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Capital Reserve Planning

Just when you thought that maybe your church would weather the current economy with its finances intact, the unexpected happens.

A major piece of equipment or an important part of your physical plant—the HVAC system in the sanctuary, the roof, the parking lot, that old stretch of sidewalk—stops working, falls in, buckles, and/or cracks, requiring your church to come up with the money to cover major repairs or even replacement.

For most churches, it’s time to crank up a fundraising effort. But those (for now) relative few that have planned ahead and gone through a process of “capital reserve planning” and set up “capital” or “replacement” reserve funds, will have at least part of the costs covered.

Long a feature of residential community/homeowner association management, formal capital reserve planning is a relative rarity in the world of worship facilities, according to Jim Sheppard, principal of Atlanta-based Generis, a church fundraising/capital campaign consultant.

Indeed, “One reason organizations like ours probably exist is because not very many churches are doing this,” Sheppard says. “My experience has been that while most churches are very careful about planning ahead and establishing reserves for operations, replacement/repair funding for facilities and other capital items is typically handled on an as-needed basis.”

That’s not good.
“When a church pays $12 million to $15 million to put up a new building to serve as part of its ministry, it has the responsibility to be a good steward and take care of it over the years,” Sheppard says. Endowing a capital reserve fund enables a church to ensure that the building and its systems are maintained, “preserving the building and the vision that created it in the first place.”

The Plan
A capital reserve plan prioritizes and sets aside money for big expenses that come with owning/maintaining physical facilities and equipment, explains Ameeta Soni, senior vice president of marketing and business development for Boston-based VFA Inc., a provider of integrated software and services for facilities asset management and capital planning.

“The plan provides the means to anticipate these big expenses and lets you plan ahead for the future,” says Soni. It is largely based upon facilities capital planning and management, a process “that allows an organization to understand the condition of their facilities today, and make intelligent decisions about how to spend a limited budget to maintain or improve that condition—five, 10 or 20 years in the future.

The knowledge gained from doing facilities capital planning provides the basis of the core of the capital reserve plan, according to Soni, namely “how much to save over what period of time to pay for projected capital repairs and replacements.”

A careful assessment of building conditions is a basic element of any capital reserve plan, according to Soni.

“Accurate information about the condition of facilities and building systems forms the foundation for ensuring smooth operations today and planning for future needs,” says Soni. A second key element is a reserve fund forecast, she notes, explaining, “Using the information gathered in the condition assessment, it is possible to determine how much you’ll need to spend on capital repairs and replacements, and how much you will need to save over time in order to pay for those capital expenses.”

Important Considerations
Replacement intervals and a facilities use are two important considerations in capital reserve planning, according to Bill Scrivens, a reserve specialist for Miller+Dodson Associates Inc., an Annapolis, Md.-based firm nationally recognized for capital reserve consulting.

Different components of a facility have varying useful lives and “replacement intervals,” Scrivens explains. For example, a standard 20-year shingle roof has a manufacturer’s warranty of 20 years and, depending on the conditions of the placement of that roof, one can reasonably assume that the roof will last from 18-22 years. This makes funding for roof replacement a very straightforward process, he notes, adding, “Many other replacements fall into that type of schedule, where the replacement cycle is driven by a predictable interval for the installed material or component.”

Replacement intervals of other facility features can be more complicated.

An example of this, according to Scrivens, is a concrete sidewalk, which typically never needs to be entirely replaced, but areas of the concrete must be repaired and/or replaced on an as-needed basis, making replacement intervals slightly more complicated to estimate and model, but still very predictable based on the experience of modeling and projecting for similar facilities.

Meanwhile, the life expectancy of some of today’s high efficiency HVAC systems is open to debate. The increased pressures required by new refrigerants such as Puron [or R-410A, a new synthetic, non-ozone-depleting chemical mixture used as a refrigerant in air conditioning applications] complicates any projections of useful life, Scrivens reports, adding, “Until these first-generation HVAC systems get some history behind them, the recommendation when doing a capital reserve study is to be conservative in estimating their life expectancy.”

According to Scrivens, the individual use and style of worship of a given facility is an essential aspect of a properly prepared reserve study. A study for a more traditional worship facility, with items such as carpet, tapestry, upholstery, stained-glass work and an expensive main sanctuary organ, for example, will be quite different than that for a facility catering to evangelical worship that’s enhanced by state-of-the-art video and audio production.

“Both of these facilities have roofs, and sidewalks, and HVAC equipment; but, lighting for the first facility is traditional and important, but in a different way. The second’s lighting needs are likely to be impacted strongly by changes in technology and a wow factor,” Scrivens explains.

“The same type of distinction can be made for every component of a facility that is directly affected by that congregation’s mission. It is this attention to the unique use of the facility, in addition to the modeling of the brick-and-mortar assets, that makes a reserve study such a useful long-term financial modeling tool,” Scrivens adds.

Capital Replacement Plans/Contingency Funds
As noted earlier, few churches currently engage in formal capital reserve planning. However, some have set up programs that, for many intents and purposes, accomplish a number of the goals of such planning.

While it does not have a true capital reserve fund, Willow Creek Community Church, a South Barrington, Ill.-based interdenominational church with weekly attendance of more than 22,000, does have “a multiple-part plan that helps us deal with the idea behind the capital reserve fund,” according to CFO/director of operations Brian McAuliffe.

Components of the plan first include devoting a significant portion of the church’s operations budget to preventative maintenance, which McAuliffe notes “can extend the anticipated life of our assets by many years, helping spread the potential need for capital for replacement over a greater period of time.” Secondly, the church developed a multi-year “capital replacement plan” based on anticipated life of its assets, allocating an appropriate amount needed into each year’s annual budget as a capital expense. Thirdly, a “capital contingency fund” deals with major unanticipated asset replacement/repair.

Willow Creek’s capital replacement plan encompasses its main campus as well as regional sites, according to McAuliffe, with each regional site also having a capital contingency fund in place to deal with its site-specific assets. The main campus contingency fund currently has around $2 million, with a goal to increase that fund to $5 million; the church built a new auditorium in 2004, he reports, “and we anticipate that the capital needs for that new facility will grow in the next several years as the assets age.”

This approach works well for Willow Creek, and likely for other churches, adds McAuliffe.

“It can be very difficult for churches and other entities in the not-for-profit world to set aside all the cash they would need to create a true capital reserve fund,” he notes. Unless you have a donor willing to contribute the chunk of capital needed to set up a fully funded reserve, he advises, “Take it slow and steady. If you establish an unrealistic goal in the short term, it will become self-defeating and you will never achieve it.”

McAuliffe’s other advice is this: “Come up with a manageable amount to work into your annual budget to set aside in a capital replacement fund—and develop the discipline to follow through.”

And McAuliffe adds, “A church needs to look at the most important assets that make achieving its mission possible, and have a financial plan to deal at least with those assets vs. its entire asset base.” Work up an annual maintenance plan and follow through, he adds, “and put something in your budget every year for capital needs that you anticipate that year—as well as for the unanticipated needs that pop up.”

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