Funding New Facilities Aubrey Malphurs & Steven Stroope January 1, 2008 The constant, major challenge for any growing church, whether newly planted or established, is providing adequate facilities with which to do ministry. To address this challenge, you must wrestle with at least three critical questions: What can you afford to build? How will you fund it? How will you spend the money you raise? What Can We Afford? Most churches begin by asking, “What would we like to build?” or “How much building do we need?” These are interesting questions. The problem is they are the wrong questions. When you establish your own personal budget, you don’t ask, “What would I like to spend?” And the church shouldn’t begin this way either. The right question is: “What can we afford?” It’s very important that before you begin to work with an architect that you determine the answer to this question. There are three reasons for this: 1. Your answer provides the architect with some limitations or parameters as he or she designs the building. 2. Your answer will keep you from having to redesign the building several times because it keeps coming in over budget. 3. Your answer will also keep you from designing a building, putting it out for bids and then finding that you can’t afford what you would like. This will disappoint your people as well as waste much time and money. How Will We Pay for It? In deciding how much building you can afford, first, you need to determine the total amount of money potentially available to fund the project. There are several primary funding sources the church may use. Capital Campaign. Most churches need to conduct a capital campaign to help raise the necessary finances for a new facility, remodeling an existing one, or the purchase of land. In a normal three-year capital campaign, most churches should be able to raise one to two times their annual income. Thus it’s reasonable to expect that a church with a $1 million budget could raise an additional $1-2 million dollars in a three-year capital campaign. General Fund. Most churches that have needs for land and facilities can service a mortgage out of their general fund. For example, a church with a $1 million budget might use 10 percent (we recommend 20 percent) of its general fund for its current mortgage payment. Thus it has $100,000 available to service ongoing debt out of the general fund. In most economies, that would service a debt of $1 million, amortized over a twenty-year period. The church must determine how much additional mortgage service it can underwrite out of its general fund. The following process will help you answer this question for your church. First, the church must take into account any existing mortgage debt that it is currently servicing out of the general fund. In our example, the church has designated 10 percent of its general fund to service current debt of $1 million. To service any additional debt, it has to increase the percentage of the general fund available for debt service. Let’s say, for example, over a three-year period the church increases the percentage of the general fund that services debt from 10 percent to 16 percent. To do this, one of two things must take place. The church must cut back or eliminate funding in other areas of the budget, or the church must freeze at current levels or limit the growth of other items in the budget. Then the church would allocate any increases in the total budget to service debt. Now return to the big picture. Assume that our church with the $1-million budget decides not only to increase the percentage of its general fund to service debt, but also to have a capital campaign over a three-year period. During the campaign, it raises $1.5 million in additional funds. That means the funds available for a new building project would be somewhere around $2.1 million ($1.5 million from the capital campaign plus $600,000 additional debt). One way to stretch or increase the building budget even further is to leverage a portion of the capital campaign funds to supplement the servicing of a larger, long-term debt. For example, let’s assume the same church with a general budget of $1 million raises $1.5 million in a capital campaign. If it has created new capacity in its general budget to service a $600,000 long-term debt, it wouldn’t necessarily be limited to borrowing that amount. It might also choose to borrow more up front and then put less down from its capital campaign into the project. It could then hold back some of the capital campaign funds in an escrow account, using it over a three-to-four-year period to supplement payments on its larger long-term debt. This approach would allow the church time to grow its general budget to become large enough to cover the larger loan. After a three-to-four-year period, the church could conduct a second capital campaign to retire any remaining debt, if it is not able to service the debt out of future general funds. For example, our sample church with a $1-million budget might raise $1.5 million in a capital campaign but use only $1 million as a down payment on the building. It could use the other $500,000 from the capital campaign to make supplemental payments for the next five years on an additional $1-million loan. This allows the church to borrow a total of $1.6 million. They would service $600,000 from $60,000 of their general budget, and the $1 million remaining would be serviced at $100,000 a year from the $500,000 in escrow from the capital campaign. This would give the church $2.6 million for its building budget. There are two potential problems that could short-circuit the above process. The greatest problem related to building project funding is that churches haven’t designated a large enough percentage of their general fund to deal with the servicing of mortgage debt. We recommend that you designate about 20 percent for facilities. The problem is that some churches have paid off their mortgages and diverted those funds to another part of the budget, such as personnel or programming. Even though paying off the mortgage is a good idea, it presents two concerns. The first is missional. When a church eliminates facilities as a line item in its budget and diverts such funds, in effect it’s saving that it no longer plans to grow. A church that is growing will almost always need more facilities and land with which to minister to its people. Even a church that no longer plans to grow at a particular site will still have needs for facility funding for new church plants or satellites. Another concern is budgetary. To service debt to build a new facility, expand or remodel a current facility, or purchase additional land in the future, the church will have to reallocate a substantial percentage of its general fund. That is most difficult, if not impossible, when you’ve started new programs and hired additional staff members using that portion of the budget formerly designated for servicing a mortgage. Our advice to churches that don’t have any current building debt is always to allocate some money in your general fund that could be available for servicing debt in the future. In the years when you’re not servicing debt, place the money in a building-and-land-acquisition fund that could be used as a down payment. Even if a church doesn’t place the money in savings each year, it could use the funds for various one-time purchases, such as a vehicle or for paying for major unexpected repairs, or it could be given to missions. The important issue is that retaining such an allocation provides capacity. That’s the key – capacity to service a future debt. It’s important that the church’s budget continue to allocate monies for a building fund, so that in future years, when building is necessary, there will be money already protected in the budget to service the debt. ? Leave a Reply Cancel Reply Your email address will not be published.CommentName* Email* Website Notify me of follow-up comments by email. Notify me of new posts by email.