In this tight economy, it has become increasingly difficult for congregations to finance needed building improvements. Are you considering external financing from a local lender or from the UUA to help finance a building project? Because financing can be fraught with peril, I offer the following guidance.
Each congregation has its level of financial comfort. Some are comfortable with a relatively high amount of debt, while others are comfortable only if they are debt-free.
Most lenders, including the Unitarian Universalist Association, consider that some level of debt is healthy and can help a congregation to fulfill its mission. Here are three guidelines for determining an appropriate amount of debt:
- Be sure that annual debt service does not exceed 25 percent of the congregation’s annual operating budget. The Unitarian Universalist Association does not even consider a loan or loan guarantee request if the annual debt service exceeds this level. The concern is not whether the congregation can service its debt; the concern is that the congregation may focus too much attention on making loan payments rather than on fulfilling its mission.
- Keep the total project cost within two to three times the annual budget total.
- Keep the total project cost to a maximum of 50 percent of the total property appraisal (when the project has been completed).
Historically, some congregational leaders have suggested funding a building project by making a deposit of 10 percent, with the remaining 90 percent to be carried with a mortgage. Here is the argument that they often use: The new building will attract visitors who will soon become members, and these new members will make substantial annual financial commitments to help make mortgage payments.
This “build it and they will come” model is not reliable. Until new congregants feel included in congregational life, they seldom make significant financial commitments. Rather than helping to increase financial stability, their financial commitments often do not even provide the money needed to support programs and ministries.
If external financing is proposed as a way to help pay for a building project, develop financial projections to show how the mortgage fits into the entire financial picture. Then the congregation can make an informed decision about whether or not to accept external financing.