Borrowing for Construction
Creating a Source-Use Table: Part 1

by Scott Rolfs 

Construction of a source-use table is a critical exercise that will not only help your church plan, but also help you determine how much construction financing you might need. A well-developed source-use table will also help you secure any needed financing because it demonstrates to potential lenders that you understand the cash-flow demands of the overall project. It’s the equivalent of an algebraic budget, accounting for the ebb and flow of each variable you’ll encounter.

To create such a table, list all the sources of funding for your project (gifts, cash on hand, loan proceeds, etc.) and all the uses of funds (architect fees, construction costs, fund-raising expenses, and so on). The goal is to get both the source total and use total to balance. If they don’t balance, it can help you identify budget gaps and how to best fill them.

To follow are the key elements to account for in constructing the “Source of Funds” portion of the table. In next month’s issue of Church Business, we’ll focus on the “Uses” portion.

Sources of Funding

Cash. It’s a good idea to have two source categories for cash. Have one line for the current cash you have on hand in your building fund account. Lenders and your congregation always want to know how much real money is actually on hand and available to be used for the project.

The second cash line item should be labeled “future cash and/or pledges.”

Future Cash and/or Pledges. This line item is critical, and one in which churches frequently overestimate the dollars available. If your church is conducting a pledge campaign, there’s no question that the future pledges have significant value.

However, many churches fill in this line with the exact dollar amount of pledges outstanding. Unfortunately, this number rarely holds up under scrutiny, and is many times discounted by lenders when reviewing a construction loan application because:

a) Many pledge campaigns don’t collect 100 percent of the amount pledged.
b) Pledges made might not come in on a timely basis.
c) Pledge money might be needed to pay interest on a construction loan 

Most church construction projects last 10 to 18 months. If your pledges don’t come in on a timely basis during that period, the pledge funds won’t be available to pay project costs.

This is more art than science, but a conservative approach is to assume a collection rate of 70 percent. If you have $1 million in outstanding pledges, then it’s suggested to rely on collecting $700,000 of these pledges. This number should then be further discounted by the amount of pledges you think will arrive on a timely basis to pay construction expenses.

Some of your pledges might not be scheduled to be received for another two or three years and thus wouldn’t be available to pay construction costs as needed.

Many professional fund-raisers will take exception with the discounting of the pledges by up to 30 percent, since it goes to the heart of their profession. There’s no question that certain campaigns are able to raise in excess of 100 percent of the amount pledged. However, there are also other campaigns that realize in the neighborhood of 50 percent of the pledges received.

A number of factors can affect the amount collected, including the state of your local economy (and, thus, a church member’s job security); the overall satisfaction of the congregation with the project; the amount and intensity of past fund-raising efforts; and whether or not the major lead gifts are fulfilled.

If your church doesn’t collect 90 percent or 100 percent of the amount pledged, it doesn’t mean your campaign was a failure or that the fundraiser failed; it just means that some other common variable intervened. The point is to account for this by not relying on 100 percent of the future pledges to pay construction bills as they come due.

An additional way to work around this is to earmark your future pledges to pay for construction items that aren’t essential to the actual construction. These would be items such as furniture and equipment. Many lenders prefer future pledge dollars are allocated for such items; that way, if the pledges don’t materialize, the base building can still get completed on time and on budget. By way of example, if pledges are allocated for equipment, the new $150,000 sound board you might have wanted could theoretically wait until funds are available, while the old sound board is used in the meantime.

Mortgage or interest payments on a construction loan are another consideration. Many churches embarking on a major project typically don’t have excess cash flow built into their budgets to pay the mortgage payments. At least for the first few years, the mortgage payment might be dependent on the pledges. Communication between different committees is critical here. In certain instances, the finance committee might be counting on at least 50 percent of the future pledges for the mortgage payments, while the building committee might be counting on 100 percent of the pledges for brick-and-mortar costs. This is a common occurrence and results in double-counting of your pledge monies. Over the years, there have been a number of churches that have gotten into financial difficulty with a new project because they double-counted the pledges, relying on them to pay construction bills and pay the mortgage.

Every church should prepare a three-year cash flow projection to determine just how the mortgage will be paid in the coming years, and whether or not building fund pledges will be needed to do this. For some churches, the idea of using pledge monies for debt service on a loan is a new concept, their belief being that pledge monies can’t be used for something less noble, such as interest expense. The reality is that most churches in America that build do indeed heavily rely on pledges to service the mortgage in the early years, until the church grows in the new building and can absorb the mortgage payment into the general fund budget. It’s a common and very accepted practice.

Sale Proceeds of Old Site. If your church is building at a completely new site, there might be some reliance on the proceeds from sale of the old site. Many lenders won’t accept using future sale proceed dollars in your Source and Use of funds table. The reasons are as follows:

a) Church property generally takes a longtime to market and sell. It’s always a good idea to prepare for a process that could take months or years. Given that your church is “moving,” that means that congregations similar to yours probably won’t find your building appealing. It will take time to find another church that will think your old site is an upgrade.

b) Contracts to purchase churches frequently fall through or are delayed. Make sure your buyer has solid funding and that their congregation approves and agrees with purchasing your building. Sometimes purchase deals made by a pastor interested in buying your building are later not supported by his or her congregation.

c) Churches frequently sell for less than what the congregation or an appraiser believes the property to be worth. Even if your church spent $3 million dollars building and developing your site over the years, it might only be worth $2 million to a potential buyer. Be realistic in how much in the way of sales proceeds you hope to collect. Also factor in any debt on the old site that might need to be paid off with a sale.

Under certain circumstances, lenders are willing to factor in sale proceeds when underwriting your loan. However, it’s preferable for your church to obtain cash sale proceeds simultaneously with the commencement of construction for your new project. A common technique is a “sale-leaseback,” in which a congregation sells its old site in advance while writing into the contract an ability to continue to use the facility for worship until the new building is completed. This is the optimal sale strategy since you already have the needed cash proceeds from the sale before moving ahead with construction.

Loan Proceeds. This part of the Use of Funds is self-explanatory; it’s the amount of funds the church will seek to borrow. Usually, this number is filled in last on the table, to plug any gaps in the funding. After you have completed your table and filled in this number, it’s a good idea to test the needed loan size with a number of lenders that specialize in church finance to see if it’s a supportable loan based on the specifics of your congregation.

Many times, churches are reluctant to get lenders involved early in the process. However, the lender can add a great deal of helpful advice and counsel, validating the numbers in your source-use table and determining a realistic borrowing amount.

Next month, in Part 2 of this article, we’ll analyze what variables need to be accounted for in the “Uses of Funds” section for a well-constructed table.

Scott Rolfs is the managing director of the Church and School Lending Division of Ziegler Capital Markets Group, based in Milwaukee, Wis.