March 2012 Issue: How to Determine the Affordability of a New Building
By: Greg Retzlaff
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 may 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.
2. Hard and Soft Costs
3. Additional Revenues
4. Timing and Amount of Mortgage
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 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.
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
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
2. Assistance Obtaining Financing
3. Cash Management
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.