The Crystal Cathedral, one of America’s best-known churches, recently filed for bankruptcy with more than $40 million in debt. An example of some of the extravagant spending: one creditor that provided live animals for the church’s annual Christmas presentation is owed $57,000. While most churches don’t have expenditures like the Crystal Cathedral, the number of churches in foreclosure has tripled in the last three years. Churches, like many Americans, used the real estate boom to borrow and expand. Now, with donations down 15 to 25 percent nationwide, there is a growing number of churches in financial crisis.
How individual members may lose money when a church fails
Many churches look to their congregations to borrow money to build or expand their facilities. This is usually done through church bonds. The bonds represent a loan to the church. The bonds are secured by real estate, but in most cases are in a second position to a first mortgage. What this means is that if a church fails, bondholders will only be paid if there is enough money to satisfy the first mortgage. This is many times not the case, leaving bondholders with nothing but a worthless piece of paper. This is why it can be unwise to invest in church bonds with money you cannot afford to lose – making an outright gift to your church building fund would be a better option for both you and your church.
At Reliance Trust, the largest trustee for public church bonds, about 10% of the firm’s $1.3 billion portfolio is now in default, up from less than 1% historically, said Anthony Guthrie, president and managing principal, though foreclosure rates haven’t yet increased markedly. (excerpted from the Wall Street Journal August 16, 2010. Church Bonds: Winners or Sinners).
Churches trying to make sense of their operating costs
Many have long-questioned the wisdom of constructing multi-million dollar buildings that get used on Sunday mornings and mostly sit empty the rest of the week. Churches today are being forced to think of the church property as an asset that must be working throughout the week. Starting a daycare or private Christian School has become a popular way of generating day-to-day income from a church campus. Some churches rent out space for community groups ranging from AA meetings to dance instruction. Few churches today can simply open the doors up on a Sunday morning for two hours and expect to cover their costs.
Advice to churches
The financial advice being given to churches during these especially difficult times is very similar to that which is being dispensed to individuals: pay down debt, work on increasing income, and save money. This is not a good time to expand if it requires borrowing. Churches meeting in a rented facility, such as a school or community center, should not build until they can do so with minimal debt (or no debt). For many churches, thinking “outside of the box” will be a necessity. Buying an abandoned movie theater, a foreclosed strip plaza, or even a warehouse, makes much more sense than the cost of building a new structure.
Some observers find it ironic that many churches offer courses to congregants on becoming debt free, while the church itself piles up debt. With charitable contributions not likely to be on the upswing anytime soon, churches will have to continue to find ways to survive on less donation income.