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Creative Funding Options

Creative Funding Options

A coastal North Carolina church funds its expansion through t-shirt and coffee-cup salesalong with maybe some divine intervention. Meanwhile, a long-established New York City church takes advantage of the value of its long-held real estate to pay for a new home that will also generate future income. And at the same time, churches of all types can take advantage of a controversial way of lowering their costs of borrowingbut they need to be careful.

There are all sorts of ways to fund a facility. Here's how some churches go about it.

Tapping the Tourist
Located in the historic district of Corolla, a tourism-oriented town located in the Outer Banks of North Carolina, Corolla Chapel began as a one-room church. Originally constructed in 1885, the 20-foot by 31-foot facility had been abandoned for about 20 years when John Strauss became pastor in 1987.

"It is basically a tourist church in an upscale tourist areaand during my first couple of years there, attendance at services was rarely more than 8-10 people in the winter off-season," says the recently retired Strauss.

In 1992, the church added on a vestibule, restroom, and front porch, using funds on hand for the $26,000 project. Almost immediately afterward, attendance at services rose sharply during the summer vacation season, he recounts.

"From the third week in June to the end of August, we were filled to overflowingwe had to put a loudspeaker for people outside to hear," Strauss says.

Strauss and the church launched a search for a site upon which to expand, planning to move the existing chapel and attach it to a newly constructed facility. Property in the area was expensive; but the church finally found a parcel, just across the street from the chapel, with an owner willing to sell for $89,000. "One thing I learned from working for Pat Robertson years ago is that you don't start a building program until you have at least 50% of the total cost in hand," says Strauss. To raise this kind of money for Corolla Chapel's land acquisition/expansion, Strauss and the church set up a building fund, and then created a series of Christmas cards and coffee mugs, each emblazoned with a picture of the chapel. Sales of these items from the vestibule, primarily to tourists walking in the area, generated more than $70,000 in revenues by the end of 2001.

As it turned out, this was far short of the amount needed to complete the expansion project. But in 2002, Corolla Chapel was blessed with a series of windfalls that carried the building fund over the finish line.

The good fortune came about after Strauss and members of the church board decided to contribute funds to rebuild a church in India that had been destroyed by a monsoon. The missionary there, who had been supported by Corolla Chapel for years, had forsaken love offerings for him-self and his family totaling some $4,600 and committed them to a rebuilding effort; Strauss polled his board members by phone and got ap-proval to send an additional $4,000 to complete the project.

"Some members of the congregation found out and gave me a hard timeand I told them just you wait, God will bless us back,'" says Strauss. "And sure enough, two weeks later, we had a check for $25,000 come in from nowhere; and a week later, one for $10,000."

Sent mostly by summer tourists who had seen construction underway for the expansion, checks for $1,000 and more poured in to Corolla Chapel, recounts Strauss, "enabling us to pay off our loan on the project in less than four months." A combination of sales and windfalls to raise funds for expansion was preferable "to going up in the pulpit and begging for moneywhich I do not believe in doing."

Building the New Bethel
Unlocking the value of a long-held piece of Manhattan Island real estate was the key to a large church getting a brand-new sanctuaryas well as opening the door to a significant new income stream.

Slated for opening March 2009, Fifth on the Park is a $143-million, high-rise, mixed-use building that will occupy the full-block front of Fifth Ave-nue between 119th and 120th streets in New York City.

At completion, the 30-story tower will be anchored by a four-story/38,000-square-foot/1,800-seat sanctuary for Bethel Gospel Assembly, a 2,000-member church that has been a foundation of the Harlem community since its inception in 1917.

Below the sanctuary will be a 117-space underground parking garage. Above it will be a 26-story residential tower that will include approximately 47 units/50,670 square feet-worth of affordable rental apartments; and 162 units/247,000 square feet of condominiums, priced in the $600 to $1,000 per square-foot range.

The project is a venture of Phoenix Realty Group, a New York City-based national real estate investment firm that provides capital and expertise for urban and infill developments; Artimus Construction Inc., a New York-based development and construction company; and Uptown Partners LLC, a Harlem-based real estate development company.

Bethel had long owned and partially occupied the entire Fifth Ave./119th/120th block. In 2006, the church entered into an agreement to sell a portion of this valuable real estate to the Phoenix/Artimus/Uptown Partners venture for an undisclosed price. In return, the 2,000-member church got a brand-new sanctuary, cash at the closing table, and the rights to the cash flow generated by the rental apartments.

"This is a great example of a church making smart use of property by unlocking the value of its real estate," says Phoenix Realty Group Senior Vice President Art Jimenez.

"Like many churches Bethel had valuable property that it had owned for years," Jimenez explains. And because, like many other churches, it had historically relied on tithes and offerings, "it didn't have the resources to build a new facility on its own, and not enough income to cover debt service [on] a loan."

In this instance, the church reached out to one of its members, Uptown Partners Principal Joe Holland, "who knew how to bring together the par-ties needed to make a project like this happen in a way that made sense for both the church and the developer," says Jimenez. And in the process, "they helped create a deal that [is] a prototype for situations where churches are bursting at the seams and own valuable landbut don't have the resources necessary to put together everything needed to make a new project work."

The Swap Strategy
One strategy for churches seeking to lower the cost of borrowing funds to make their major capital projects work is the use of a financial instrument known as "interest rate swaps," or simply "swaps."

A relatively recent (in the past 15 years or so) product of the credit and capital markets, "Swaps provide a way for a borrower [be it a church or otherwise] to obtain a longer-term fixed rate on a bank loan or a variable-rate bond issue," according to Scott Rolfs, managing director of the Church and School Finance division of Milwaukee, Wisconsin-based Ziegler Capital Markets, a full-service financial services company.

In a typical scenario, a church borrows $5 million for a capital project from a bank. Wanting to protect itself against "interest rate risk," should rates rise in the future, the bank makes the loan with a floating interest rate; so if prevailing rates go up, so does the interest rate on the loan.

If the church, like many borrowers, would like to replace this floating-rate loan with a longer-term fixed-rate loan, their lender (or another finan-cial services provider/advisor) can utilize the services of a third party in what is known as "the swap market." Here, a group of companies that include some of the world's largest financial institutionssuch as Goldman Sachs, Merrill Lynch, or JP Morganmake deals with lenders that effectively replace their floating-rate loans with fixed-rate financing; the borrower pays for the privilege via a fee built into the ultimate fixed interest rate on the loan.

Don't Try This at Home
While most of the details of swaps are taken care of by the financial services experts, churches do need to be aware that if they ever decide to prepay their "swapped" loans, they'll have to settle up with the provider of the swap who has assumed the interest rate risk component of the loan.

"When you prepay a loan, you're most likely going to have to unwind/terminate any third-party swap contracts," Rolfs explains. "And depending upon where interest rates are, you may wind up paying a penalty, as well as the fees built into the interest rate on the loan. Conversely, if rates have risen substantially in the interim, it is possible that your Swap will not have any unwind fees."

Like a lot of things in today's credit markets, the use of swaps is not without controversy, according to Rolfs. "Their use is a real discussion point among lenders in generaland some church lenders use them, while others don't," he says. "In reality, swaps are neither good nor eviland for a lot of lenders, they are the primary tool to provide fixed-rate financing. Swaps can be very useful if used properly and with full knowledge. Too often bankers do not explain all the specifics, both pro and con, to allow the borrower to make an informed decision."

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