Creating a Source Use Table

This table will determine how much construction financing you need. It demonstrates to potential lenders that you understand the cash-flow demands of the overall project.  It’s the equivalent of a budget and accounting for the flow of each variable you’ll encounter.  To create such a table, list all sources of funding for your project (gifts, cash on hand, loan proceeds, etc.) and all uses of funds (architect fees, construction costs, fund-raising expenses, and so on). The goal is to get both the source total and the use total to balance. If they don’t it can help you identify budget gaps and how to best fill them.

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 the 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.  This number should be further discounted by the number 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 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 the local economy (and thus, a church member’s job security); the overall satisfaction of the congregation with the project; the amount and intensity of the 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 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 build and can absorb the mortgage payment into the general fund budget. It’s common and a 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 the 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 long time 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 dollars 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 con 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 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 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, Tenzer Partners, Ltd can add a great deal of helpful advice and counsel, validating the numbers in your source-use table and determining a realistic borrowing amount.

Use of Funding

Architect Fees For many churches, the building process begins with hiring an architect to design the new building . Some churches choose to engage an independent architect, while others choose to engage a design-build firm whereby the architect and the contractor are essentially combined into one firm. Without discussing which approach might better suit your church, there are some important factors to consider when figuring out your use of funds if you have an independent architect.

When factoring in the cost of your architect, make sure you discuss how the fee is determined. In a number of instances, an architectural budget is created based on the initial designs and drawings. There is, however, a reasonable chance that at various points in the process your church will request that the architect make some major modifications to the drawing. It’s typical for churches to either downsize or enlarge the building after the initial plans are drawn.

Additionally, as municipalities review site plans and building designs, they might impose new requirements that will force your plans to be redrawn. It’s always a good idea to budget some level of contingency into your architectural budget to account for this.

Another factor to consider when budgeting for architectural costs is that it’s possible the architect will charge a monthly inspection fee during construction. This fee is to compensate the architect to do site visits and certify that the building is being built according to all specifications. Ask your architect how much it will cost for such ongoing inspections.

Architects cite the fact that your architect can act as a check and balance on the builder as one advantage of using an independent architect vs. a design-build firm. It doesn’t make sense to go the route of an independent architect, and then not have the independent architect do monthly site inspections. Be sure to budget for that cost if applicable.

Construction Contract This is always the largest line item in the uses section of the table, and typically the one susceptible to the most inflation. At the point in the process when most churches are constructing a source-use table, they usually aren’t obtaining reliable numbers for the actual cost of construction.

It’s essential that you emphasize to your builder that you need a reliable construction cost budget for budgeting purposes – a number that reflects actual construction costs in your local market and specific design of your building.

This sounds simple, but isn’t always easy to obtain. Contractors are notorious in trying to avoid providing a firm figure, as many times they don’t have all their actual costs locked in until the very end of the process. Labor shortages, raw material price increases and a host of other issues can force a project budget higher at the last minute.

One very helpful technique is to ask your contractor for references of completed church projects in your area. Call them and ask how the construction contract estimates and final cost varied, if at all, throughout the process. Compare the actual cost per square foot for construction at the reference churches. See if it tracks with the estimates being provided by your contractor. This method is your best protection to ensure your budget numbers are realistic.

For purposes of internal financial planning, it can make sense to take the most up-to-date contract estimate and add 10 percent to account for future cost increases. If your budget isn’t able to sustain a 10 percent increase in the construction contract planning stages, it’s better to know sooner vs. later, and plan accordingly.

Soft Costs and Site For many churches, all construction costs are incorporated in the construction contract referenced above. However, certain contractors will break out site- work into a separate contract. If your site isn’t a flat piece of ground with easy road and utility access, it’s best to work with your architect and contractor to determine if your project will have special costs related to your site.

Soft costs incorporate items such as municipal fees, permits and engineering and traffic studies your church might incur to construct the project. We’ve found most architects and contractors don’t put together a detailed budget in this regard; from their perspective, these are smaller costs which, to them can be less relevant.

On the other hand, these “soft costs” can run in the hundreds of thousands of dollars for a typical church project, so encourage your building team professionals to give you solid estimates. Also remember that if you’re working with a contractor or architect who’s based outside your local area, they might not account for many of the locally required soft costs. Therefore, make sure out-of-state construction professionals truly know your local market and regulations before signing a contract with them.

Furniture and Equipment This category is an area that frequently gets paired back or sacrificed during a project to keep things on budget. If you’re $100,000 short, it can make sense to use the sound board from the old church and defer purchasing a new one until you raise the funds after building completion.

Many professional fund-raisers actually encourage churches to move into buildings that are “bare” because it can be a very effective technique to then make appeals for needed furniture and equipment items.

For budgeting purposes, make sure you know exactly which elements of furniture and equipment are essential to obtain a certificate of occupancy for your new building. Sometimes you’re not able to completely defer this line item to another day as certain items are required by your local building inspectors to use your new facility.

Contingency Even the most well-thought-out budget and construction process will have unexpected overruns. It’s always a good idea to budget a 4 to 6 percent overall project cost contingency if you can afford it.

Additionally, your contractor will present you with options during construction to increase the quality or functionality of your new building. Churches should be prepared to have the financial ability to fund needed or desired change orders to the construction contract.

Loan/Legal Fees With any major project, a number of legal documents will need the church’s review. These can be related to construction contracts, land purchase contracts, loan documentation and a host of other items. For the church’s benefit, it can make sense to have an attorney review these documents on your behalf throughout the process.

Additionally, some forms of financing might require an upfront fee for the loan, or they might require the church to fund the cost of items needed to underwrite a loan (i.e., an appraisal, environmental report, title insurance, etc.) Since these costs are all part of the project, it makes sense to account for them upfront as you create your table.

Churches are often 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 plan.

Investing the time and effort in creating an airtight source-use table will go a long way in making the entire process more efficient and less costly in the long run.

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