How to Determine the Affordability of a New Building
As published in Worship Facilities, Nov/Dec 2006
Consider for a moment your ability to estimate your home utility bills for one year. You could probably estimate fairly accurately. But could you make an accurate 10-year estimate? That would take considerable effort. In fact, some careful planning might be required and the use of a more structured process to gain the desired accuracy might be wise. This planning might include such things as how many individuals will be living at home during that time and whether you have grade school children becoming teens (long showers) during this period. You might want to estimate inflation and apply this to your future estimated costs. This evaluation process to estimate your utility bills 10 years into the future is a simple analogy of the evaluation process for estimating the long-term cost of a church building.
If one could predict the church's annual cash flow for future years, determining the future financial health of the church would become much easier. Utilizing an evaluation process similar to the utility bill example described above will enhance the leadership's ability to make wise financial decisions regarding the planned new building.
THE EVALUATION PROCESS
Historical Information
This recommended evaluation process begins by gathering the church's historical attendance, giving and expense information. This information should be collected for the past six to 10 years.
Hard and Soft Costs
Second, contractor construction costs, non-contractor costs, and soft costs associated with construction and financing of the new building must be estimated and collected. Typically, the contractor or architect is consulted for a cost estimate of the building envisioned, which usually includes most of the "hard" construction costs. There are many non-contractor and "soft" costs that can be overlooked during the planning stage. Non-contractor costs that must be captured in the evaluation process include office furniture, pews or chairs, other building furnishings, permitting costs, engineering and architect fees, inspection and testing costs, acoustical engineering costs, and land costs. The largest soft costs that should also be part of the building cost estimate include interest during construction (which can be quite significant), financing fees, contractor bonding costs, fundraising costs and builder's risk insurance costs. Some churches purchase the builder's risk insurance to avoid the contractor's markup or because the church's existing fire insurance company offers better rates.
Additional Revenues
Third, any additional giving or revenue associated with the program must be considered. This may include revenues from the sale of existing property or houses and expected giving from planned building campaigns. Fundraising professionals advise that the anticipated giving pledged over three years from a building campaign is typically one-and–a-half to two-and–a-half times the church's annual budget. Professionals also warn that if the campaign does not include adequate follow up, actual giving can be significantly less than the amount pledged.
Timing and Amount of Mortgage
Fourth, funds will be given before construction starts, and funds may also be given after construction starts and after construction is complete. The timing of this giving will determine what funds are available for 1) construction, 2) down payment for the long- term loan, and 3) future mortgage payments. Utilizing a detailed evaluation process will reveal the funds likely available for each of the above mentioned categories. Once tentative financing terms are identified by lending institutions, the building team will be able to quantify the expected mortgage payment, which is a key element needed to define cash flow projections. The cash flow projections will help the building team decide whether to use all available cash for the down payment and/or construction or to hold some cash in reserve to help pay the future debt payments.
Projected Expenses and Giving
Fifth, the future attendance, giving, and expenses must be estimated. By understanding the greatest, least, and average historical increases of these items, the building team will have a basis for making a reasonable estimate of future attendance, giving, and expenses. The building team should take into account how these items will likely change as the excitement of the new building grows, after the building is completed and occupancy has been granted, and in future years as the novelty of the new building begins to wear off. Observing recent trends and averages for the past three to six years will add intelligence to this process. Future insurance costs, utility costs, operating costs and, of course, costs for increased staffing over the next 10 years should all be included. Visualizing the staffing needs 10 years in advance is not easy, but when the expected future attendance numbers become available, the additional staff required begins to come into focus.
Inflation
Finally, don't forget to adjust the giving and expenses for inflation since expenses may inflate faster than giving during the 10 years in question.
Future Net Cash Flow
By this point in the evaluation process, estimates have been prepared based on knowledge of the church's history, information about anticipated building size, expectations of future growth in attendance, giving and expenses, and financing terms. When all of these individual estimates for each year are added or subtracted (as appropriate), a reasonably and perhaps amazingly accurate representation of the expected financial future of the church will evolve. The resulting product will be represented by a net cash flow value for the future 10 years and will directly communicate whether the congregation can afford the planned new building using current assumptions.
THE EVALUATION PROCESS INCREASES HARMONY
Besides offering a snap shot view into the church's financial future, the evaluation process described above will help the church blend God's providence and man's will (faith vs. planning). Some churches develop their building plans based on their needs and desires. They plan one or more building campaigns, set a giving goal as high as they dare, and leave the rest up to God. This acceptable method is often used but may lack vital planning elements. One verse that particularly contrasts God's providence and man's will is Proverbs 16:9: "We can make our plans, but the Lord determines our steps." Speaking on this matter, John Calvin said, "God's providence is no excuse for imprudence." Congregations or building teams typically have individuals who hold the opinion that the church should build on faith and God will honor such action. Others may believe the church should be more prudent and even pragmatic about its decisions. Contrasting approaches can sometimes lead to dissent, and statistics show that congregational division is not uncommon during building programs. No one wants a church to divide because of a building program. Blending both the faith approach and the planning approach to solve a problem through this evaluation process will create a stronger team and enhance the harmony and joy within the congregation.
OTHER BENEFITS OF THE EVALUATION PROCESS
"What If" Scenarios
Once the information outlined above has been assembled and the original forecast completed, the input values can be adjusted to determine how the future cash flow forecast changes with new input assumptions. These "what if" scenarios will allow the building team to determine how close the current plan is to the financial edge. Higher or lower construction costs, faster or slower growth in attendance, faster or slower staff additions, and construction timing are a few examples of possible "what if" scenarios that can be evaluated. The following detailed example provides one sample of how the "what if" scenarios can be utilized to find a workable plan that provides a positive cash flow each year or an overall positive accumulated cash flow.
Assistance Obtaining Financing
Assistance obtaining financing is another benefit of undertaking an evaluation process. Lending institutions will recognize the rigor and thoroughness of the work, which is somewhat uncommon for churches seeking loans. Detailed attention to the financial planning will likely impress lenders, and the church's ability to pay the mortgage payments will be evident. The building team has already done the lender's job for them by demonstrating how the church will afford the new mortgage payments.
Cash Management
Knowledge of the church's current and projected financial status and growth will offer information that will allow leadership to properly manage the cash funds. The building team will be able to determine what funds will be available for the down payment or early construction and whether to retain funds for future mortgage payments to shore up years that may be projected to have negative cash flow. The most likely period in which this may occur is at the end of the last building campaign (which might occur after occupancy has been granted) before the body has been able to grow in numbers to support the new mortgage payments.
Greg Retzlaff is founder and owner of Foundation First (www.foundation-first.com), a company that provides financial forecasting tools and services to churches and not-for-profit organizations planning new or expanded buildings.
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