Church debt is often considered a negative mark on a church. Some leaders feel like ‘debt’ is the ultimate four-letter word. For others, a church’s debt gets set – and then added to the budget for minimum payments – and then promptly forgotten. Why? Because the church’s finances are tight to begin with … or, because it was a difficult set of decisions to go in debt in the first place … or – maybe there are other reasons in your church.
We find that many are looking at how to manage the church’s funds and meet the challenges of building improvements in a tight budgetary cycle. And so, they are looking for creative options.
After recent discussions with leadership in two churches about refinancing their mortgages, it was obvious that they were in a “must re-fi” situation as their balloon payments were coming due or the end of the term was approaching. In our discussion, one had a “small maintenance” issue (yes, that little leak in the sanctuary could be telling you something) that needed to be fixed. The other was finding their collection plate “a little lighter” than it had been in the past. Their question to us: How could they handle their unique financial situations AND re-imagine their finances to meet needs for the future?
Neither situation is uncommon here at the Development Company! Both had parallel repayment thoughts as they expressed the same desire to pay off the loan early. Both were seeking to address their ministry priorities. As they considered options, the idea of a new cash flow stream from the refinancing was attractive. We discussed what would be their next steps. I thought both might be missing an opportunity to capitalize on their use of the funds.
The first church had a balloon note that was going to reset within a few months. Based on the forecasted Federal Reserve rate increase, they knew their rate would likely reset higher than their current rate of 5.125%. However, they also needed to address their pesky roof leaks that the church wanted to fix before they had to replace their 40 year old roof. In reviewing their church financial information, we offered a creative solution: a hybrid re-financing loan with a short-term renovation. As a result, they would save $200 a month as well as put another $12,000/year of additional principal payments they have been making back into their operational budget. The result: giving them an additional $14,400 a year.
In exchange, we recommended:
- they create a Building Reserve fund with the new “savings” to cover minor church upgrades/repairs and get estimates on the costs of a new roof since the 40 year leaking roof would need to be replaced. Once they got estimates,
- they look into a Capital Campaign to finance getting a new roof, handle other capital improvements, and reduce the principal balance on the loan. Capital campaigns are asset financed; and thus seen as ‘second mile’, or expanded gifts beyond regular tithes and offerings.
However, the church leaders were reluctant because they had not had a capital campaign in years and that the congregation had voted to keep the payment arrangement the same. By reconsidering their re-financing options and possible benefits, they switched gears and made some strategic moves to impact their ministry future. The loan re-set was definitely a lower rate and better payments. The Development Company loan also had ‘no pre-payment’ penalties and gave them a lower monthly minimum payment. In the end, they could see a much improved financial picture for the church – and re-financed the loan with us!
The second church had been experiencing an offering reduction since a series of changes in church and community. Since the loan had to be refinanced soon, they thought it would be proactive to talk to us first to discuss their options. By refinancing the loan, they could net an increase of $1,363 a month or $16,356 annually. This could help them stretch their income further and give them a favorable debt service coverage while continuing their goal to pay off the debt early. Their goal was “to eliminate the burden of debt hanging over the church”.
My response led to a discussion about:
- Starting a Capital campaign instead of refinancing. Paying off a loan early through refinancing, extra principal payments, or through tithing, takes years.
- Using the increased net cash flow to reinvest in the church today by putting a fresh coat of paint on the building, installing new carpet, adding landscaping, or building up reserves to have the funds to fix problems or replace things before they need fixing, will leave a future burden on the church.
- Planning for their “wishful needs” list. They wanted to improve their nursery to meet the needs of a recent influx of young families. Based on our research, a safe and welcoming nursery is one of the top reasons why Millennials decide to come back or not. It might be a better option to transfer some of the refinance proceeds to hiring a trained or licensed nursery attendant as a way to ease the Millennials’ concerns. Further, they could highlight this enhancement in their marketing of church ministries.
Bottom Line: Why Re-finance? It’s your money and your assets as a local church. Make the most out of it. Use the benefits of a re-fi to enhance and expand ministry by investing in the spiritual body of the church as you care for the fiscal and physical body of the church!