries because there are limited transactions in the mortuary market. In addition, complicated research is likely needed in order to analyze locational differences. Using the sales comparison approach with mortuaries also causes difficulties with verifying the business volume characteristics and breakdown, as well as analyzing for a capitalization rate due to the seller’s ability to influence and report discretionary expenses. Appraisers should keep in mind that business brokers and accounting firms that specialize in mortuaries are a potential source of information. Comparative valuation indicators would be priceper- square-foot of building area, price-per-service, or gross revenue multiplier. Sales of mortuaries may only involve a leased fee, which directly relates to the real property, or a leasehold, which will complicate the adjustment process even more. The sales comparison summary in Table 8 illustrates the wide variance in unit prices and rights conveyed in actual mortuary sales. Income Capitalization Approach Since mortuaries are seldom leased on an arm’slength basis, the income capitalization approach is employed on an enterprise or business revenue and expense allowance basis. Typical categories of revenue and expense are listed in Table 9. Annual statistics to show trends in business performance are generally expressed fairly simply as number of total services, number of full services, and average price of casket and service. A full funeral service would include basic service of the funeral director and staff; transfer of remains to the funeral home; embalming; cosmetology and hairdressing; dressing and casketing of remains; use of flower car; use of facilities and staff for the visitation and/or a funeral ceremony in the funeral home chapel; and use of a funeral coach. Typical cost would be from $5,000 to $6,000 including an ordinary casket, but costs could run into the tens of thousands of dollars for a premium memorial service. Cremation may involve all of the previously listed items except for the funeral coach, since cremation typically takes place in the mortuary. Or, cremation services could include basic services of funeral director and staff; transfer of remains to funeral home; sanitary care and dressing of unembalmed remains; and use of facility. The cost would be around $2,000. Financial Analysis of Mortuaries Financial benchmarks, such as those that can be derived from RMA data, can be important to the appraiser, especially when the going concern is of sufficient size and complexity, to have available balance sheets and profit and loss statements with detailed and consistently reported line items or categories. The RMA currently provides data on about 325 funeral homes and funeral service businesses. It is beyond the scope of this article to present this information in detail. Financial benchmarks of particular applicability to funeral homes and funeral services, and which can be readily measured and compared to industry norms with RMA data, are shown in Table 10. 340 The Appraisal Journal, Fall 2008 The Valuation of Cemeteries and Mortuaries Table 11 Income and Expense Statement, Typical Urban Mortuary* Category Total Amount ($000) % Amount Per Service† Income Gross receipts $2,136 100.0% $4,172 Cost of goods sold − 623 −29.2 −1,217 Gross profit $1,513 70.8% $2,955 Other income + 27 + 1.3 + 53 Total Income $1,540 72.1 $3,008 Expenses Officers’ compensation $222 10.4 $434 Salaries & wages 242 11.3 473 Repairs & maintenance 30 1.4 59 Bad debts 10 0.5 20 Rent 300 14.0 586 Taxes & licenses 63 3.0 123 Advertising 14 0.7 27 Pension/Profit sharing 39 1.8 76 Other expenses† 358 16.8 699 Depreciation 24 1.1 47 Total Expenses $1,302 61.0% $2,543 Net Income $238 11.1% $465 EBITDA $262 12.3% $512 ∗ Actual 2006 data † 29 items of expense ranging from $210 to $46,631 512 total services Valuation of the Enterprise A combination of income and market data is commonly used to appraise the business and the real property. The starting point is the income and expense statement of the mortuary as shown in Table 11. The appraiser may look at financial statements covering several years to denote and analyze trends. Comparative operating data can be derived from RMA. In Annual Statement Studies: Financial Ratio Benchmarks, 16 the data shows EBITDA ranging from 8.5% to 13%, compared to the example at 12.3% in Table 11. To appraise the real property, the rent expense can be capitalized. If the rent is under or over market, an adjustment may be appropriate. A sales comparison approach can also be employed. In Table 11, the EBITDA for the mortuary business was $262,000 and for the enterprise, with the rent added back, it was $562,000. Assuming that the market indicates that an appropriate multiplier is 8.0, derived from transactional data or surveys, this figure multiplied times the enterprise EBITDA of $562,000 (including rent at $300,000) would indicate a total value for the enterprise of $4,500,000 (multiplier of 8.0 × $562,000 = $4,496,000). The valuation of the enterprise can also be determined by separately appraising the real property and the business. An Example of Valuation of the Real Property Sales Comparison Approach Due to the relative small supply of mortuaries in a given market area, it is reasonable to analyze trans- 16. Risk Management Association, Annual Statement Studies: Financial Ratio Benchmarks (Philadelphia: Risk Management Association, 2007), 1520– 1521. Table 10 Financial Benchmarks for Mortuaries Liquidity Ratios Operating Ratios C overage Ratios Current Ratio % of Profit Before Taxes/Tangible Net Worth EBITDA/Interest Quick Ratio % of Profit Before Taxes/Total Assets EBITDA/Current Ptn Long-Term Debt Sales/Receivables Sales/Total Assets Leverage Ratios Sales/Working Capital Earnings Before Depreciation and Taxes as a Fixed/Worth percentage of Net Sales The Valuation of Cemeteries and Mortuaries The Appraisal Journal, Fall 2008 341 −‡ †− Table 12 Summary of Income Capitalization Approach Annual Rental Income $300,000 Expenses of Landlord - $12,000 Net Rental Income $288,000 Cap Rate ÷ 9% Indicated Value $3,200,000 Table 13 Balance Sheet Allocations for Various- Sized Mortuaries Category Allocation Fixed Assets 81.1%–85.1% Intangibles 14.9%–18.9% actions involving mortuaries over a much larger area, one that is regional in scope. A sample of data developed from such a comparable sales investigation is shown in Table 8. In the example in this section, for a hypothetical building of 12,500 square feet, the unit sale prices after adjustment indicate that a range of $240 to $260 per square foot of building area is reasonable, resulting in a total value estimate of $3,000,000 to $3,250,000 for the real property. Income Capitalization Approach In this example, a mortuary with an annual rental income of $300,000 is equivalent to $24.00 per square foot per year or $2.00 per square foot per month. The income capitalization approach would be as briefly summarized in Table 12, assuming that the investigation indicates a market rent; vacancies are unheard of in this business; the landlord is responsible only for structural (including roof) maintenance and repairs; and special purpose properties of this type sell at 100 base points over a typical commercial building capitalization rate of 8%. The real property of the mortuary in this example appears to be worth $3,200,000, a figure supported by the sales comparison approach. The difference between the total enterprise value of $4,500,000 and the real property of $3,200,000 is $1,300,000 for the intangible assets, or 29% of the total. Balance sheet allocations from the RMA for various-sized mortuaries are shown in Table 13, and compared to the EBITDA figure of $262,000, reveal a capitalization rate for the business of about 20%. The data in Table 13 was derived from RMA’s Annual Statement Studies balance sheet for the category Funeral Homes and Funeral Services. From 2003– 2007, over 300 financial statements provided mean statistics on the portion of total assets represented by fixed assets and intangibles. The allocations shown in Table 13 were calculated by the author. An example of this allocation for the years 2006–2007 would show that of the total assets (100%), fixed assets represented 41.7% and intangibles represented 9.7%. These two categories by themselves calculate to 81.1% for fixed assets (41.7 ÷ 51.4) and 18.9% for intangible assets (9.7 ÷ 51.4). A determination of the reasonableness of the rate can be made by research into published data. A dependable source is the Business Reference Guide, published by Business Brokerage Press; the appraiser may consider conducting interviews with industry experts or business brokers. When dealing with a chain acquisition, the SEC Form 10-Q of publicly traded corporations may reveal the yield rates attributed to recent acquisitions. This data is available online, but the appraiser is cautioned that such statistics are usually hidden in footnotes and may be difficult to interpret. Allocation to Components Data from the cost approach would provide estimates of the value of physical or fixed assets to compare to the total enterprise value derived from the sales comparison and income capitalization approaches. The business component of a successfully operated mortuary is expected to be much greater than that of a cemetery, since the investment is in fixed assets and does not have to include a costly land inventory. Also, the name of the business tends to be carried on for decades, even when there have been multiple changes in ownership. In the mortuary example used in this section, the estimate for intangible assets was 29%. This would be considered an upper-quartile performance statistic. Mean data from the RMA report is as shown in Table 13. Conclusion In this day and age of enormous data availability, a seasoned appraiser can undertake assignments involving a wide variety of special purpose properties that are part of business enterprises. Before meeting with a potential client, it is always smart for appraisers to update their basic research into the business. The deathcare business is complicated due to its numerous revenue and expense categories, limited transactional data, high degree of propri- 342 The Appraisal Journal, Fall 2008 The Valuation of Cemeteries and Mortuaries etary secrecy, and unique assets. Offsetting these disadvantages is the availability of a compilation of statistics and other data. Smaller operators in the deathcare industry are being squeezed on the operating expense side and on the demand side as the popularity of cremations continues to erode revenues for cemeteries and mortuaries. On the plus side is the limitation on new competition due to the unavailability of land for such projects, and due to factors such as high development costs, or the entitlement process that makes it virtually impossible to gain governmental approvals in a cost efficient time period. Overall, the number of nationwide establishments in the deathcare industry is static, but revenues keep growing, albeit slowly. For example, there was a modest increase of $1.4 billion between 1999 and 2006, or 10%. The outlook can be summarized by the market symbol ↔. Arthur E. Gimmy, MAI, is the president of Arthur Gimmy International, a firm currently employing researchers and appraisers, plus support staff, located in Corte Madera and Newport Beach, California. Gimmy has been widely published, and he won the George L. Schmutz Memorial Award from the Appraisal Institute in 1996. Contact: agi@arthurgimmy.com The Valuation of Cemeteries and Mortuaries The Appraisal Journal, Fall 2008 343