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Church Financial Planning Presented by: Thrivent Financial for Church & Institution Financing
Table of Contents REFINANCING — DECODING THE PROCESS
We often hear the complaint that lenders use too much “financialspeak,” and that churches just want an applesto-apples comparison when they’re seeking to refinance. Unfortunately, the options are so numerous and varied that an apples-to-apples comparison can be very hard to achieve. So, how do you know what will serve your church best for the long term? How do you evaluate the options? By Kari Boyce
FINANCING PROJECTS — BORROWING VS. CAPITAL CAMPAIGN 5 Few topics elicit a stronger response than money — how we get it and how we use it. Understandably, it’s also a tough subject when it comes to a church or ministry project. By Kari Boyce
FACILITY REPURPOSING: FINANCIAL PROS & CONS
Whether you’re a new church looking for a first home, a growing congregation needing a larger space to worship, or searching for a space for your exploding youth group to meet, there’s no denying one major trend for churches: facility repurposing. What are the financial risks and opportunities of thinking outside the proverbial “box”? By Kari Boyce
PROPERTY ACQUISITION FINANCING: COMMON QUESTIONS Coming in June 2017
CHURCH EXECUTIVE • C H U R C H F I N A N C I A L P L A N N I N G
Refinancing — decoding the process By Kari Boyce
Amortization. Balloon payment. Adjustable rate. Do these terms have you feeling like Dorothy in Oz? (“Lions and tigers and bears! Oh my!”)
We often hear the complaint that lenders use too much “financialspeak,” and that churches just want an apples-to-apples comparison when they’re seeking to refinance. Unfortunately, the options are so numerous and varied that an apples-to-apples comparison can be very hard to achieve. So, how do you know what will serve your church best for the long term? How do you evaluate the options? The moving parts There are several key features to almost any church mortgage. If you know what each piece does, the differences make more sense when you start to combine them. [ https://www.thriventchurchloans.com/ ChurchLoans/FAQ.jsf ] Let’s look at a few ways these moving parts can fit together. While many of us are familiar with a home mortgage, church mortgages are most similar to commercial mortgages. C H U R C H F I N A N C I A L P L A N N I N G • CHURCH EXECUTIVE
Example 1: Neighborhood Community Church has a mortgage of $1 million with a 6% fixed interest rate, which is currently amortized over 20 years but matures in seven years. Monthly payments are about $7,164, and a balloon payment of about $774,752 at the seven-year maturity will need to be refinanced or paid in full. Example 2: Friendly Fellowship has a mortgage of $1 million with a 3.5% adjustable interest rate, fixed for three years and also amortized over 20 years, maturing in 20 years. The monthly payment will be about $5,800 initially, but the rate will adjust on every third anniversary of the mortgage, and it is uncertain where rates will be at that time. As you can see, the variable pieces make these two $1-million mortgages — both with 20-year amortizations — difficult to compare over the long term. Adding to the confusion, fees and covenants and other terms of a specific mortgage loan add limitations, costs or more moving parts. This makes our comparison more kumquats-to-kangaroos than applesto-apples. Getting the best terms for your church’s situation Lenders might evaluate your church differently, but there are some fairly universal points that will help you secure the most favorable interest rate and other terms. These are not “quick fixes”; in fact, some might take years to achieve. So, planning ahead is imperative. Cash reserves to cover mortgage payments or all operating costs for a period of time. Some lenders might require reserves, but the timeframes vary. Recommendations generally range between three months and one year of expenses. In some cases, as much as two years of mortgage payments might be needed if the church has had recent financial challenges. Clear financial statements. Many churches do not have annual independent audits — a best-case scenario. If not, ensure that your financial records have multiple, knowledgeable people participating in your financial management. Separation of duties not only protects the church, but also protects the individuals from temptation and suspicion. The closer to standard accounting practices you are, the easier it will be for a lender to be comfortable with important issues, such as cash flow, balance sheet changes, and appropriate allocation of resources. Do the math. The lowest interest rate might not be your most important term. Yes, low interest rates are easiest to explain; however, fees and covenants can be restrictive to your ministry in the long run. Also, the length of time the rate is fixed, or you have to repay the mortgage, or if you have a balloon payment that will need to be refinanced in the future — all these might ultimately cost more, create more work and more uncertainty. Can you prepay your principal balance if you have excess funds? Prepayment penalties are important to understand, as they are not all the same and can be significant. Start talking to your lender early You might think it’s too early in the process, but your lender can give you valuable insights for your own preparation, anticipated interest rate changes, and how long the process might take. Like running a church, much of the process depends on relationship. Developing and maintaining relationships with financial entities that come alongside your ministry in support, advice and service can make your refinance process a surprisingly pleasant experience.
What do these loan terms mean? Fixed-rate period refers to the length of time that the interest rate is set. At the end of the period, the interest rate changes. A five-year fixed-rate period is most common among commercial lenders. Generally, loans with shorter fixed-rate periods have lower interest rates than those with longer fixedrate periods. Amortization refers to the amount of time it would take to repay the loan in full if equal monthly payments are made throughout the entire loan term. The length of the amortization period drives the monthly payment amount. Term refers to the length of time from the closing of the loan to the maturity date of the loan when any outstanding balance must be repaid. When the term is shorter than the amortization, it results in a balloon balance. Balloon Payment or Balance refers to the amount that will be unpaid and owing on the mortgage loan at the end of the term (maturity) when a mortgage loan does not fully amortize over the term of the loan. For example, a loan with a 10-year term that is being paid using a 30-year amortization, will have a balloon payment due at maturity. That’s because monthly payments have been calculated as though the loan would be fully paid over those 30 years (the amortization period). Maturity is the date the remaining principal and interest amount are due to be fully repaid. Adjustable rate or variable rate loans have interest rates which change at set periods of time over the life of the loan. These loans are also referred to as Adjustable Rate Mortgages, or ARMs. Mortgage is a document granting a security interest in specific real estate to the lender providing the loan, as collateral for the repayment of that loan.
Kari Boyce leads Business Development at Thrivent Financial for Church & Institution Financing (Church Loans) [https://www.thriventchurchloans.com] in Minneapolis, MN. Church Loans currently serves more than 1,400 Christian churches across the United States.
CHURCH EXECUTIVE • C H U R C H F I N A N C I A L P L A N N I N G
Financing projects — borrowing vs. capital campaign By Kari Boyce
Few topics elicit a stronger response than money — how we get it and how we use it. Understandably, it’s also a tough subject when it comes to a church or ministry project. If your ministry is considering putting a new wing on the church, or building a gym, or renovating the sanctuary, how do you finance the project? • Borrow? • Collect pledges through a capital campaign? • Set aside savings as part of regular Download our Lender Comparison Worksheet at thriventchurchloans.com/ChurchLoans/ expense allocation? ToolsResources.jsf
In many cases, the wise answer is a mix of all three. There isn’t a simple, one-size-fits-all answer to these questions. Each ministry will need to make this decision based on its unique situation and outlook. So, what considerations will help your team find the best answer for your own unique project? Borrowing to fund a project Most ministries will acquire some level of debt to complete a major project. The financial health and circumstances of your ministry will influence the amount of debt available, and at what cost. Your church’s perspectives on borrowing, governance, and ministry vision will also be key considerations when working with lenders. Other considerations include: •W ill debt be repaid through operating budget, savings or capital campaign? •H ow do you compare varying loan products, such as fixed interest versus resetting rates, balloon mortgage versus fully amortized or differing loan covenants? [ For details, read our previous series installment, Refinancing — decoding the process: churchexecutive.com/ archives/church-financial-planning] •A re there other parties that need to be aware of the process, such as your congregation, a governing body within your denomination, or a current lender? • How much would you qualify to borrow? • What monthly payment will you make on a loan? •H ow will the additional debt expense impact ministry budgets? •W hat percentage of equity do we want in the project? Will a lender require more equity? • What collateral will be used for the loan? Saving to fund a project Some level of saving to fund a project is always wise. You might decide to save some amount to fund the equity or down-payment portion of a project, or set aside operating funds over a long period of time to fund all or part of the project. While saving minimizes the amount of financing needed and the interest you pay on a loan, it might increase your cost over the long term. Labor, materials and expertise are variables that can
have significant swings in actual cost over time. • Do you have savings set aside that can be used for this purpose (designated for this specific project or unrestricted)? • Opportunity cost to ministry is also a factor. Is the time to raise or save the full amount an acceptable delay versus the ministry that could happen once the project is completed? • Should you plan specific fundraising activities or congregational appeals? Did you know one of Jesus’ many parables was about saving and planning for a project? Check out Luke 14:28 – 30. Capital campaign Conducting a capital campaign conjures a range of reactions. You might have had a negative experience with hard sell tactics in the past, or you might have seen a campaign bring in astounding resources for ministry and generously bless both the givers and the ministry. Again, the unique culture of your ministry needs to be considered as you plan a campaign. • Do you hire a consultant? • I f so, how do you find a consultant that resonates with the vibe of your ministry and has a history of successful campaigns? • Do you have internal expertise and experience to do a campaign well? • W hat ministries can you ask for a referral to a successful campaign consultant? Did you know the first recorded capital campaign was conducted by King David of the Bible? Check out 1Chronicles28 [http:// tinyurl.com/1Chronicles28] and 1Chronicles29 [http://tinyurl. com/1Chronicles29]. The Bible has more to say about money and possessions than any other topic — including heaven and hell, combined. There are more than 2,350 verses that reference how we handle this precious commodity. Kari Boyce leads Business Development at Thrivent Financial for Church & Institution Financing (Church Loans) [https://www.thriventchurchloans.com] in Minneapolis, MN. Church Loans currently serves more than 1,400 Christian churches across the United States.
C H U R C H F I N A N C I A L P L A N N I N G • CHURCH EXECUTIVE
Facility repurposing Financial pros & cons By Kari Boyce
Whether you’re a new church looking for a first home, a growing congregation needing a larger space to worship, or searching for a space for your exploding youth group to meet, there’s no denying one major trend for churches: facility repurposing. Churches across the country are taking advantage of vacant space that would not be traditionally used for worship. In your neighborhood, you might have noticed a big-box store that now houses a church. Or maybe it was a drug store, the corner bar, or even a car repair shop. Many church bodies are finding creative and interesting places where they can worship, gather and serve their communities. So, what are the financial risks and opportunities of thinking outside the proverbial “box”? Be realistic in assessing the risks If you’ve ever done a remodeling project on a home, you know that as soon as you open the walls, you’re bound to find some surprises — even if you’ve lived there for many years. Imagine what those surprises could be if you’re just purchasing the property! If purchasing a mechanic’s shop, it seems logical to look for oil storage; but what if you’re looking at a former Kmart or Best Buy? Here are some questions to consider before talking to lenders or drafting a purchase agreement. • Regardless of the use(s) you know about, ask for or research the property history yourself. You might need to do more than a cursory environmental evaluation, which can get costly. Don’t forget to check into the history of adjacent properties, as well. • Are there any zoning restrictions or concerns that could impede planned use of the property (i.e., adequate parking to meet zoning requirements or traffic control upgrades in the area)? • Location, location, location — We’ve all heard this real estate adage. Remember not to become enamored with the price or the “cool factor”; instead, ask yourselves: Is this location the best / good / sufficient location for the intended ministry, and also a good value? 6
CHURCH EXECUTIVE • C H U R C H F I N A N C I A L P L A N N I N G
• Keep renovation costs in mind. Construction experts will confirm that until the project starts, some things can’t be known or anticipated. I’ve encountered a project where a building had a long-term, slow water leak that had caused dangerous levels of mold to grow within the walls. While this is an extreme example, even a small hiccup can create additional project costs or delays. • Perhaps the biggest risk of all is whether or not the space will ultimately meet the needs of the intended ministry use. It might be advisable to perform some level of feasibility review or study before making the commitment and investing time and money. Seize the opportunities With all these unknowns and potential challenges, why would you consider repurposing an existing facility? There are some excellent reasons! • Good stewardship. Vacant buildings can be a bargain to purchase, even considering the costs of renovation or repurposing. • Less “runway time.” Repurposing an existing structure might enable your ministry to get up and running in less time. • Resale value. If the building had a previous life not as a church, it might be easier to sell down the road, to serve another new purpose. Let’s say the congregation continues to grow quickly and several years later, you’re looking to move to a larger site. You might have a larger pool of potential buyers than just other churches. • Serving the community. This is another common benefit of repurposing property. For example, if your church meets in a local school on the weekend and now wants space it can use all week, vacant space in the strip mall up the street can be very appealing. You’re staying in the neighborhood and creating a visual presence, with the added benefit of activating vacant space. Ultimately, this provides multiple benefits to your community. • Creative ministry. This is another reason we hear when churches are considering repurposing existing real estate. Perhaps the corner bar that’s currently vacant becomes a new food pantry or coffee shop sponsored by your congregation. Given the number of congregations repurposing facilities, this trend is likely to continue to grow. A sage piece of advice one church offered to another church is: Don’t be in a hurry. Take time to fully evaluate your options, risks and rewards. Jumping in because it’s a great deal that won’t be on the market long could turn into the church version of “The Money Pit.” Kari Boyce leads Business Development at Thrivent Financial for Church & Institution Financing (Church Loans) [https://www.thriventchurchloans. com] in Minneapolis, MN. Church Loans currently serves more than 1,400 Christian churches across the United States. churchexecutive.com
OPEN THE DOORS AND SEE ALL THE PEOPLE FULLY COMMITED TO ADVANCING YOUR MISSION As a not-for-profit membership organization of Christians, we share your values of faith and service. With our competitive rates and low fees, the money you save can go toward supporting new projects, existing programs and increasing your outreach. For more than 110 years, we’ve served churches just like yours—helping them get the mortgage financing needed to grow their ministries, improve their facilities and make a difference in their communities. CUSTOMIZED TO FIT YOUR NEEDS No matter what your financing goals may be, our financial experts will work closely with you to provide a solution that meets your needs. In addition to providing some of the best rates in the industry, we offer short- and long-term fixed-rate options—giving you the flexibility to choose the terms you want.
For more information or to discuss refinancing, call 800-984-9425 or visit Thrivent.com/churchfinancing for more information. Appleton, Wisconsin • Minneapolis, Minnesota • Thrivent.com • 800-847-4836 •