Leadership Solutions Blog

Is Church Debt Good? or Bad?

Debt has become an epidemic in the church world today.

We’ve all heard—or even experienced—churches who are packed to the walls, but either don’t have the capital or are still raising money to pay down debt from the last project before they can even think about an expansion or a multi-site campus.

According to the Christian Standard, 73% of churches in America today are carrying debt. In the past five years, there have been a record number of bankruptcies and foreclosures on churches. Out of all the categories of churches impacted by debt, the emerging Mega-church (>1,000 in weekend attendance and <2,000 in weekend attendance but growing) is by far the most impacted by debt. In the emerging Mega-church, there is approximately 2.5X the amount of debt per giving unit as there is income per giving unit. While only 21 of the top 100 largest churches in America are debt free, the debt in relation to giving is much lower.

This information, whether it’s factual or intuitive, has forced the popular question in the church world:

“Is debt good or bad?”

Truthfully, though, we think that may possibly be the wrong question. Money, whether it’s in the form of generosity or debt, can either act as a great servant or a terrible master. The difference in the role that debt plays in your church comes down to how good you are at financial strategy.

“Money, whether it’s in the form of generosity or debt, acts either as a great servant or a terrible master.”

Debt, inherently, is not necessarily a bad thing in the business world (this statement does not apply to consumer debt). Almost every large company in America has taken on debt as a means of productively growing the organization. Commercial real estate developers have made billions of dollars by leveraging buildings that pay for themselves immediately, allowing them to use their capital to move onto the next project. So what is it that works for companies and commercial real estate developers that isn’t working for churches? The answer, to us, is simple. Historically, churches are the only vertical of real estate where buildings are not evaluated based on how they pay for themselves!

“Churches are the only vertical of real estate where buildings are not evaluated based on how they pay for themselves!”

For commercial real estate developers, the developer (or owner) can use debt to erect a building whose expenses and debt service are paid for by the tenants who occupy the building. Churches, however, don’t have tenants, so let’s look at another example: American Widgets Company (AWC).

AWC, owned by John Smith, is a company who manufactures widgets for large retailers. The company currently has the infrastructure to manufacture 1,000 widgets per month. However, AWC is doing so well that a large retailer puts in an order for an additional 500 widgets per month for the next 10 years, with an option to buy more if things go well. John has a challenging dilemma. Because he can’t fund the additional infrastructure with cash, he can either tell the purchaser that they are not interested in increasing their business by 50% per month, or, he has to borrow money to buy the equipment and take on the personnel to fund the order. When John looks at the cost of the debt versus the potential income, the answer is easy—the increase in capacity pays for the debt that he has to take on within the first year, so he does what any business owner would do and he says yes to growth.

You probably see where this is going… Growing churches and their visionary pastors, like John Smith at AWC, have more needs and vision than resources. The question then is not “do we take on debt,” but “how do we take on debt intelligently?”:

To answer this question, there are a few important lessons that we can glean from our friend John Smith at AWC:

  • Debt is not a strategy; it is the result of a strategy
  • Debt should only be taken on when it’s clear how it pays for itself
  • Debt pays for itself only when there is a need to create capacity

So how do we use this information within the context of planning a building project? First, it is important to understand that church projects are not about real estate. Church projects are about creating ministry capacity, and the capacity that is created should pay for itself. As an example, Atlanta Church is currently hosting four services in a 700-seat venue. Each seat represents $1,500 in annual giving. An architect designs a space program for an additional 500 seats, family ministry space, and additional parking, which comes to a total of $10M in cost for the hard costs, soft costs, and site work.

Doing simple math, the project costs come to $10,000 per seat for a church whose seats create $1,500 in income (6X cost to revenue). Assuming the church can come up with enough capital to bring the loan amount to $7M, the debt service (principal and interest) on the building would be close to $500,000 per year, against a potential/future income of an additional $750,000 per year. This means that 2/3 of the capacity that is created goes to make the minimum payments on the loan, leaving only $250,000 of the additional income to pay down the debt, hire personnel, and fund additional ministry. It’s simply not enough! The pastor should make one of two decisions—either scale down the design/scope of the building, or double the amount of capacity for the same dollar.

“Project budgets are about creating ministry capacity, not buildings!” 

Our goal at Ministry Solutions is to help you say yes to growth by eliminating the guesswork, accelerating vision, and protecting the purpose of your church. If you are planning an upcoming church building project, are unsure about taking on debt, or navigating the complexities of church growth and would like a second opinion, you might find value in a conversation with a member of our team. 


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