Capital campaign or bond issue: Which is the best for you?

Each option has its strengths and weaknesses, in evaluating which serves you best.

By John Mrazek

So you have a project to fund! You may be asking yourself which is better, a capital campaign or a bond issue? I have survived both, and the answer is either one. I am sorry to say it is not one or the other, but each option has its strengths and weaknesses, and relying on only one could put the funding of your project in jeopardy or kill it entirely. I’ve learned a few lessons in the school of hard knocks that I hope will help you in the evaluation of which will serve your needs better.

In 2008 our church started our building project with a capital campaign because we understood it, had seen good outcomes elsewhere, and felt comfortable with the process. When we completed it, however, we received commitments for about half of what we expected and still needed yet another solution to entice the lenders.

Despite having very solid financials, we were unable to secure a reasonable loan because of the growing nervousness of the commercial lenders and their heightened reluctance to work with churches. We did find one ministry-based lending option, but elected to take a pass because their terms were lousy and left us feeling exposed to future risk.

Faced with the possibility of having to pause our project until the markets improved, we expanded our search and found the bond vendors. At first glance a bond issue seemed too good to be true. I even told one salesman that his offer smelled a lot like “snake oil” to me.

I have become a little cynical lately, so it took a few really long conference calls, several chats with peers and other financial vendors, and lots of interviews with previous customers before I felt comfortable enough to propose issuing bonds as a funding solution to our board.

Here is what I found:

• There are two bond options. The first option has the bond company selling every bond possible to your local purchasers and the remainder on the open bond market for an additional 5 percent fee. This is OK, but it can take months to sell all of your bonds and have your funds secured.  The other option is basically the same plus a fixed rate/25-year mortgage as well. It is called “firm underwriting.”  We went with this option because it is easier to negotiate with contractors with cash in hand, and we were afraid of a full-court press on our members to purchase all of the bonds.

• Bonds can be an excellent alternative if you can withstand being under a microscope in an evaluation of your financial reports and internal processes. Plan for something like what is happening at the airports, but times 10 over – and you have to pay for it!

• Bonds access a different funding source than capital campaigns. Think of your overall financial picture as a pair of pants with a “right-hand pocket” and “left-hand pocket.” The “right-hand pocket” funds your lifestyle and pays your monthly bills. But it is also the same pocket that capital campaigns usually get funded from, and that can be problematic in this very tight economy. A bond issue accesses the “left-hand pocket” which holds the investment and retirement funds that people are generally reluctant to give to a capital campaign. The bond issue taps those funds in a way that is beneficial to the purchaser because they get back their principal plus interest.

Capital campaigns are sort of a “1-Way Transaction” because the person gives the money with no expectation of a return other than a blessing for having participated and a tax write-off.  A bond issue is a “2-Way Transaction” because the person loans your organization the money for a set time frame and then gets back their initial investment with good interest depending on how long they “lent” it for.

So, when should you use one versus the other? I think a capital campaign is the best fit for organizations that are just getting started, may not have a long-term record of successful ministry, or their business processes are new or unable to withstand the incredibly intense scrutiny by auditors and the bond vendor.

Another benefit to a capital campaign is that it also fits better for projects that do not require the cash up front or where the commitments are a part of a financing package where long term, relatively secured income is used to woo a potential lender.

They also work very well in “up” economies where “right-hand pockets” may have a little more margin or flexibility. The final advantage is that they are easier to manage because they are mostly vendor led and the impact to your teams is minimal compared to a Bond Issue.

A bond issue works well in “down” economies when investments are doing poorly and traditional lenders are skittish. They also help people who are cash-poor, but savings/investment-rich to participate when they otherwise would not.

Another plus is that it is a litmus test that helps increase buy-in and excitement by double-checking your people’s buy-in to your vision and leadership team. I cannot stress enough that you will need to invest a lot of time into preparing for a long, hard season of auditing and justification if you go the bond/firm underwriting route.

So what is the best option? My answer will have to be both. You may want to use a hybrid approach that leverages the strengths of both a capital campaign and a bond issue like we did. I believe your best strategy is to find someone who has been there before, done both, and who can help you determine the best fit to your environment. Hopefully, my hard-learned tips will get you started in the right direction and help you pick the right person to assist in that evaluation process. If I can help, count me in. I’ve got lots of spare time now that the audits are almost done!

John Mrazek is executive director at Pikes Peak Community Church, Colorado Springs, CO.


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