On the surface, the question of whether to finance a building project with borrowed money or capital fundraising appears obvious. How can you argue against capital fundraising? It's interest-free money! Another advantage of a capital campaign is that it requires a clear presentation of the church's vision and encourages individual participation through sacrificial giving. It is an opportunity for spiritual renewal, forcing members to deal with the question, "What part does God want me to play?" It encourages us to listen to God's voice and follow him. For many people the biggest obstacle to trusting God is money. The best way to have victory over the control of money is to give it away. The act of sacrificial giving is counter-cultural and represents an act of faith that draws us closer to him. Finally, capital campaigns avoid covenants typically required by lenders which restrict the financial operations of the church.

While this list of fundraising benefits is compelling, the church lending market is alive and well. Why? There are very good arguments for borrowing money to fund your next building project. Scot Proud, a vice-president at Bank of America, points out that there are risks associated with all fundraising campaigns. "It is important for the church to make sure that capital campaigns are successful. If a campaign is perceived to have missed its predetermined objective, it can cast a shadow over the entire project that will cause the church to doubt its vision and adversely affect the future of the project." An ill-timed or poorly-conducted capital campaign could have this effect.

Borrowing makes sense in light of the escalating costs of building projects. Usually, borrowed money is necessary just to get a project off the ground. Pledge drives and fundraising activities can blossom with fruitful harvest when church members see the land, design plans, architectural models, and construction activity already underway. It makes a statement of commitment from church leadership to the members that inspires giving. The loan can then be repaid with the proceeds from the campaign.

Saddleback Valley Community Church used this strategy with a slight twist when it constructed its interim worship facility. The church obtained financing to construct enough of the building to obtain a certificate of occupancy. When the capital campaign was conducted, the building was already under construction. There was great excitement in the church and the members responded to the challenge. Rather than paying off the debt, however, Saddleback used the proceeds to enhance the building and place options on surrounding land that would ensure room for growth in the future.

When Opportunity Knocks
Timing is key. A well planned campaign can take six months or more to execute. If you can afford to wait, then a campaign may be your best option. Suppose you've just started looking at options for relocating and building, and a piece of contiguous property becomes available for immediate purchase. If the church has adequate cash flow to service the debt, it is much easier and quicker to put a loan in place than to organize a capital campaign. If the church has already established a good banking relationship, lines of credit can already be in place to fund initial deposits. The remainder of financing can be secured during the due diligence work associated with the acquisition.

How do you know if you can afford the project you're thinking about? Lyndon Johnson of Johnson Mortgage Services uses several metrics to measure a borrower's ability to repay a loan. First, the loan should not exceed 65 to 75 percent of the appraised value, but can go has high as 80 percent in some states. Second, the loan amount should not exceed 2.25 to 2.75 times gross annual revenues. For example, $250,000 in gross annual revenues would qualify for a loan amount between $562,000 and $687,000. Third, the calculated monthly payment should not be greater than one week's average contributions, or twelve monthly payments should be less than 33% of gross annual revenues. The monthly payments involve principle and interest.

Church health is also a key ingredient. Lenders will want to see both attendance and giving growth over the past three years. Be prepared to prove these trends with neat, accurate, up-to-date records. Church leadership must be solidly behind the project, committed to seeing it through. Recognize that many lenders have loan minimums, typically between $500,000 and $1 million. If you need less than that, consider fundraising as a better option.

Much More than Money
Perhaps the greatest advantage to borrowing money is the opportunity to work with an experienced lender. Most churches do not have the dedicated financial staff to manage a large capital project. By carefully selecting a lender, the church enlists a "partner" for the project. Institutions such as Bank of the West and Evangelical Christian Credit Union have many years of experience loaning money for church projects. These and other lenders have dedicated staff members who specialize in church loans. They understand the financial operations of churches, and can be sensitive to being flexible as projects develop. Most lenders see churches as very good credit risks. Church loans have a history of performing better than commercial loans. This confidence should encourage the lender to be flexible in meeting the church's needs.

Your lending "partner" can be a valuable asset. The right lender will be able to help you with any phase of your project, from choosing a building site or a good contractor, to helping you negotiate zoning laws or environmental concerns. If your church is not prepared to deal with these issues, consider finding a lender who can, even if the fees or rates are not the rock-bottom best you can find. You'll either have to provide these services yourself through volunteers, or pay someone to help you.

A knowledgeable lender also helps with project planning. Bank of the West maintains a database of industry standards to help in budgeting and bidding. B.C. Ziegler has been loaning money to churches since 1913. Their experience helps churches deal with known problems, and guides them through unforeseen problems that may come up. Particularly troublesome are land use restrictions or other covenants that may severely restrict a church's operation now, or in the future. These issues are especially common when acquiring property from a developer of a master planned community.

As an example, the church might want to include a bookstore or private school. If the developer intends to include retail operations and a private school elsewhere in the planned community, the purchase documents may have language that restricts the church to "church use" only, eliminating the ability of the church to include a bookstore or school. Or the developer might want to retain an option to repurchase the property and place its option in a preferred status over the interests of a lender. Such a provision would severely impact the title and make it hard for the church to obtain financing.

While it is true that money provided by a capital campaign costs less than borrowed money, there are circumstances where borrowing makes good sense. And when the church engages the services of an experienced faith-based lender, it is adding a member to the team that brings much more than money to the table. It is adding someone who will dramatically improve the strategic planning of the project and the financial future of the church. Lenders seek clients who want to develop a long-term relationship. Being included in the planning process gives the lender an opportunity to prove themselves as a "value-added" member of the team. The church pays nothing to include a potential lender as part of the team, but can save many dollars by taking advantage of their skills. Don't rule out borrowing until you've considered the value of an experienced lender.

Thomas Greer (tgreer@marinerschurch.org) is senior associate pastor and CFO of Mariners Church in Irvine, California.