Church building is a complex endeavor, and there can be numerous pitfalls along the way to a finished project. Having spent over 50 years designing and building churches, the McKnight Group has seen a variety of issues arise. We’ve gathered some lessons to share, so that today’s church leaders can learn from the church design mistakes of others, rather than having to learn those lessons on their own.

The Dangers of Over-Borrowing

One significant error that churches can make is borrowing too much or building beyond their financial means. This can lead to monetary strain and, in extreme cases, the closure of the church, so It’s crucial to know your limits when planning a church building project. Here are two recommended calculations for determining what your church can afford to borrow: one for when there’s a capital stewardship campaign, and the other when there is not.

Capital Stewardship Calculator

A capital stewardship campaign is when congregation members pledge money over a period, usually one to five years. For our example, we will use three years, as this is a common duration. Here’s a detailed look at how this works:

  1. Operating Budget: First, determine your church’s annual operating budget. For this example, let’s assume an operating budget of $273,333.
  2. Stewardship Factor: This factor, which is typically 1.5 to 2 times the annual budget, estimates how much you can raise in pledges. Using a conservative factor of 1.5, in this example, we estimate $410,000 in pledges over three years.
  3. Discounting for Lending: Lenders often discount pledged amounts to 80% for the total pledged. Therefore, $410,000 over 36 months is discounted to $328,000.
  4. Loan Calculation: Converting this to a typical 20-year commercial loan at 7.5% interest, your borrowing capacity is approximately $1,134,000.
  5. Total Project Budget: Adding cash-on-hand and subtracting current debt, you arrive at a possible project budget of $1,164,031.

Straight Financial Institution Borrowing

This method will calculate the debt limit which banks and financial institutions often use when a capital campaign is not included:

  1. Average Total Income: Consider your church’s average annual income. For our example, this is $258,333.
  2. Loan Factor: Banks might lend up to three times this amount, which totals $775,000.
  3. Debt Service Limit: A good rule of thumb is that annual total mortgage payments of a church should not exceed 35% (or roughly one-third) of the annual budget.
  4. Giving Units: Another approach some banks use is to consider the number of active giving units in your church. You shouldn’t exceed $1,000 per giving unit annually for debt service. If you have 85 giving units, this translates to $85,000 annually, or $7,083 monthly.
  5. Loan Calculation: At 7.5% interest over 20 years, this translates to a borrowing capacity of $881,640.
  6. Total Project Budget: Including cash on hand and subtracting current debt, your possible project budget in this example is approximately $911,000.

Understanding and using these calculations is a good way to avoid over-borrowing. They also are helpful for laying the groundwork of a church building project budget. In our next article, we will delve into accurately counting the costs of a project, ensuring that every aspect is budgeted correctly. Meanwhile, we invite you to join our i3 webinars for more detailed discussions on the church design and building process. Visit our website for additional resources and to sign up for upcoming webinars.