Special-Purpose School Campus on Appeal
You appraise a private school campus for a property-tax appeal. The campus has a 38,000-square-foot classroom building built in 1974, a 12,000-square-foot gymnasium built in 1982, and 14 acres of land. Enrollment has fallen from 410 to 235 students; capacity is about 420. The buildings have 8-foot ceilings, 28 square feet per student in classrooms, and a single-loaded corridor. The county assessor valued the property at $9.7 million using replacement cost new less depreciation: $270 per square foot for the classroom building, $200 per square foot for the gym, land at $60,000 per acre, physical depreciation of 30%, and no functional obsolescence. You find no recent sales of private schools, but three former school buildings sold for conversion to offices or self-storage at $48 to $62 per square foot; those sales required substantial reconfiguration. A cost consultant estimates replacement cost new at $310 per square foot for the classroom building and $240 per square foot for the gym, with land value at $65,000 per acre. The owner says the school is 'worth at least $12 million because it would cost $15 million to build.'
1. Which valuation approach should be primary for this property, and how should the lack of private-school sales be handled?
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The cost approach should be primary because the property is special-purpose, has little or no income data at market rent, and lacks recent sales of comparable operating schools. The cost approach sets an upper bound: a buyer would not pay more for the real estate than the cost to create a substitute, less depreciation, unless there is a locational or business premium. The sales of former schools converted to offices or self-storage are relevant but secondary. They reflect alternative use, not continued school use, and they require adjustment for conversion cost, location, size, condition, and market conditions. Their low per-square-foot prices are evidence that the subject may suffer substantial functional obsolescence, but they are not direct comparables. The owner's $12 million claim based on $15 million replacement cost is not a market value conclusion; cost new ignores depreciation and does not prove what a buyer would pay.
2. Reconstruct the cost approach using the consultant's figures and explain how you would measure physical and functional depreciation.
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Classroom: 38,000 sf x $310 = $11,780,000. Gym: 12,000 sf x $240 = $2,880,000. Improvements cost new = $14,660,000. Land: 14 acres x $65,000 = $910,000. Total cost new = $15,570,000. Physical depreciation at 30% of improvements = $4,398,000, leaving depreciated improvements of $10,262,000; plus land = $11,172,000 before functional obsolescence. I would not simply accept 30%; I would use age-life as a check and a breakdown for short-lived items such as roofing, mechanical, and paving. Functional obsolescence is the larger issue. The 8-foot ceilings, small classrooms, and single-loaded corridor are less efficient than modern school design. If curable, measure the cost to cure less any value added; if incurable, measure the capitalized loss in utility or the cost of a modern equivalent less the subject's depreciated cost. The conversion sales at $48 to $62 per square foot suggest that a pure cost approach without a substantial functional deduction would overstate value. A supported deduction in the range of several million dollars is plausible; the exact amount must come from a cost-to-cure or income-loss analysis, not a guess.
3. How should enrollment, tuition, and the owner's 'replacement cost' argument be treated in the property-tax appeal?
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Enrollment and tuition are business factors. A going concern value includes real estate, tangible personal property, and intangible business value such as goodwill, brand, and assembled workforce. The property-tax appeal concerns the real property only. Declining enrollment may affect the real estate's utility and marketability, and it supports functional obsolescence if the buildings are oversized or poorly configured for current demand. But I would not add or subtract the value of the school's tuition stream as if it were real estate income unless I can show a market rent for the real estate and separate the business income. The owner's $15 million replacement-cost figure is not the answer because replacement cost new must be reduced for physical deterioration and all forms of obsolescence, and it does not establish what a willing buyer would pay. The assessor's $9.7 million may still be too high if functional obsolescence is substantial; the appeal should focus on a supported cost approach, conversion-sale evidence, and the distinction between real estate and business value.