Tel: 905–690–4709 - Darryl Kirkland, Publisher

Dear God, Do We Have to Build? Part II

Last month we addressed the issue of the importance of having a compelling God-given vision that inspires and drives your ministry. I know that sounds redundant. How can anything God-given not be compelling? Think about that as you try to “sell” your vision. If it’s not compelling, if it’s not inspiring your group to action, perhaps it’s not God-given. Or perhaps you are not communicating it well. Or…

This month we will discuss some concrete and necessary actions we have discovered if you are to make your vision a reality. Our Community Development Team’s business analyst, Pat Connolly, has become our resident expert here. Allow me to pass on to you his good thoughts and ideas.

Our main point to you this month is this:

Work with a firm that can deliver a comprehensive solution for your ministry expansion needs.

1. Do you need to acquire and/or dispose of property?

Selling an existing property: Has the broker established a list price based on church sale comps or some other possible use for the building or the land? Has the church come to peace with the possibility that the building may be razed to make way for another use? If the buyer is another church, are you as the old owner, going to be at peace with differences in ministry, vision, mission (brand!!!?) of the new owner? Has the listing agent held preliminary talks with the city to assess the road ahead for any reuse (since the purchase agreement may be mined with contingencies on city approval)?

Buying a new building: I always start first with the city: what is the make up of city government and the approval process? Where is the real power: staff, appointed commissions (planning commission, parks commission), or elected bodies (city council)? How is the power structured: individuals, boards, etc? What kind of timing can you realistically expect? Get schedules and an outline of the process toward approval. Is there a process, or is the deal to be done in a ‘back room’ and then rubber stamped by a council or commission? Watch out if so! You need to look for a transparent public process.

General: Watch out for special assessments and concerns about roads and utilities if you are building something new. There could be huge hidden costs. Also understand where the city is coming from when they are talking with you, a NON-tax paying land owner. You will probably increasingly be asked what you are going to do for the city: you won’t be paying taxes (other than assessments) so will you offer community use of the building, an athletic field or complex for youth, etc.?

2. Have you conducted an adequate financial feasibility study so that you know from the beginning what you can and cannot do with your project?

Be prepared for all the components of the financial implications that you are proposing:

Population baseline and demographic make-up (number of people and their collective characteristics: age, income, and other demographics).

Growth rates by age and user group (not every group will grow the same way)

Preliminary project space needs driven by total population and the different ways that different types of people use them (youth, adult, children, men, women, handicapped, Gen Xrs, whatever!!!)

Baseline regular giving budgets: how do your people give right now? What is your giving culture (strict tithing vs. doing your best)? What are the priorities (missions, programs, outreach, education, etc?)

Expenses: same kinds of questions on priorities, directed giving, administration, the role of volunteerism vs. professionalism on staff and resultant budgets. etc

• What are the capabilities for capital giving on top of regular giving? What is the culture about debt? Can regular giving ever go to pay the mortgage, including interest expenses, or do you insist that the money coming in from capital campaigns only go to paying off the balance on the mortgage?
• Facility expenses: what can be done to make the building run more efficiently? Have you had facilities maintenance experts look at ways in which expenses could be reduced or managed?
• City assessments and taxes: although NPOs don’t typically need to pay real estate taxes, there may be other ways through which cities will ask NPOs to participate financially. Be sure to think that through before you build a new facility.
• Debt Service: what is the church’s culture toward borrowing? Is debt an acceptable way to create a physical environment where more people can be reached if it means they can be reached faster and sooner and in greater numbers? Are there existing relationships with banks that can be leveraged? Many lenders have specialists who focus on “civic” clients, like churches and community groups. Lenders frequently see this as good PR as well as good business, but remember that lenders will still look carefully before lending money… and they may look extra carefully at churches, because FORECLOSING on a church is a Public Relations nightmare.
• Summary: how do all the dynamics of the financial implications of growth trickle down to the bottom line? How do the decisions and ideas about how to physically grow a ministry through real estate impact priorities for missions, programs, outreach, evangelism, community service, etc.? What additional giving is needed? Where will the money come from? Are these impacts broken down into simple to understand language, like dollars per week per family?

3. Are you prepared to deal with governmental authorities and ordinances?

As alluded to above, the largest source of friction is that fact that ministries don’t pay real estate taxes. Despite a ministry’s presumed point of view that it is indeed contributing to a community, the local municipality needs to pay its bills too, and the good will and community cohesion that comes from churches doesn’t help to pay off municipal bonds!! Churches have to understand how cities go about their business (expansion of real property tax base, and secondary economic development implications). Churches must be prepared to explain how they will be a direct benefit to a city when they are not only NOT paying taxes but also taking taxable land off the property tax rolls. Start to think in terms of how many people use your church on a weekly basis and what that means for (1) families attracted to the city (who will pay taxes); (2) how many breakfasts are purchased at the restaurant down the street each Sunday morning; (3) how many gallons of gas are purchased at the corner gas station near your church; (4) how many free community basketball league hours your church is contributing to the youth of the neighborhood. Basically, we believe cities WANT to make room for churches. But under the ever present bottom line reality of municipal budgets – paid for by TAX PAYERS – churches need to get better at presenting their own contributions to the community (in a nuts and bolts fashion) to the elected officials who are being asked for approval.

4. Do you need a new building or are you better off expanding an existing one?

• Have someone run the scenarios (taking into account all the variables above) about whether it is best to (1) rent a facility to handle growth; (2) buy an existing building and renovate it for your use; or (3) build a brand new facility.
• Hire a good construction manager who will work for the church, not for the contractor. Make sure the person is able to give realistic estimates of construction costs EARLY in the process to help prevent the misalignment of dreams and financial reality.
• Is the contractor driven by the church’s best interest or a desire to generate fees? Does the contractor understand how churches make decisions and is the contractor able (through its business plan and diversity of clients) to be as patient as is necessary to see your group through the process on YOUR terms, not theirs?

5. Will the architect you’ve chosen work in harmony with the contractor you’ve chosen?

• Is the architect driven by the church’s best interest or by a desire to generate fees? Does the architect understand how churches make decisions? Is the architect able (through its business plan and diversity of clients) to be as patient as is necessary to see your group through the process on YOUR terms, not theirs?
• Does the architect think that all solutions are driven by design, or does the architect understand that function may need to transcend form? Same question with the contractor (does he or she think all answers lie in getting a building built, period? OR does the contractor know that the application of his expertise, as ultimately manifested in a building sitting on the landscape, is only part of the solution. Same question of the financial consultant: does he think everything must be influenced by the bottom line, or does he understand that faith has a role in decisions?
• All members of the team must be able to accept, within the constraints of their business model, that working with churches and NPOs will not be a quick process, but that well-served relationships will come back to them many times over?

6. Do the firms you’ve chosen understand ministry or do the y only understand building buildings?

• See editorial above.

7. Can they provide ministry consulting as well as construction consulting?

• If not, can they put you in touch rapidly with a ministry consultant who’s corporate mission and vision are aligned with that of your ministry and will result in suggestions and solutions driven by YOUR NEEDS and not their need to log billable hours?

8. Do you need assistance with financing and/or fundraising?

• First off, understand that financing and fundraising are two different things.

a. Fundraising is how much cash you will receive, both in cash immediately and pledges over a finite future amount of time (2 or 3 years).
b. Financing is how much money you will need to borrow to make up the difference between the total project cost and how much money you get up-front.

• What is your culture about asking for money, giving money, and borrowing money? How much intelligence exists in your congregation about these functions?
• Be careful about coordinating a capital fund raising campaign internally… predicting the results of a capital campaign IS a science, not just something for which to form another committee, and if you don’t get some kind of professional help you WILL leave money on the table.
• Banks do not respond the same to way to requests for money from churches as they do from an office developer or apartment builder. Church properties (as a real estate asset class securing mortgages) are not liquid and are difficult to re-use in the catastrophic scenario of a foreclosure. People in your congregation who work at bank will probably know the process it takes to get a loan underwritten, but they will not be able to predict the exact questions banks will ask (unless they have underwritten church loans).
• There is not a liquid, active secondary market in church loans. Banks almost always have to keep the loans “on their books”, and are thus retaining most of the risk in house and blending it into the rest of their portfolio of loans. They use interest income on these loans to pay interest requirements of their depositors, and thus will have to look carefully at lending money to relatively risky borrowers like churches. When dealing with a local bank, this could be a detriment to getting financing approved.
• Some lenders on a national scale get participation in their loans. In other words, they get other people to put their own money at risk for parts of the amount they have borrowed to churches. These people then get part of the interest income and spread the risk around.
• Bonds are another option. Backed by a mortgage on the church, the bonds allow the risk to be spread from one bank or one group of investors to a whole bunch of smaller retail investors in the bonds. Therefore, the deal will be looked at differently because the risk inherent with lending money to a faith community will be distributed differently.
• Summary of banks vs. bonds

a. In addition to interest rates, there will be fees associated with the loans or bonds. Banks lending you the money will probably charge lower fees than a bond company. A bond company has to charge a higher fee because they have to employ brokers to sell the bonds to retail investors. This process is slow, because the typical types of institutional investors (like insurance companies and pension funds) rarely buy church bonds because they do not understand how church real estate assets function.
b. The flipside? You will have much more interference and interaction with banks than you will with bond underwriters. Once the bonds are sold, the bond underwriter carries no risk (other than to reputation). Once the loan from a bank has been made, you are financially married to that bank and can expect all kinds of regular visits, inquiries, and intrusions into your financial statements and performance.

9. What about occupying, managing and maintaining your new facilities?

• It’s only common sense to (1) plan, financially and logistically, for ongoing maintenance; (2) to use as many smart systems as possible; (3) to integrate technology and energy efficiency to the Nth degree in any new facility

10. And, when God blesses you more, have you thought out a workable exit strategy?

• Is the facility flexible enough to be used easily by a non-church entity (a warehouse, a health club, a community center)? If so, under worst case scenarios or even in the regular planning cycle for the growth of a community, you will be able to harvest significantly higher resale proceeds ($ per square foot) for a general function building than you would with a traditional church structure.
• If you are building new, and going through the city approval process, be sure to negotiate in your developer’s agreement with the city the possibility of future alternative uses in the zoning designation you request. If you are requesting a re-zoning, especially common in growing communities in suburbs, where land is sometimes on the edge of town and still zoned agriculturally, it may be best to go with a Planned Unit Development that allows for future uses, either additional or alternative. Alternatively, some zoning designations like residential will allow a church as a conditional use but easily re-integrate housing.

Choosing one firm that can provide solutions to these and other pertinent issues will save you time and money.

I feel morally obligated to note “if that is the fit that best serves the ministry’s needs.”

Anything less could result in delays and the potential of increased costs.

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