Buying Extra Land? Why it’s probably a bad idea.

Should your church purchase more land than is necessary to accomplish its future expansion vision? 

By “purchase more land…” we mean buying a site beyond what the church needs. This is done because 1) the church hopes to profit through development/sale; or 2) the perfect site’s seller won’t subdivide. These are legitimate desires that present a tempting option. But read on.

The real question this topic leads to is this: “Should your church get into the real estate development business?” In most cases, we think not.

We believe that every church should stay focused (with room for varied interpretation) on its primary mission of being the living, breathing body of Christ.

We’ve known churches to successfully buy excess land, sell a portion, and gain essentially free land for their new church buildings through the profits. But such stories are very few and far between. And those who’ve succeeded collaborated with experienced real estate professionals.

Sadly, we’ve observed some local churches, despite the best of intentions, have failed and severely burdened their congregations as a result. One local church had to stop construction midstream on their ground-up development project  because they relied on the sale of a surplus land site for funding. The sale did not happen even though a large relied upon non-refundable deposit was in place. The general contractor left the site and the partially finished building sat unfinished for almost two years while the church raised more money. Another local church acquired approximately five times the land it needed to construct its envisioned new church in hopes of selling surplus parcels. After several years, precious resources remain tied up in undeveloped land that remains unentitled and without a single sale.  

Why do these kinds of things happen? Too much is beyond foresight and control, including the cyclical up-and-down nature of real estate. Even an expert can’t tell you everything. And typically church leaders do not have particular real estate expertise or acumen.

A church has several hoops to jump through when it comes to selling excess lots. For example, under 501c3 law a clear separation of pursuits is necessary, divided into separate entities, so that for-profit activities don’t void tax-exempt status.

Meanwhile, of course people want to help, so there’s rarely a shortage of amateur advice aimed at leaders. Thus it is not surprising that lots of mistakes are made when a church ventures away from its core pursuits.

For these reasons substantiated by life experience, we don’t recommend that churches enter the for-profit real estate business. We hesitate to douse vision flames and big ambitions, but we’ve seen too many try with unfavorable results.

All of that said and general advice aside, we recognize that every case is unique. And wise management for one church may look different for another. So if your church is pursuing an expanded real estate vision beyond the norm, we’d love to hear about it…and maybe to help you succeed.

Development Advisors provides A to Z services for churches seeking to expand their facilities. For more information about our church real estate and development services, contact Scott McLean at 303-534-3344 (x 103) or at scott@developco.com.

Getting a Loan 101

One of the key questions churches face when it comes to facility renovation or expansion is, “Where will the money come from?”

If you’re prepared, your church has been saving for this day and has a nice nest egg already set aside. But building projects are expensive and, depending on your specific circumstances, paying cash may not be possible. Therefore, it’s almost certain that you will have to take out a loan—at least for a portion of the funding. So here are some rules of thumb to consider.

All lenders have certain criteria that they use when considering a lending candidate. They don’t treat church applicants any differently.

In general, they apply these criteria:

• Loan amount not exceeding 3-4 times annual gross operating income plus net worth (usually in owned property).
• Debt service (principal + interest) not exceeding 25 percent of general operating budget. Total facility costs (including debt service plus property operating costs) should not exceed 35% of general operating income.
• Loan-to-Value ratio tops out at 75 percent of the new facility appraised value for either a conventional loan or a bond underwriting.
• The Loan-to-Cost ratio, which compares the loan amount to the project’s cost, typically tops out at 65 percent. For example, a project costing $1.1 million with $1 million in “loan-able” project costs, could merit a $650,000 loan. Project costs that are not “loan-able” include some FF&E (furniture, fixtures, equipment) and AVL (audio, visual, lighting).
• Debt coverage ratio is the amount that the gross operating income exceeds debt service which must be 110-120 percent. This means that there is positive cash flow sufficient to make the loan payments.
• Liquidity reserve.  Every church needs a “rainy day” fund to cover six months of operating expenses.
• Church history.  Lenders expect a future client to have been in existence for a minimum period of time. Many banks will not loan to a church that is less than 10 years old. Further, lenders will look to the tenure of a church’s senior pastor, expecting a minimum of five years.
• Capital campaigns. If these monies are to be used in underwriting a new loan, the lender will expect a third-party organization to be involved.
• Project Manager.  Many lenders expect a church to contract with a third party professional with project/construction management experience.
• ·Congregant giving. Most experienced church lenders these days are seeking annual contributions of at least, on average, $2,500 per giving unit. A “giving unit” is based upon the demographic data for the area. Generally there are between 1.5 and 2.8 persons per household. (Note: We prefer to use giving per attendee, having observed that giving ranges from $1,100-$1,500 per attendee for area evangelical Christian churches.) 

Obviously, each church we work with has unique circumstances. And every church wants not only a great, accessible facility, but also a lasting legacy of wise management.

As your advocate, our goal is to help you obtain the best loan possible, as well as to counsel you in prudent and sustainable debt resources.

Development Advisors provides A to Z services for churches seeking to expand their facilities. If you would like more information about our church real estate and church development services, please contact Scott McLean at 303-534-3344 (x 103) or at scott@developco.com.

Outwardly Focused Church Creates Community Oriented Facility

We work on a variety of projects—each custom and unique—but these days we’re especially excited about our new project with Grace Place Church in northern Colorado.

Grace Place has outgrown its current facility in Berthoud, Colorado and hired us to lead it through the development of a larger church. But this project will be more than a just a church building. We are creating an outwardly focused campus with indoor and outdoor spaces to be used by the local community as well as the church.

Located at the gateway to the Town of Berthoud, Cross Creek Commons will join a growing movement among large churches toward broader community uses for facilities.

The 19-acre site at the southeast corner of Highways 287 and 56 will contain three separate buildings (two in Phase 1) and will include the Trailhead Café, a performing arts auditorium (with 600 seats), ”urban farms” for local food gardening, a new indoor and outdoor playground, a 10-feet wide bicycle trail, and eventually a recirculating creek/pond (with live fish) using non‐potable water.

The town is very excited about this project and has expressed desire to collaborate with Grace Place on portions of the project, particularly the regional trail that eventually will connect to Loveland to the north. We’re excited about helping a church partner with its community in this positive, mutually beneficial way.

Grace Place isn’t alone. Many churches around the nation have begun to shift the way they view their facilities to more of a community focus.

For example, in 2012 Granger Community Church in Indiana changed its name to Granger Commons to reflect its heart to serve its broader community. And last year Word of God Church in South Carolina purchased a tract of land with the specific goal of helping to redevelop a blighted area and provide community services.

To learn more about Development Advisors’ A to Z services for churches expanding their facilities, please visit our website or contact Scott McLean at scott@developco.com or 303-534-3344 x103.

GOD LEADS THE PROJECT AND WE FOLLOW

When Galileo made public his discovery that the earth revolved around the sun, he was excommunicated. People thought in those times that such a thing couldn’t be. The Psalmist clearly wrote that the sun “rises” and “sets!” Therefore, it had to be the sun that moved and anyone who said otherwise was a heretic.

Of course we now know that was folly. Galileo’s discovery never threatened God, but reaction to it made the church look rather ridiculous. Those Biblical statements aren’t meant as scientific treatise, but rather poetic verse. And we can see that Galileo, by seeking out truth in real time, learned more about God’s universe than most.

There’s an important lesson in this story: God sets the course of his Kingdom, not us. We don’t always know everything, and we’re not in charge.

We are cogs in a grand story-wheel, revolving around God. And the minute we get dogmatic—the minute we limit Him to what we already think we understand­—that is the minute we risk losing sight of Him.

This lesson applies to life in general, but particularly to church expansion projects.

These projects go up and down, roller coaster rides from obstacle identification to obstacle resolution. This is necessary and normal.

But often these highs and lows can be frustrating. They cause delays; they call into question things we thought we knew about our direction; they can be costly and humbling; they may feed conflict; they can make us wonder if God is really with us, after all.

This ebb and flow pace may challenge patience and emotional wherewithal, but it can also allow us to discern God’s will for the project—if we let it.

The church naturally experiences seasons—just like the individual people who compose it. At any given time there are best practices and relevant wisdom floating around that we hold on to, for good reason. Some things seem to work; other things don’t. But still we don’t know everything.

A church project requires allowing enough time to test the latest vision assumptions. It requires recognizing that there’s a bigger story than the details of any one project, or even any one church—however vibrant and growing it may be!

In short, it requires moving at a pace deliberately behind God. Church leaders must discern where God is moving and join Him at His place.

We can tell you from experience: the outcome of an expansion effort will not always be what people originally envisioned. But if you prayerfully consider each step and move at a God’s pace rather than yours, you can be assured that the outcome is what God intended for His glory.

There is another related benefit to this discipline. Until a church encounters obstacles, it will not be united in its purpose. Often when things are easy, routine is settled and all seems to be “falling into place,” we may sense God’s hand at work but fail to see our role in what He’s doing.

Struggle has a refining power to overcome that. It weeds out nonessentials and noise, and refocuses us on what counts. It teaches us bit by bit, like Galileo, who we are in the universe and where we’re going.

Development Advisors provides A to Z services for churches seeking to expand their facilities. If you would like more information about our church real estate and church development services, please contact Scott McLean at 303-534-3344 (x 103) or at scott@developco.com.