By Dan Mikes
Whether your church is planning a construction project or a relocation, it might be helpful to review some of the topics your leadership team should be prepared to address in order to set appropriate financial parameters — and in anticipation of discussions with lenders.
When planning the project, churches often form a Building Committee. In a perfect world, the committee would include church members with professional experience in real estate, architecture, property development, construction, law, accounting, finance, and other related professions. These individuals can prove invaluable to the successful implementation of the vision.
One of committee’s first priorities should be to identify the church’s financial parameters and overall project cost limit. Lenders use the term “Sources and Uses,” which is essentially a four- or five-line high-level preliminary summary of the Sources of Funding, and the Uses of those funds.
For example, the list of Sources typically includes:
- Current Cash available at loan closing in excess of an appropriate operating reserve
- Pledge receipts from a Capital Pledge Campaign — if applicable
- Long-term debt
- A short-term Bridge Loan against pledge commitments.
A preliminary summary of Uses of funds would typically include:
- Existing Debt which might need to be refinanced if you end up with a new lender
- Land Acquisition
- Architectural costs
- Hard construction costs, including an appropriate contingency line (typically 5% to 10% of hard costs)
- Owner-Provided items such as furniture, fixtures and equipment
- Offsite costs such as turning lane or street widening, as might be required by the city
In your early discussions with lenders, they want to see this initial high-level estimate of the dollar amounts assigned to these Sources and Uses. The total estimated dollar amounts for the various Sources must equal the total of the dollar amounts assigned to the Uses.
It’s best to start by estimating the Sources
Begin by having the building committee chairman or the Executive Pastor engage in a debt prequalification discussion with an experienced church lender(s). There should be no cost or obligation when seeking a borrowing capacity letter or a preliminary financing term sheet.
Your long-term debt capacity is going to be determined by your financial history. Banks typically look at three to four years of financial performance when assessing your debt service capacity. The loan typically has a five- to 10-year term duration with 20– to 25-year amortization. These term loans are routinely renewed / extended assuming the church’s financial performance has remained stable.
If your long-term borrowing capacity isn’t sufficient to fund the size of the project you are contemplating, you’ll be encouraged to know that some experienced church lenders will also consider making a bridge loan against collected pledge commitments. This is an additional loan which is shorter in term, the maturity of which coincides with the end of your pledge campaign.
If your church is contemplating a pledge campaign as a source of funding for a construction project, it is important to distinguish between a “Capital Pledge Campaign” and a “One-Fund” campaign.
A Capital Pledge Campaign is a fundraising effort where donors are asked to give exclusively for the purpose of your construction project. The pledge duration is typically three years. When these campaigns are professionally orchestrated, the outcomes are fairly predictable, thus the lender’s willingness to make a loan against these pledges.
In contrast, a One-Fund campaign is a fundraising approach where the congregation is asked to give to one unified fund that covers multiple expense categories, including categories within the general operating budget (salaries, ministries, missions, etc.) and capital initiatives like a construction project. These campaigns are typically two years in duration.
The lender might not be willing to make a bridge loan against One-Fund campaign pledges. The solicitation materials used with these campaigns typically show various dollar-amount targets for each of the expense categories. Often, the final gross dollar amount of pledge commitments ends up below the sum of all the targets. Consequently, lenders find it difficult to parse which expenses will be prioritized and what amount will be left for the construction project.
Don’t let your church make this mistake…
When planning a construction project, churches often make the mistake of beginning by having conversations with an architect. The risk is an unaffordable facility design concept gathers momentum, only to be reengineered later after the reality of the funding limitations is known.
When planning your project, begin with a thorough assessment of your Sources of funding. There are experienced church leaders available to assist you with this process.
Dan Mikes is Executive VP / National Manager, Faith-Based Banking Division @ Cass Commercial Bank.
