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Churches Face Challenges, Opportunities in Debt Department

    Added May 04, 2010

Effectively making use of debt to help fund new facilities-and retiring debt incurred for building previous ones-remains high on the list of challenges for church leaders across the country. According to a number of experts, today's tight-credit economic environment is presenting these churches with both challenges and opportunities in doing both.

For the most part, U.S. churches did not go on the same kind of borrowing binge as the American consumer in general did earlier this decade, according to Sarasota, Fla.-based Lawson Group Architects Inc. Principal Don Lawson, a church architect, real estate developer, and bank founder/chairman.

Nonetheless, many churches have cut back on both spending and borrowing as a result of their congregations' personal experiences during the current economic recession.

"Churches are reacting to the impact of the recession and the resultant reduced giving from their congregations, and their budgets are reflecting revenue shortfalls," Lawson says. As a result, "Fewer churches are focusing on taking advantage of the significant opportunities that exist in the current economy, or seeking to add additional debt to their balance sheets."

"Virtually all churches have taken a more sober approach to their level of indebtedness following the meltdown of fall 2008," reports Jim Sheppard, CEO and principal of Atlanta-based Generis, a fundraising/stewardship consultant for faith-based organizations.

In general, "If they have a modest level of indebtedness, they are very aware of the advantages of getting it off their books as soon as is practicable," Sheppard says. Conversely, "If a church has a high level of indebtedness, then there is a realization that they are overextended-and imperiling their ability to do ministry.

"Churches that are expanding are taking a more conservative approach to their space and what they can afford, especially in light of what they can raise from their people," Sheppard adds. "The tendency now is to be very cautious in taking on any new indebtedness."

A good time to build

Perhaps counter-intuitively, today's slow economy may be a good time for churches to build new facilities at costs that enable them to take on less debt than is usually the case, helping them keep their total borrowing in line.

"Construction costs are very favorable at the current time, at least compared with prior years," reports Scott Rolfs, managing director of the Church and School Financing Division of Ziegler, a Chicago-based financial services firm that specializes in church lending.

Construction project estimates are coming in at some 10%-20% lower cost than they were 18-24 months ago, according to Rolfs. "Lower labor cost is a big driver," he says, noting, "Subcontractors are very eager for work and aren't demanding the premium they were during the boom times."

Various sources report that school, road, and church projects have been able to enjoy significant reductions in costs, compared with those of pre-recession times, over the past year, according to Jim Rosenbaum, president of White Mesa Inc., a Plano, Texas-based construction cost analysis and auditing firm.

Like Rolfs, Rosenbaum cites overall reductions in the 10%-20% range, the result not only of competitive pressures on contractors bidding for jobs, but also reduced commodity prices. "China's explosive growth had been putting significant upward pricing pressure on basic commodities," he notes. "But since even their growth has slowed, commodity price increases have moderated."

This situation may not last long, adds Rosenbaum. "Once demand for labor and materials starts increasing again, upward pressure for price increases may well reassert itself."

And a good time to borrow?

Even though now may be a good time to borrow and build, the availability of loans is nowhere near what it was during the 2003-2008 credit bubble. But there are debt dollars available for funding construction/renovation projects, given a strong financial position on the part of the church.

In the loan arena, a smaller church might actually be in a better position to get bank financing in the current environment-to the extent that they have a healthy balance sheet, according to Sheppard.

"In general, the larger the loan, the more conservative the lender's position," Sheppard says. The key for any church, though, is a healthy balance sheet with strong assets and low liabilities. "For example, if a church already owes two or more times its annual budget," he notes, "it is going to be difficult, if not impossible, to qualify for additional financing in the current market."

Lenders have established criteria that they apply to most churches in their evaluation of debt capacity, "and these same guidelines have been used for years," says Lawson. "But unfortunately, the guidelines do not take into consideration God's plan for a church, or the unique opportunities created by strong church leadership possessing skills to grow a church with a strong economic upside."

In Lawson's view, the basic test for a church is its ability to consistently meet or exceed its annual revenue and budget projections.

"Has the church consistently met its budget in recent years? Is the annualized debt service-to-annual income ratio within the 25%-40% range? Is the ratio of total annual budget to the total number of donations received less than or equal to $600?" If a church consistently struggles to meet its budget, Lawson reports, "then it may not be prudent to further burden the ministry by incurring additional debt obligations."

When in trouble

Churches that find themselves over their heads in debt have to get their financial houses in order, according to Lawson.

"There are no quick means to get out of debt other than to reduce expenses to match revenue," he says. And he adds, "Traditional lenders are not inclined to provide additional capital to churches that, as a result of their debt history, show an inability to effectively manage their balance sheet."

Special "debt reduction" campaigns to help pay off existing mortgage loans are cropping up more often than usual these days, according to Sheppard. These fundraising efforts can be more problematic than regular building campaigns, he notes.

"People who join a church tend to assume the facilities that are there are already paid for, and there can be some reluctance to participate in paying for what was built before they arrived," Sheppard explains. At the same time, "Paying off a mortgage invokes a perspective of the past, not the future-and most people give more of their charitable dollars to initiatives and projects that build for the future."

Sheppard adds, "The challenge is to explain what the ministry can do with money saved by paying off a mortgage. The message you need to get across is that for every X number of dollars we pay down the mortgage, we will free up that many dollars to do more ministry."

Avoiding problems

Avoid debt problems down the road by working with established, reputable lenders, advises Rolfs.

"Good lenders want to make good loans and will do everything possible to help you try and finance your project," says Rolfs. He advises churches to be wary of loan brokers: "With the shortage of funding alternatives, there are some unscrupulous types out there who collect large upfront fees from churches and then abscond with the funds-they promise to obtain financing but never deliver."

And remember that while everybody wants a brand new, freshly constructed facility, you may be able to save some money (and keep your level of mortgage debt down) by purchasing a "used structure."

"I'd encourage all churches to also look at purchasing an existing building and retrofitting it," says Rolfs. There are very high quality buildings on the market in most locations of the country that are selling for half of what they might have commanded during the last construction boom, he reports. Contact a commercial real estate broker to see what's available, though, "because sometimes top properties don't necessarily have ‘For Sale' signs in front of them."