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Capital Campaigns: Managing Expectations

Capital Campaigns: Managing Expectations

Capital campaigns are a critical component for any successful church project. The most important part of a successful campaign is managing expectations of the leadership, staff, and congregation. We will explore four key areas for any church staff to evaluate as you move forward with your fundraising for a new project.

How Much Can I Honestly Raise?
When planning a capital campaign always solicit the advice of multiple parties and attempt to come up with a reasonable goal for your campaign. A reasonable goal can be a goal that is a "stretch" goal or a "challenge" goal, but it should always be something that your leadership believes is an amount that the congregation can support. If you believe that your church is not able to make this determination, it is then all the more important that you are talking with and perhaps engaging the support of outside fundraising counsel.

Contrary to conventional wisdom, there is no rule of thumb to follow in setting a fundraising goal. As a lender involved in church financing for many years, we are privy to the results of capital campaigns across a broad spectrum of churches. We’ve seen campaigns that have succeeded beyond expectations and campaigns that failed miserably. Caution should be involved if someone on your committee suggests that they heard a rule that a church should be able to raise "x times our general budget" with a definitive emphasis on "x times" being possible for your church. The result variance on campaigns can be significant. The best rule that seems to consistently play out is that a typical church should be able to raise somewhere between one to four times the general budget depending on a number of factors.

Some of the factors to consider are whether or not your church is a strong tithing church, the age and demographics of your membership base, and the nature of the project being built. For example, if your church is a strong tithing church, there is a chance that your ability to raise a three to four times multiple of your general fund will be harder, given that many of your members are already strongly supporting your church on an annual basis with close to 10% of their annual income. Contrast this with a traditional mainline church where the membership perhaps only gives 1% to 2% of their annual income to the general budget, thus they have a reserve of unused giving capacity that might allow for a high multiple to be attained in a capital campaign.

Another factor is demographics. If your church consists primarily of young families in the age 20 to 40 demographic, your chances for reaching a high multiple on a capital campaign may be reduced. Why? Campaigns that hit high multiples many times are built on an older demographic; a demographic that consists of seniors that have already built their wealth, have less ongoing expenses such as a home mortgage, and are more able to make large pledges that are key to a high multiple campaign.

The project itself can also play a role. If the proposed project does not impact a broad base of the congregation, the capital campaign may not be as well received. A new gymnasium primarily for schoolaged children, for example, may not have the appeal to an older demographic as, say, a new worship center or chapel might have to this age group and vice-versa.

Collection rates are another factor to consider. We’ve seen some campaigns that are built on an emotional appeal to the congregation made at a one-time church-wide fundraising event or as part of the worship service. Frequently this type of campaign does not involve the pre-screening of donors or personal private meetings to solicit a donation. Church campaign leadership may lack the necessary background about whether the people making the pledges can financially support their commitment or how committed they are to the ministry. These programs may actually obtain the desired dollar amount of pledges, but in the end only 60% of the pledges are actually received. We’ve seen instances where the collection rate on these types of campaigns was as low as 30%.

Will We Need to Borrow?
As part of managing expectations, it is always a good idea to note for your congregation that funds may need to be borrowed to help complete whatever project is being contemplated. Given the high cost of construction today, there are many projects that require some sort of bridge financing, if not a full long-term financing component.

Many churches struggle with how to communicate the concept of borrowing. If a loan is already lined up or contemplated, it can perhaps reduce the effectiveness of your appeal as some members, knowing the project is already funded, may not feel the need to give as strongly as they otherwise might. There needs to be equilibrium as to how much information is conveyed regarding borrowing. If you do not tell your members the potential need for borrowing, they may feel blindsided when, six months after the campaign is launched, a borrowing resolution for a major loan is brought to the membership for approval.

There are always some members in any congregation who are not comfortable with the idea of borrowing money for a variety of reasons, some of which they feel are Biblically based. It is better to engage in a candid dialogue with members who are strongly debt-averse before the campaign launches so that if or when a loan is needed, everyone understands that this was a possibility or a needed part of the overall project funding plan.

Do Not Count On 100% of Your Pledges for Project Costs
Over-reliance on receiving pledge money to pay directly for construction costs is a common problem for churches that are engaging in their first major campaign. It is something that can get your church into financial trouble right out of the gate. An example of this would be a church that embarks on a $10 million project, receives $7 million in pledges, and obtains a loan for only $3 million to fund the "difference." The problems with this scenario are:

  • The church may not collect the entire $7 million in pledges. Campaign success rates can vary widely. The loan size may need to be greater than $3 million.
  • In the example above, the church is planning on using all $7 million pledged towards the brick-and-mortar costs of the project. It is likely that the pledge receipts will come in over a three-year period, while the construction costs will be incurred in a 12-month span. Again, the initial loan requirements will then be much greater than $3 million.
  • If a loan is involved, the church will have to pay at least interest payments on the loan. The church general fund may not be in a position to support such payments, and capital campaign monies from the $7 million pledged will be needed for debt service.

This can all be avoided beforehand if your church prepares a three-year cash flow projection based on the pledged funds and the cost of construction. Budget when you expect the pledges to be received and your actual disbursements for construction. That will help determine how much you need to borrow short-term to complete the building. Also factor in if any of the pledges will be needed for debt service. Finally, put in your model a realistic pledge collection rate discount factor. It is far better to err on the side of caution than to overestimate pledge receipts.

Prepare People for Multiple Campaigns
It is very difficult to conduct a follow-up capital campaign if the membership is not properly informed during the first campaign that a second campaign may be needed. Here again is a balancing act between the need to keep the congregation informed but also to not diminish the enthusiasm of the first campaign. It is increasingly difficult for most churches in America today to construct a major project without two campaigns. Many times a second campaign is needed to pay down debt incurred with a project and in many instances also provide the church with funds for debt service on any loan incurred. There are few churches today that can completely handle debt service on a major loan without using some monies received in a capital campaign.

A common occurrence is for the second campaign to fund needed mortgage payments while the membership and revenue base grow with the new facility. The hope is that only two successive three-year campaigns will be needed, but sometimes even a third campaign is necessary.

At a minimum, be candid with your membership about the possibility of a second campaign. In our opinion, more damage occurs if the membership is told there will only be one campaign yet the financial realities of the project dictate a second campaign. This does not mean you need to overemphasize the need for a second campaign, but just simply disclose to people this possibility. Your members are also your strategic financial partners and they should be privy to all the information that the leadership has regarding the long-term funding needs for the project. Having good fundraising counsel will help your church significantly in determining what a realistic goal is for your congregation as well as in avoiding some of the pitfalls above. Professional fundraisers are not required, but they are helpful, especially if this is the first campaign your church embarks upon.

QUICK-LINKS
Ziegler Capital Markets Group
Financing and investment
(800) 797-4272  http://www.ziegler.com/investment_banking/church_and_schools/

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