Borrowing to Build


A capital campaign is different than a normal stewardship drive:  the amount of money involved is larger by several times.  It also is money that will be used on something that can be seen and touched.  Thus, it is both more difficult and easier to finance capital needs.  The main point is that it is different, so different that it needs different conceptual approaches, not simply more organization or more energy.

Let’s approach this slowly:  In order to build a building, we need cash.  There are only two sources of cash for a church:  loans or gifts.

Many congregational leaders have an aversion to loans.  Usually the objection to borrowing is that interest costs are too high.  Interest is a cost, but whether interest costs are too high depends on an assessment of the benefits of borrowing.  Unfortunately, there is usually no weighing of benefits at all, so of course any costs are “too high”.

There is sometimes also a fear that the congregation will borrow too much and get into trouble, perhaps even go into bankruptcy.  Such a scenario does not happen often, but it does happen.  And, when a church goes bankrupt or experiences extreme financial difficulty there is always debt present, by definition.  Most churches that borrow, however, pay their debts.  The more frequent problem is that after money is borrowed there is a continuing debt service that can crowd out the programmatic needs of the congregation.  Sometimes there is a beautiful new building and no money left for what the congregation really needs.

The issue in such instances, then, is not borrowing per se, but ill-considered and excessive borrowing.  Too huge a debt can cause a church to skimp on important program opportunities.  Churches with debt also sometimes get into trouble for reasons quite apart from the indebtedness — such as a fissure within the community over the minister, or some other reason for commitments to evaporate.  Even when debt is present, it is not always the culprit; sometimes it’s a red herring.  Let’s clear a place in our minds to consider the possible benefits of church borrowing.

Three Reasons to Consider Using Borrowed Money

1)         It will be easier to pay for a new building as the congregation gets bigger.  Churches sometimes grow handsomely when a new building is built.  A membership increase of  30% within three years is not uncommon, but neither is it guaranteed.  It is difficult to accept this possibility when you’re leading the congregation into the project.  Other factors being equal, however, if you have a good demographic profile in your town, if you build extra capacity for newcomers, and if you build your church where it will be easily seen and found, the church will attract many visitors.  If the congregation has vital and attractive programs, the visitors will become members.  Where any one of these conditions is not present, long term membership growth is more problematic.

2)         More of the current members can participate in paying off the mortgage in a meaningful way.  Even for a congregation that believes it is stable and will not grow,  there is something to be said for stretching the payments out over ten to fifteen years rather than three.  If a building is to be completely paid for in three years, the congregation is necessarily leaning heavily on a few fortunate members who can afford to make sizable gifts from accumulated savings or very high incomes.  In this scenario no one pays for the building after the three years are gone.  By stretching out the payment schedule to a ten year period others are able to participate at a more moderate level out of current income rather than savings.  They are more heavily involved in the project.  Having a wider base of heavy participation is a worthy community goal.

3)         If a building mortgage is paid for over an extended time, new members get to participate in the costs too through their annual gifts.  Membership changes in a congregation over time even where there is little growth.  Again, the widest possible spreading of support in paying for the building is the healthiest for the community.  Extending the mortgage over several years ensures that all members who enjoy the use of the building also help finance it.

I noted above that there are two sources of cash — gifts and loans.  In truth, there is only one source of cash.  Ultimately any loans will also be paid off with gifts from members.  Therefore the issue should be framed solely in terms of how those gifts are to be sought:  quickly — primarily from wealthier congregants — or over a somewhat extended period to include those who can only make gifts out of their income as they receive it.

A healthy congregation will assure that the widest array of members is involved in any capital campaign, and involved in a way that lets them know their participation mattered to the success of the project.  Interest expense is not the cost to the congregation of borrowing money.  Rather, it is the cost of obtaining a level of widespread participation in paying for new facilities.  Since such participation is healthy, interest is the cost of an important benefit rather than a wasted expense.

There is still a legitimate need to determine how much debt a church can take on.  It depends.  There are many heuristic measures, each of which has some value, and some limitation.  It is, in truth, a judgment which the leadership must make.  It is a judgment based on determining 1) how much giving the congregation can do this year, 2) how much giving will unfold in the future if there are new members, and 3) how long the congregation will continue to give at the increased level.  As I have tried to make clear earlier, I believe that Unitarian Universalists are capable of much higher giving levels than we generally expect.

Let’s consider The Community Congregation again.  This congregation has 218 committed pledging families or individuals and about 293 adult members.  It is difficult to imagine a serious building project which would cost less than $1,000,000 for such a congregation.  Suppose they can sell the current building and realize $500,000 in net cash.  They are left with a need to seek gifts or financing for $500,000.  Suppose further they decide to borrow the full amount, understanding that they will need to pay an interest rate of about 6%.  The only remaining question is how long they will take to repay the loan.

If 5 years,     $119,000/year

If 10 years,     $68,000/year

If 15 years,     $52,000/year

If 20 years,     $44,000/year

The fundamental question the leadership faces is how much can be added to the current budget without endangering the ability of the congregation to still have the programs and services it wants.  It is poor planning to build a religious education wing, for example, then find that the church can no longer pay an RE Director.

But, as we see, such a situation is not entirely dependent on the amount of debt incurred.  It is even more strongly a function of the expectations of the congregation in determining how long they must take to pay it off.  Unless the congregation foresees its demise, there is much to be said for stretching out beyond ten years.  The annual payments reduce substantially for each year of extension.  Note that beyond twenty years, however, there is not much further reduction in the payment level.

Sources of Capital Funds

Those are the reasons for using borrowed money, best summarized as spreading participation in the financing to as many members as possible.  Where do we get it?  Banks will lend to churches, but (in my town) at higher rates than are applicable to second tier commercial loans.  The denomination sometimes has money to loan at more attractive rates, but the amount available to any single church will usually not build much of a building.  That means we must get a large portion from ourselves.  Most of us have some savings in an IRA or in college accounts for the kids.  This is not money available to give away;  but it is available to loan for a few, or many, years.

There is a great deal of money in your own congregation!  If you ask people to give it to the church you will never see it.  If you ask people to loan it and you agree to pay at least what the credit union is paying, you can have all you want.  Our congregations can come up with amazing amounts of cash by borrowing it from the members.  A congregation I’ve been a member of raised $150,000 in loans in less than two weeks without much effort beyond an announcement in the newsletter and on Sunday morning.  Other congregations have borrowed significantly more from members in a single weekend.

The Borrowing Campaign

Step 1:  You will need help.  Call the District Office and get referred to someone who can do the technical legal work.  Borrowing money within the congregation requires very specialized legal work, usually including filing paperwork with the State under securities laws.  Expect to pay for the attorney’s efforts.

Step 2:  Consider the various pools of cash you will be marketing to and structure the notes to be attractive to those needs.  For example, retirees will want regular income and not much risk.  This means some of the notes should be 4 -5 years in duration, with an interest rate fixed for the entire period, and monthly or quarterly payments.  For both college and IRA money, a series of notes maturing in 8, 10, or 12 years with a single payment at term is more attractive.  These people may not want to be bothered with payments along the way.  Interest can be adjusted annually (tied to something such as the ten-year Treasury bond rate), and compounded quarterly.  There are diverse ways to set up your loan offerings.  The point to consider is that there are a variety of needs of lenders.  Structure terms appealing to varying sources of money.

Step 3:   Do not go after loans and gifts at the same time!  You will confuse your canvassers, and your members.  They will get the message that after you have the money things will be like always.  Someone will try to talk them into making the loan a gift.  Do not fantasize about members “forgiving” the loans.  When conducting a campaign to borrow, focus the effort entirely on borrowing — on terms that are attractive financially, seem secure to the lenders, and are straightforward in intention.  (It is appropriate to invite members to forgive the loan in the event of their death.  That is an option that can be offered with an initialed check box without endangering the perception of repayment under normal circumstances.)

In the quest for money to borrow, some will want to make an outright gift.  That’s what they want to do.  It’s always OK to take gifts, but a loan campaign must focus entirely on loans.

Step 4:  Establish the appropriate financial controls to assure that the loans are dealt with responsibly every year in the budget.  This means that each year an appropriate interest expense must be included in the budget as well as a set aside of a portion of the principal.  Show a reserve account on the Statement of Financial Position which is the “escrow” where interest expense and principal gets set aside annually until it’s actually paid out.

Step 5:  Organize a single canvass each year.  It is important for the congregation to understand that the financial obligation of the mortgage is no different than the financial obligation of the minister’s salary.  Managing a separate canvass for each of these obligations makes no sense.  It is clear that one well-done canvass is vastly superior to the draining sense that comes from running two or three major money raising events each year.

So, let’s say we borrowed $500,000 in the fall.  In the next regular annual canvass there is a major new item — debt repayment.  It is not a negotiable item.  It establishes the need for a higher commitment level from all the members, not just the ones who had savings to spare.

In every church budget I have reviewed, a standard of 5% in stewardship giving will provide enough to easily cover the operations of the congregation and to pay off capital notes.  So, the annual canvass needs to focus on goals in the 3 – 7% range for all members.

There will be some in the congregation who want the loans “paid off as soon as possible”.  I believe this approach is wrong, in general, for the reasons outlined above (best summarized as spreading the cost to more people).  And, if the terms of the notes are reasonably attractive, many of those who hold the notes will not want them paid off early either.  After all, the members are getting an opportunity to receive attractive interest — often in their IRA or college savings account.

Carrying these notes has real benefits, if you can get the fiscal conservatives to turn around and consider them.  Nevertheless, some will want to make gifts specifically directed to debt reduction.  Here’s my approach to such gifts:  Note that the debt structure is pretty clearly spelled out in terms of due dates and interest rates.  Every year anyone with a sharp pencil and a calculator can determine required escrow account  reserves to meet the eventual payment obligations.  If there is more than the required minimum in escrow, the church is ahead of schedule whether or not any cash payments are made.

Whenever a large debt reduction payment comes in, it should go directly into the escrow account.  From that point on, the board should never let the escrow account fall behind on escrow overage.

For example, if a donation of $10,000 comes in to reduce the debt there is an opportunity to move the eventual debt payoff ahead by, say, six months.  The promise I would extend to the donor would be that the payoff would be moved forward and not slip beyond that new date.  This would guarantee that the church will be in a position to prepay all the obligations uniformly at a time earlier than promised.  (No principal is paid at the time of the gift however; doing so would either violate the terms of the note for those who do not want prepayment, or violate the uniformity of treatment which should be extended to the note holders.)  In the budget presentation there might be a footnote that clarifies this matter.  For example:  “The notes undertaken in financing the addition in 1995 are due December 1, 2010.  Current escrow reserves are such that we will be able to pay these notes in full on June 1, 2009.”

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