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