Important: CPA-prepared Financial Statements

'What's Best For The Church?' Have a Certified Public Accountant prepare annual financial statements on the church, for both your internal management of the ministry and for when you request a credit arrangement.

There is a uniform, widely recognized format of an organization's financial statements called Generally Accepted Accounting Principles.

According to Wikipedia, the online free encyclopedia, 'Generally Accepted Accounting Principles (GAAP) is the standard framework of guidelines for financial accounting. It includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements. Financial accounting information must be assembled and reported objectively. Third-parties who must rely on such information have a right to be assured that the data are free from bias and inconsistency, whether deliberate or not. For this reason, financial accounting relies on certain standards or guides that are called "General Accepted Accounting Principles" (GAAP). In any report of financial statements (audit, compilation, review, etc.), the preparer/auditor/CPA must indicate to the reader whether or not the information contained within the statements complies with GAAP.'

I highly recommend having a CPA do your church's annual financial statements, to give you the best tools to manage the business of the ministry.

Practically speaking, and this may change from one financing source to the next, church lenders may accept non-GAAP (the church's internally generated financial records) for financing of $500,000 and under. From $500,000 to $1 million, they may or may not want GAAP. For financing over $1 million, expect financing sources to request GAAP financial statements as part of their decision to provide the credit. This can vary based on the amount of credit related to the church's income.

Scams - Avoid Them!

'What's Best For The Church?' Search the Internet about any provider of church financing or investments, get references and check them, and get input from known legitimate church finance sources as well as from ministries dedicated to biblical financial training.

Sadly, I expect to always read and hear of scams related to financing for church real estate. Here are just a couple of recent examples:

In the early 2000's, Dynamic Outreach (aka Olympic Outreach), Houston, TX, took sometimes $10,000-20,000 deposits from churches promising a church building financing scheme supported by life insurance on church members that never panned out.

In December 2006, an Arizona newspaper reported a police officer was indicted for helping owners of a non-profit company that investigators say ran a fraud scheme that netted millions of dollars from church goers in Arizona and 12 other states. The non-profit company promised investors their money would be used to fund Christian charities while generating high returns.

"Fair Tax saves Christmas!"

'What's Best for Churches, Staff and Members when it comes to paying federal taxes?' The Fair Tax.

Here is a humorous and hopeful Commentary & Opinion from the Americans for Fair Taxation about 'saving Christmas' and the real joy that would come for you and me with passage by the U.S. Congress of a bill that is presently in process through both the House and the Senate, The Fair Tax Act.

Commentary & Opinion: "FairTax saves Christmas!" 12/24/2006 Washington, D.C. Gazette

After round-the-clock deliberations on Capitol Hill during a special session of Congress called to save Christmas, agreement was made to overhaul the federal tax system. With hundreds of thousands rallying on the National Mall, the FairTax was officially passed nearly unanimously at 10:00 p.m., just hours before Christmas. In one of the most unified rallies since the civil rights movement, people from all backgrounds and political leanings united to save Christmas by standing up to Congress and demanding passage of the FairTax legislation (H.R. 25 and S. 25).

The FairTax replaces the income tax system with a transparent and simple national consumption tax of 23 percent levied only on new goods and services. The FairTax provides the same amount of funding to the federal government as the income tax. Many economists favor the consumption tax over the current system, as it is a more stable and economically stimulating form of taxation.

Bob Cratchit, a low-paid clerk, said, "I have a minimum-wage job, and after FICA taxes are taken out of my paycheck I barely have enough to survive on. With the FairTax in place I’ll get to keep that 15 percent and the prebate will help my family tremendously."

The prebate is provided to every legal American, making all spending up to the poverty level ($26,400 for a family of four) federal tax free. The FairTax also broadens the national tax base, thereby lowering almost every taxpayer’s marginal tax rate by capturing taxes from accumulated wealth, the underground economy, illegal immigrants, and millions of foreign visitors.

A large contingent of Gingerbread House Builders and United Elf Workers were also present at the rally. Both groups cite "keeping our whole paychecks and bringing American jobs back" as reasons for their support. A toasty gingerbread man added, "We are really excited about the FairTax. When you combine the elimination of embedded tax costs in the price of our products with lower interest rates and increased take-home pay, like the FairTax does, it is easy to see how beneficial this will be to businesses such as home building and to consumers as well."

With Christmas’s fate on the line it was no surprise that leaders of the next generation were well represented. Small children as well as young adults came out in droves to the Mall to voice their support for Santa as well as the FairTax. Organizers of these young patriots calling themselves the "True Believers" were Charlie Brown and Tiny Tim. Charlie Brown said, "I was having trouble figuring out what Christmas was all about. I realized it’s not about presents; it’s about coming together with friends and family. This whole mess with losing Christmas will be looked back upon as the turning point in my generation’s future because of the FairTax."

Moments after the FairTax’s passage, Santa’s sleigh could be seen doing a fly by of the Capitol building filled with packages. Eyewitnesses said that he seemed both 'holly and jolly' and that he shouted out a hearty "Merry Christmas to all, and to all the FairTax."

Credit & Debt: What the Bible and some say

'What's Best For The Church?' If the strategy is to borrow money to pay for real estate, a wise use of credit and the avoidance of debt.

Scripture, supported by many of today’s Christian theologians, pastors and ministry leaders, is clear about debt and credit, and whether they have a place in the life of a Christian institution and its people.

Dilemma?
The teaching about debt seems clear enough; Scripture strongly counsels against debt. A 2002 survey conducted by a Wheaton College professor and published in Christianity Today found that 84% of churches have borrowed or do borrow money. There seems to be a gap between Scripture and the practical application of churches today.

Old Culture and New Translations
Many Christians say debt is wrong and base this on Scripture; they are right. Debt, to use vivid Old Testament imagery, is like bondage, slavery. The words ‘debt’ and ‘credit’ are not always used accurately in our language today. The English word ‘debt’ translated in Scripture is not commonly used today to mean what it did to the Bible writers.

A Top Authority Speaks
In his book Debt-Free Living, Larry Burkett, a co-founder of today’s Crown Financial Ministries, wrote: “Credit and debt are not synonymous terms, although they are used interchangeably in our society. Credit can best be defined as the establishment of a mutual trust relationship between a lender and a borrower…Debt is defined as a condition that exists when a loan commitment is not met…The very best way to establish credit is to borrow against an acceptable asset.” “Even if a loan is current, the borrower is potentially in a position of servitude. But if the loan is delinquent, the lender is given an implied authority from God, according to the Bible…Not once in Scripture is there even a hint that that was not the legitimate right of the lender…nobody was forced to borrow money; they borrowed voluntarily. The lender extended honor (money) and the borrower represented himself as trustworthy. Thus, the punishment for default on a debt was actually more severe that for theft because it was considered a breach of trust." Burkett distinguishes ‘credit’ from 'debt’ as a borrower being in or out of compliance with their borrowing agreement; describes the best way to establish credit and the proper, prudent use of credit; and, puts the problem of debt on the borrower getting themselves into a bad situation.

What is ‘credit’ and what is ‘debt’?
‘Credit’ and ‘debt’ can be described as a range of possible conditions. On one end, the use of credit is done in a fashion where the borrower has far greater assets than liabilities and can pay back the loan in an instant; on the other end, severe debt means that the borrower must do whatever the lender says by law in order to pay back the loan. It is the middle part of this range where the state of credit vs. the state of debt differs from borrower to borrower. And, it is within this range where a ministry or individual must chose to be free to follow the Lord, or take on a situation that could limit their abilities to move as the Lord calls. As Burkett pointed out, there is a prudent and wise use of credit, and there is the unwise assumption of debt.

What Do Christian Opinion Holders Against Borrowings Say?
Some Christian opinion holders argue that is inaccurate to say credit and debt are different. Their position goes like this: Calling a loan just a contract, rather than a debt, sounds like the legal fiction by which the Pharisees circumvented Scripture. Word studies of the biblical terms for debt, owe, borrow, lend and interest reveal that the words are clear in their meanings. The words translated borrow, lend and debt simply mean to have or to be a creditor, to be joined to another, signifying the unbiblical partnership that exists when debt is incurred from unbelievers. The Hebrew term for interest literally means 'to bite as a serpent', illustrating the consequences of debt. Redefining debt won't make it go away. If you have a creditor or lender, then biblically you are in debt. Even though a mortgage is cheaper than renting (and some would say is good stewardship which God commands), stewardship is only 'good' by God's definition, meaning biblically permissible. We may be able to secure cheaper housing through a variety of means - theft, deception, extortion - but these would be morally prohibited. We would have cheaper housing, but God would be dishonored by our wrongful method. The end (stewardship) never justifies the means (debt).

Questions Worth Asking
If ‘no borrowings at all’ is to be the standard, and consequently no lending, how do we reconcile this with the fact that many professing Christians are employed by banks and other lending institutions, and the finance divisions of large manufacturing companies, and real estate owning landlord companies that extend credit through renting apartments and providing housing, and so on? Their paychecks provide money that is tithed to support much church and ministry work. Whether a church rents space or has a mortgage, the church is in a borrowing arrangement. If renting, the church has agreed to a lease committing them to some future payments, an extension of credit from the landlord for which the church is obligated whether they use the space or not. If using a mortgage on space they own, the church is in a borrowing arrangement. What is the more prudent ministry strategy for a growing church: to raise from its people enough money to pre-pay the lease for many years worth of rent payments and then rent a facility for that period of time, or within the confines of a wise borrowing strategy, to use credit to build and own a facility?

Concluding Thoughts
A pastor friend of mine has said: “The wrong use of something does not preclude its right use.” The issue of borrowing for Christian institutions and their people comes down to Scripture interpretation, and the definition of wise and prudent. Those who are against borrowings have some Scripture on their side. Those who believe borrowings are allowable, like the 84% of churches from the aforementioned survey, have some Scripture on their side. I believe that there is a right and wrong use of borrowings. The right use, defined as ‘credit’, is a tool for furthering ministry. The wrong use, defined as ‘debt, is restrictive to ministry. Scripture seems clear that there is a severe situation to avoid because of the results. And, Scripture is clear about the need to make wise choices. There is no doubt that Christian churches and individuals have gotten themselves into debt. And, there are many examples of the wise use of borrowings to further the work of Christ and the lives of his people. I believe that the pastor mentioned above is accurate: just because some churches and individuals allow borrowings to get the best of them or use them wrongly, does not mean that the right use of borrowings should be ruled out.

Bonds vs. Loans

'What's Best For The Church?' It's a function of Risk and Cost: how long the church needs to borrow the money, how long the fixed interest rate, and the related fees.

I started my church finance career as a bank lender. Then, I founded and operated a consulting firm where I acted like a church's temporary Chief Financial Officer to structure and arrange the best financing, whatever the strategy. Now, I am a licensed securities Registered Representative and help churches with financing through bond issues and commercial loans. As an both an employee of financing sources and as an advisor to church clients, I have worked with just about every strategy to finance church real estate. I am not biased towards loans or bonds; they are both fine ways to do it. I want what is best for any church.

Experience tells me that loans account for about 80-85% of church financing and bonds about 15-20%. I believe most church financing is with a loan from a bank local to the church. I think the bonds percentage would be higher if more churches understood bonds.

The primary thing to consider is Interest Rate Risk. If a church needs to borrow money for 5 years or less, i.e. will really pay the credit off within 5 years, it's an 80% right answer to use a loan because bank and non-bank lenders will usually fix the interest rate for this period of time with relative low fees. If borrowing for 10 years or more, it's an 80% right answer to use bonds because of the fixed interest rates up to 25 years. If borrowing for 5-10 years, it's a toss up which is best; running the numbers on the costs of each and assessing the risks should provide the answer. While rare, sometimes a lender will fix their rate for longer than 5 years. If so, closely compare this option to bonds, line by line, fee by fee, interest rate by interest rate, in order to make your decision.

How Do Church Loans Work?

'What's Best For The Church?' Use a loan if for a relatively short period and if you can pay back the principal within the term of the loan.

Church loans are usually made by some kind of commercial lender, a bank, credit union, denomination loan fund, or real estate investment trust (REIT). Here is an outline of the typical church loan structure:

• Fixed rate equal to Wall Street Journal Prime Rate +/- 1.00% at closing time
• 3-5 year term
• 15-20 year amortization
• 70-75% loan to real estate collateral value
• 1.20-1.25 times cash flow coverage
• 2.0-3.0 times the church's annual undesignated income

This typical structure is best for a church that can repay the loan within its term, in this example 3-5 years. When the loan term is up, the church will be faced with having to refinance any outstanding principal at the prevailing interest rate and to pay any new loan origination fees.