Obtaining A Church Home
By Alvin Mason
To the Pastor and Leaders of the Church:
This is my analysis of the Church's Purchase / Lease opportunity.
The Church currently meets in the School. The Pastor and members would like their own church building. A building that will meet the Church’s needs has been located. The desired building is located at XYZ Avenue. The Avenue has a steady traffic flow which becomes a heavy traffic flow doing the morning and evening rush.
The Building will need major improvements. The following is a summary of the purchase or lease offer by the property owner, followed by a line Item cost for renovating the building on XYZ Avenue. The revenue and expenses are taken directly from the church treasurer’s reports.
The building owners will rent the facility for 10 years with an option to purchase. The rent will be $2,000 a month for the first 2 years of the 10 year lease. The rent will increase to $3,000 a month for years 3 and 4. Then the rent will be $4,000 a month for years 5 and 6. The rent will be $5,000 a month for years 7 through 10. The tenant will pay all utilities and insurances. The building owners will pay property taxes up to $5,000 a year if a tax free status is not obtained by the lessee/occupant being a church.
The sale price to the church is $800,000 for years 1 and 2.
$900,000 for years 3 and 4.
$1,500,000 for years 5 through 10.
The improvements to the building will cost approximately $490,000 of which approximately $71,000 will be for the removal of asbestos. Professional fees for a Lawyer, Certified Public Accountant, and an Architect making blueprints will be about $100,000, which may be discounted.
The building is on land that has a finished parking lot which has the required spaces to meet the city ordinance.
The church will use their existing tables and chairs in the fellowship hall initially. Cost to replace is $10,000.
The church will also use their sound system in the beginning. Cost to purchase new Sound System $25,000.
The church will use the existing instruments (piano / organ) Cost to purchase $60,000.
The church approved a benefit package (insurance/retirement/disability) for the Pastor and Co-Pastor which will be about $2,000.00 per month and will start the coming New Year.
The following Fund Balances and Revenue and Expenses are from the church Treasurer.
The church has a Building Fund with a balance of $373,000.00.
The church has Building Fund Pledges (Due within 12 Months) of $85,000.00.
The General Fund has a balance 0f $32,000.00.
The church has a membership of 403 adults including married couples.
The offering averages $4,500.00 a week. That is Tithes and Offerings going into the General Fund.
The monthly average contributions for the Building Fund is about $1,500.00.
Other monthly amounts collected are restricted funds which include: The Scholarship Fund, Outreach, Benevolence and Missions.
The cost of Purchasing the Building today and renovating would be: $800,000.00 plus $500,000 which is $1,300,000.00. My first recommendation would be to take the last 3 years of your Financial Statements to the churches bank. I recommend having the bank statements from the most recent year audited by a Certified Public Accountant.
First attempt to borrow $1.3 million leaving $300,000 in the bank as collateral only to be used to pay on the mortgage if needed and for necessary emergency repairs. At a rate of between 3.8 % and 4.1% the monthly Principle and Interest would be between $6,100.00 and $6,300.00 per month. This does not include insurance (required) and taxes if the church property is not granted tax exemption.
If that is not successful you will have to lease the building using all the money in the building fund and the building fund pledges for renovations.
The monthly offering is $18,000.00 (4 X 4,500) Please note that there are 52 weeks in a year and this method only counts 48 weeks. It is better to think of the other 4 weeks as a fund for contingencies and emergencies. So we are intentionally underestimating Church revenue by approximately $18,000.00 a year.
If you purchase the building with a $1,300,000.00 Mortgage your monthly expenses will be:
Please note that the $6,000 to $7,500 (months with 5 Sundays) monthly expense for the rent of the school will be removed as well as the $200 a week for custodian overtime once the building is ready in about 6 months. That will make the monthly expenses about $20,000.00 ($19,934.00) rounded up. With monthly revenue of approximately $18,000.00 not including the 4 week cushion as discussed before, the church would be about $2,000.00 short of meeting monthly expenses. However if the $1,500.00 that is collected for the building fund is used to pay the mortgage then expenses would exceed revenue by $500.00 a month (at 4 weeks to a month) at the beginning of entering the new building. Under that scenario you still have over $370,000.00 in the bank which initially could be used to pay mortgage for over 5 years which would not be the most feasible approach. A better approach would be to use the money in the bank to pay the difference needed from money collected (monthly revenue) and monthly expenses.
Also remember the estimated $100,000.00 in professional fees for the Attorney, CPA and Architect. If these fees are not paid on an installment basis then the church will have only $270,000.00 in the bank.
Once again the $6,000 to $7,500.00 monthly expense for the rent of the school will be removed as would the $800.00 for custodian overtime, once the building is ready in about 6 months. That will make the monthly expenses about $16.000.00 ($15,634.00) rounded up the first 2 years of the lease. With monthly revenue of approximately $18,000.00 not counting the 4 week cushion as discussed before, the church would have revenue about $2,000.00 more than monthly expenses. Under the lease scenario the church would have to use the $370,000.00 plus in the Building Fund bank account for leasehold improvements and still need over $100,000.00 to complete renovations. Under that scenario there would be nothing in the bank for emergency repairs. If the professional fees are paid lump sum, then the church would need to borrow over $200,000 to complete the renovation.
The breakdown of monthly expenses with a lease, does not include a line-item for a loan repayment which would be necessary to improve the building for the church's use.
As stated before the first approach would be attempting to borrow the 1.3 million. The bank would have a lien on the land and building and the $370,000.00 plus would be in a bank account with the lending bank with a stipulation that it could only be used for mortgage payments and/or emergency repairs. Generally speaking real estate appreciates which would help protect the bank. At this date the land and building are appraised for $575,000.00 before repairs.
If you leased the building you would have no money in the bank to complete leasehold improvements and the church would have to initiate another building fund effort, to purchase a church home in the future. As stated before the professional fees would cause additional financial strain. Also it would be harder to borrow money for any reason including emergencies.
With the financial picture as outlined, I would recommend that the Church only attempt to purchase the building on XYZ Avenue and not enter into a lease agreement. I also suggest negotiating the sales price and/or closing cost with the building owner.
Once the audited financial statements are ready The Pastor and church leaders should sit down with 3 banks. I suggest using this document and the audited financial statements with your verbal proposal.
Before that, the churches attorney should review all church documents. The Attorney should ascertain that the charter and bylaws are in order and the names listed on those documents should be current.
Furthermore I recommend having a meeting of all the officers, the Elders, Deacons, and/or Trustees for the purpose of stating that the church officers have passed a proposal to purchase a building. The minutes of that meeting should be included with this report and the audited financial statements.
Should the church purchase or lease you must have a plan for growth.
Should you purchase by borrowing 1.3 million the church will have well over 10 years to achieve revenue (church income) to breakeven with projected expenses.
Should you lease the building and pay for leasehold improvements it becomes more critical to increase church income. In both senarios, should the Church purchase or lease, it will also be necessary to monitor expenses. I recommend that for at least 2 years all controllable expense including salaries be frozen at the current levels.
Let me advise you that when the building is ready that you will have first time visitors. I also encourage you to form an outreach committee to knock on doors or send letters to your new neighbors. Welcoming visitors without pressuring them is important. Of course the church congregation must be on one accord. Then let GOD grant the increase.
I am always available if needed.
May GOD bless the Churches wish for a home.
Brother Alvin Mason