The Role of Stewardship in Debt Management
By: Dan Mikes
Having worked exclusively in church mortgage financing during the past 18 years, I have grown a sincere appreciation of the many hats worn by the church business administrator or executive pastor. The BA's duties include far more than the obvious business and staff management, in addition to pastoral care functions. A certain level of expertise is required across a broad range of topics, including strategic planning, church communications, marketing, technology, volunteerism, HR, insurance and risk management, church security, legal, tax, and IRS regulations, just to name a few.
Of course, all of these duties must be gracefully orchestrated beneath the overarching objective of spiritual transformation. There is also no shortage of accountability, not only to the pastor and other staff, but to the board and the donors, as well.
So, let me reiterate that I have an immense respect for the church business administrator, particularly when it comes to the one, perhaps single most important, topic that is glaringly missing from the list above—stewardship. Stewardship alone is a vast topic, including donor tracking, accounting and reporting, cash management, finance, and capital fundraising.
One of the more obscure stewardship tasks the business administrator must undertake, but one that potentially has profound implications, is debt management. This is the age of the megachurch, and thousands of churches now carry debt into the millions of dollars. Managing interest expense effectively can result in tens, even hundreds, of thousands of dollars in avoidable cost over the course of full debt retirement.
For example, if a church with $5 million in debt has the opportunity to reduce its interest rate by only one percent, it will result in a reduction in interest expense of nearly a quarter-million dollars over the course of a typical five-year term loan. Through a typical amortization duration of 25 years, managing to a one-percent lower interest rate produces savings in excess of $1 million. Affecting this level of impact to the bottom line would establish an exceptional career legacy for any business administrator. Conversely, some may allege that missing such opportunities would constitute a material fiduciary breach.
At this point in this article, I am sure the average business administrator is letting out a deep sigh. On top of all of their other responsibilities some banker is suggesting they also become an economist and financier! While, admittedly, interest rate cycles and loan covenants are somewhat foreign topics to many, this is clearly one place to press on toward the high mark. Shouldering the interest expense stewardship duty can reap immeasurable spiritual treasure as significant dollars are redirected to ministry opportunities.
Unfortunately, most churches pay little attention to the terms and conditions of their debt until and unless their current loan is coming up for renewal or there is a pending borrowing event, such as land acquisition or construction of a new building. The problem with this approach is that interest rate cycles rarely marry up perfectly with the church's event calendar. If interest expense savings are to be realized, regular attention must be paid to interest rate cycles.
I understand the cultural resistance to the notion of refinancing debt mid-term. Admittedly, refinancing is no small exercise. Typically, a committee must be formed, and the administrator, and perhaps a committee chairperson, must dutifully endure appointment after appointment with one financial salesperson after another. The hope is that each lender will put their best offer on the table on the first pass. The reality is that the banker must try to be competitive in a changing market, while also meeting the expectations of those to whom he is accountable. It is certainly a time-consuming and less-than-comfortable process. It is no surprise that, following loan closing, the loan documents are quickly stuffed into a file cabinet and hoped to be avoided until the loan matures five years later.
Nevertheless, now is a great time to refinance. This interest rate detail can be easily tracked via the Federal Reserve's Web site at www.federalreserve.gov. A closer look at the past few months would cause some to conclude the bottom in the current interest rate cycle may already be several weeks behind us. Anticipating interest rates is not an exact science. The best advice is to simply look at the big picture; don't wait and attempt to pick the exact bottom. Clearly, now is a good time to refinance, and there are a number of very healthy banks that are still actively lending to churches. All churches with mortgage debt should immediately find one of those banks and explore the benefits of refinancing.
The majority of outstanding megachurch mortgage debt is characterized by five-to-seven-year term debt. Many of those churches that paid attention to the last interest rate cycle refinanced their debt in 2003 or 2004. If this is true of your church, you may feel you have a good interest rate for another one to three years. However, you should be thinking very carefully about where interest rates may be one to three years from now.
The federal government is pumping record levels of dollars into the economy in an attempt to stimulate a recovery. This will inevitably lead to price inflation. When the cost of goods and services rise, investors demand a greater return on fixed income investments. This alone will put upward pressure on U.S. Treasury rates. U.S. Treasury interest rates drive all other interest rate indexes commonly used to price fixed interest rates for church borrowers.
In addition to inflation, you should also consider the rapidly increasing level of total U.S. debt and related implications regarding the federal government's credit rating. If global investors begin to perceive greater risk, they will require a greater reward when investing in U.S. Treasuries. This may also put upward pressure on interest rates over the next few years.
Your current loan may include a prepayment penalty. Don't let this stop you from opening a dialogue with a qualified church banker. They can help you to weigh the cost of the penalty against the potential consequence of waiting to renew your loan in a higher interest rate environment. You may be surprised how little upward rate movement is needed to reach a break-even point in terms of your total expense across the next five or 10 years.
Now is clearly the time to get interested in interest rates. The benefits may well prove eternal.
Dan Mikes is executive vice president and national manager of Bank of the West's Church & School Loan Divisions, www.bankofthewest.com.