Are you part of a church that is planning a new building or major expansion and wondering how to determine what you can afford to build? What are the ramifications if you misjudge? Does your church have a defined strategy for making this determination?  Building committees comprised of lay volunteers who may have little training or experience in these matters face these decisions. Most often, these volunteers are experiencing their first church building program. Steps can be taken to help a church determine the affordability of a major church building project.

Consider for a moment your ability to estimate your home utility bills for one year. You could probably estimate these costs fairly accurately. But could you make an accurate estimate for the next 10 years? That would take considerable effort. In fact, some careful planning might be required, and the use of a more structured process to gain the desired accuracy might be wise. This planning might include such things as how many individuals will be living at home during that time and whether you have grade school children becoming teens (long showers) during this period. You might want to estimate inflation and apply this to your future estimated costs. 

The extra steps mentioned in this simple example of an evaluation process are necessary to increase the accuracy of the estimate. This evaluation process to estimate your utility bills 10 years into the future is a simple analogy of the evaluation process this article describes.

If one could predict the church’s annual cash flow for future years, determining the future financial health of the church would become much easier. Utilizing an evaluation process similar to the utility bill example described above will enhance the leadership’s ability to make wise financial decisions regarding the planned new building.

Evaluation Process
1. Historical Information
This recommended evaluation process begins by gathering the church’s historical attendance, giving and expense information. This information should be collected for at least the last six years and preferably the last 10 years.

2. Hard and Soft Costs
Contractor construction costs, non-contractor costs and soft costs associated with the construction and financing of the new building must be estimated and collected.  Typically, the contractor or architect is consulted for a cost estimate of the building envisioned, which usually includes most of the “hard” construction costs. 

There are many non-contractor and “soft” costs that can be overlooked during the planning stage. Non-contractor costs that must be captured in the evaluation process include such items as office furniture, pews or chairs, other building furnishings, permitting costs, engineering fees, architect fees, inspection and testing costs, acoustical engineering costs and land costs. The largest soft costs that should also be part of the building cost estimate include interest during construction (which can be very significant), financing fees, contractor bonding costs, fundraising costs and builder’s risk insurance costs. Some churches purchase the builder’s risk insurance to avoid the contractor’s markup or because the church’s existing fire insurance company offers better rates.

3. Additional Revenues
Any additional giving or revenue associated with the program must be considered. This may include revenues from the sale of existing property or houses and expected giving from planned building campaigns. Fundraising professionals advise that the anticipated giving pledged over three years from a building campaign is typically 1.5 to 2.5 times the church’s annual budget.  Professionals also warn that if the campaign does not include adequate follow-up, actual giving can be significantly less than the amount pledged.

4. Timing and Amount of Mortgage
Funds will be given before construction starts, and funds may also be given after construction starts and after construction is complete. The timing of this giving will determine what funds are available for 1) construction, 2) the down payment for the long-term loan and 3) future mortgage payments. Utilizing a detailed evaluation process will reveal the funds likely available for each of the above mentioned categories.

Once tentative financing terms are identified by lending institutions, the building team will be able to quantify the expected mortgage payment, which is a key element needed to define the cash flow projections. The cash flow projections will help the building team decide whether to use all the available cash for the down payment and/or construction or to hold some cash in reserve to help pay the future debt payments.

5. Projected Expenses and Giving
The future attendance, giving and expenses must be estimated. By understanding the greatest, least and average historical increases of these items, the building team will have a basis for making a reasonable estimate of the future attendance, giving and expenses.

The building team should take into account how these items will likely change as the excitement of the new building grows, after the building is completed and occupancy has been granted, and in the future years, as the novelty of the new building begins to wear off. Observing recent trends and averages for the last three to six years will add intelligence to this process. The fact that some expenses are affected by the number of attendees while other expenses are not should be factored into the estimate of these future expenses. 

There are some rules of thumb that can be utilized for some of these costs. Future insurance costs, utility costs, operating costs and, of course, costs for increased staffing over the future 10 years all need to be included. Visualizing the staffing needs 10 years in advance is not easy, but when the expected future attendance numbers become available, the additional staff required begins to come into focus.

6. Inflation
Don’t forget to adjust the giving and expenses for inflation since the expenses may inflate faster than the giving during the 10 years in question.

By this point in the evaluation process, several individual estimates will have been prepared that are each based on knowledge of the church’s history, information about the expected building size, expectations of future growth in attendance, giving and expenses, and financing terms.

When all of these individual estimates for each year are added or subtracted (as appropriate), a reasonably and perhaps amazingly accurate representation of the expected financial future of the church will evolve. The resulting product will be represented by a net cash flow value for each of the future 10 years and will directly communicate whether the congregation can afford the planned new building using the current assumptions.

Evaluation Process Increases Harmony
Besides offering a snapshot view into the church’s financial future, the evaluation process described above will also help the church blend God’s providence and man’s will (faith vs. planning).

Some churches develop their building plans based on their needs and desires. They plan one or more building campaigns, set a giving goal as high as they dare, and leave the rest up to God. This acceptable method is often used but may be lacking some vital planning elements. 

One verse that particularly contrasts God’s providence and man’s will is Proverbs 16:9: “We can make our plans, but the LORD determines our steps.” John Calvin speaking on this matter said, “God’s Providence is no excuse for imprudence.” 

Congregations or building teams typically have individuals who hold the opinion that the church should build on faith and God will honor such action. Others may believe the church should be more prudent and even pragmatic about its decisions. Contrasting approaches can sometimes lead to dissent, and statistics show that congregational division is not uncommon during building programs. No one wants a church to divide because of a building program. Blending both the faith approach and the planning approach to solve a problem through this evaluation process will create a stronger team and enhance the harmony and joy within the congregation or organization.

Other Benefits of Evaluation Process
1. “What If” Scenarios
Once the information outlined above has been assembled and the original forecast has been completed, the input values can be adjusted to determine how the future cash flow forecast changes with new input assumptions. These “what if” scenarios will allow the building team to determine how close the current plan is to the financial edge. Higher or lower construction costs, faster or slower growth in attendance, faster or slower staff additions, and construction timing are a few examples of possible “what if” scenarios that can be evaluated.

2. Assistance Obtaining Financing
Assistance obtaining financing is another benefit of undertaking an evaluation process.  Lending institutions will recognize the rigor and thoroughness of the work, which is somewhat uncommon for churches seeking loans. The detailed attention to the financial planning will likely impress the lenders, and the church’s ability to pay the mortgage payments will be evident. The building team has already done the lender’s job for them by demonstrating how the church will afford the new mortgage payments.

3. Cash Management
Knowledge of the church’s current and projected financial status and growth will offer information that will allow leadership to properly manage the cash funds. The building team will be able to determine what funds will be available for the down payment or early construction and whether to retain funds for future mortgage payments to shore up years that may be projected to have negative cash flow. 

The most likely period in which this may occur is at the end of the last building campaign (which might occur after occupancy has been granted) before the body has been able to grow in numbers to support the new mortgage payments. 

The evaluation process described in this article is a tool that provides key information for the church’s leadership to better assess the affordability question. The evaluation process provides a 10-year cash flow projection and enhances the church’s ability to obtain financing by demonstrating to potential lenders that leadership really understands the church’s present and projected financial health.  Once the information is gathered and put into a structured form, leadership will gain additional information by performing several “what if” scenarios.

The leadership and church body’s confidence to proceed will peak, and the harmony in the church will increase, knowing that options have been carefully and fully evaluated.  Yet, there will be plenty of room for God to show His omniscient hand.

Greg Retzlaff is the founder and owner of Foundation First, www.foundation-first.com.