Here at the Ministry Network’s Division of Financial Services, we are often asked to provide assistance to churches looking to purchase or renovate a building. Our team of experts is here to help you navigate these often choppy waters. Here’s the skinny on what you need to know about this important topic:
The most common first question churches ask us is “How much can we afford to borrow to complete our building program?”
While this is, of course, a “bottom line” kind of question, often times we find the church lacks the financial information to make their case to the potential lender.
We cannot stress enough the importance of maintaining proper and complete financial records for church ministry. This would include Statement of Activities (sometimes called the Profit and Loss Statement) and the Statement of Financial Position (sometimes called the Balance Sheet) for the current year and the prior two years. The quality, accuracy and completeness of these financial reports are critical to your potential lender. Failure to provide this information will most surely disqualify you for any borrowing.
Based on how much you have raised in your capital campaign, coupled with the information on your financial reports, the lender will affirm the amount you can afford to borrow.
If you provide this information to us at the beginning of your process, we can give you a pretty good idea of how much the lender will be willing to underwrite.
The single biggest mistake churches make when launching a building program (purchase or major renovation) is to over-estimate how much they can reasonably afford. We urge you to seek out professional advice BEFORE you sign a purchase or renovation contract. Let us take a look at your situation BEFORE you have obligated your church to something you might not be able to support.
In addition to the financial reports, churches will need to submit a current copy of their Constitution & Bylaws along with their Incorporation papers and list of current Board members.
Another important question is: “What factors should we consider when purchasing or renovating a building?”
- Is the building zoned for church occupancy?
- In addition to the purchase price, what are the potential renovation costs to occupy the facility?
- If you can occupy the building, what local building codes will you be subject to?
- Property collateral for a loan cannot exceed a 75% LTV (Loan to Value). For example, if a building is appraised at $1.0 million dollars, then you will need to raise at least $250,000 of cash.
- Generally a church will be able qualify to borrow between 2 & 3 times the church’s annual income, depending on expenses.
- One potential help for a church is a “bargain sale” option, where the seller takes a reduced amount of the sale price in cash and donates the balance to the church. This creates a tax write off for the seller that may be attractive. This win-win option should be explored with the seller early in the negotiating process.
- Determine first what your church can qualify to borrow. Then begin to contact an architect to design to your budget.
- Design the improvements to meet your budget constraints, not to your wants or desires.
- Get written estimates of proposed improvements and renovations from at least two to three qualified contractors.
- Assign a qualified church representative to oversee the project.
- Add a minimum of 10% for cost overruns. These are a certainty and must be built into your overall budget.
- Make certain that local building codes are adhered to when contracting for any renovation or additions. Taking a shortcut can cost you in the long run.
- Make sure you have current insurance certificates on all contractors and sub-contractors that include workers compensation coverage. These certificates must come directly from the insurance company, not the contractor. If a contractor does not have adequate insurance, they cannot work on your job. Period.
- Make sure you get work change orders from contractors for inevitable additional work – these must be pre-approved and additional costs must be agreed by both parties. Make sure your contractor knows they do not have a blank check, and all changes must be pre-approved.