Capital Planning for Churches

H E L P I N G L E A D E R S B E C O M E B E T T E R S T E W A R D S .

Presented by: Association Reserves

CAPITAL PLANNINGfor Churches

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Table of ContentsCAPITAL PLANS 101: WHAT THEY ARE. WHY YOU NEED ONE 4“We’re an old church; we just replace things when they break.”

This is the common response when I ask church leaders throughout the nation about their long-term capital planning strategy. While this statement might b e t rue for many worship facilities, for many years, that doesn’t mean it’s the wisest form of stewardship for a church’s physical assets.

By Matthew C. Swain, RS

PROACTIVE & PENNY-WISE 6We know a few things about the future: 1) that it will come, and 2) it probably won’t be exactly what we expect.

In this spirit, we counsel our house-of-worship clients to be proactive by preparing for the repair and replacement expenses that are both inevitable and predictable. But, we also counsel them to be wise.

By Matthew C. Swain, RS

CASE STUDY: IGNORE AT YOUR OWN RISK —THE PERILS AND PITFALLS OF NOT HEEDING YOUR CAPITAL SPECIALIST’S ADVICE Coming in August 2016

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What they are. Why you need one.By Matthew C. Swain, RS

“We’re an old church; we just replace things when they break.” This is the common response when I ask church leaders throughout

the nation about their long-term capital planning strategy. While this statement might be true for many worship facilities, for many years, that doesn’t mean it’s the wisest form of stewardship for a church’s physical assets.

At a glance, waiting for building components to fail — such as roofs and asphalt — might seem like a sound strategy. Financial resources are devoted to ministry while physical assets simply sit in the background and fulfill their intended purposes.

It’s only when building failures start to occur that the issue comes to light. These failures come as a “surprise,” despite the fact that the remaining useful life and replacement costs of the major components can be predicted with great reliability.

Often, those charged with overseeing the church’s physical plant are unsure of what assets should be in a capital plan. Fortunately, a national-standard, four-part test is available to determine which expenses should appear in your church’s capital plan component list. The component must:• Be a church maintenance responsibility• Have a limited life• Be predictable (otherwise, by definition, it’s a surprise, which cannot be

accurately anticipated) • Be above a minimum threshold cost — often between .5 percent and 1

percent of a church’s total budget. This limits capital components to major, predictable expenses.

Within this framework, it’s inappropriate to include lifetime components, unpredictable expenses (such as damage due to fire, flood or earthquake), and expenses more appropriately handled from the operational budget or as an insured loss.

Did you know?Capital plans reveal the true cost of building stewardship. Fortunately, the science, standards and legislation behind creating plans of this nature has been developed to maturity throughout the United States in the world of Association-governed communities. To board members and owners of condominiums and planned-unit developments, the report is known as a Reserve Study, and industry professionals can earn a Reserve Specialist (RS) certification.

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Capital asset deterioration can be expressed in the form of currency by factoring in the remaining useful lives and replacement costs of all components on the component list. In the above equation, “% Funded” provides a clear and scalable indicator of how financially prepared your church is to make necessary repairs to its buildings, where 100-percent funded is ideal.

3) Funding planThe final result — the funding plan — identifies how much money needs to be set aside “in Reserve” each year. Since most organizations start off at less than the ideal 100-percent funded, the funding plan might require stable monthly contributions to reserves that are large enough to avoid last-minute fundraising campaigns. The goal, over time, is to move the church in the direction of being more than 70-percent funded.

A capital plan reveals the true cost of properly maintaining the buildings that have been entrusted to church leadership. Knowing the truth (and responding to it) is a foundational concept of the Christian faith; it’s wise to apply that same approach to the stewardship of a church’s physical assets.

Since the remaining useful life and replacement costs of the church’s major components are all reliably predictable, it would be foolish to characterize most building failures as “surprises.”

Establishing a strong reserve fund takes time and fiscal discipline. The benefit of creating a capital plan is that your church has a sound evaluation of both its physical and financial condition, as well as a prudent course to properly care for and maintain the property.

In the long run, your church will be rewarded with efficient use of time — and stewardship dollars — so the focus can be on the true mission of the church: preaching the Good News!

Matthew Swain, RS, is Worship Facilities Specialist at San Diego-based Association Reserves. [ www.ARCapitalPlans.com ] He is a certified Reserve Specialist and has been preparing capital plans for non-profit organizations across the country for more than a decade. Swain currently serves as the national representative for AR Capital Plans worship facility clients.

It’s certainly true that capital assets are easy to forget about. A new roof — depending on the type of construction — can last 15, 20 or even 30-plus years. AC units and boilers run on thermostats and normally require little attention. Vehicles can be driven over asphalt parking lots for many years without a second thought.

However, a reactive approach typically equates to expensive deferred maintenance — leaky roofs, causing mold and interior damage; AC systems failing catastrophically in the summer heat; boilers needing hard-to-find replacement parts in the dead of winter; and parking lots riddled with potholes and trip-and-fall hazards.Imagine a church with a 30-year-old roof in late December. Inevitably, it seems, that roof will leak right before the Christmas Eve service. The result is an unnecessary waste of time, talent and treasure.Capital planning means:• Knowing when the roof will reach the end of its useful life, and• Setting aside the right amount of money to offset the accumulated

roof deterioration.

The reward for being proactive is being in a position to replace the roof before it fails.

Planning to replace a roof when the weather is right; obtaining a professionally specified replacement system to include all appropriate water-proofing details; having time to review a set of competitive bids; and, ultimately, scheduling the work around worship, meeting and other activities held on-site will result in the most efficient use of time, talent and treasure, along with the least amount of disruption to the day-to-day life of the church.

What exactly is a capital plan?A capital plan is a vital tool that will improve stewardship of your

church’s physical assets. A professionally prepared capital plan will be customized to your facility and contain three key results.

1) Component listThe component list serves as the foundation of every capital plan. It outlines the scope and schedule of all major, predictable repair and replacement projects. Some of the most influential items might include roofing, painting, asphalt, flooring, HVAC systems and restrooms.

2) Reserve fund strengthThe reserve fund strength is a calculation that compares how much money

has already been set aside “in reserve” to the capital asset deterioration that has already occurred.

% Funded = Reserves ($) .Accumulated capital asset deterioration ($)

Capital plan results

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PROACTIVE & PENNY WISEExamining repairs and replacements for houses of worshipBy Matthew C. Swain, RS

We know a few things about the future: 1) that it will come, and 2) it probably won’t be exactly what we expect.

In this spirit, we counsel our house-of-worship clients to be proactive by preparing for the repair and replacement expenses that are both inevitable and predictable. But, we also counsel them to be wise.

When your capital plan shows a component has reached the end of its “useful life,” it should simply be replaced — right? Not necessarily.

A “leaking” roof has clearly failed and requires immediate attention. But, what about those outdated restrooms which are still quite functional?

Should we postpone repairs to a cracking parking lot, or should we schedule to resurface it right away?

Let’s begin by reviewing some basic concepts A church needs to know the condition of its major capital assets

to wisely and cost-effectively budget for their eventual replacement. This foundational information is communicated in the Capital Plan’s Component List. The “scope” of a project is communicated by the project’s Description and Replacement Cost ($).

In the example below, it’s easy to see that the scope of work for sealing the asphalt ($8,000) is significantly less than resurfacing ($150,000).

The “schedule” of repairs is communicated by a combination of Useful Life (UL) and Remaining Useful Life (RUL). The UL is an estimate — measured in years — of how long the component was designed to fulfill its intended function. The RUL is an estimate — also measured in years — of how much longer the component will perform its intended function.

As time passes, the RUL of each component naturally decreases. Since outside factors (such as the quality of materials, workmanship, weather conditions and preventative maintenance) can all have mitigating effects on RUL, the rate of the decrease might or might not correspond to the number of passing years.

However, we can clearly define an item with a Remaining Useful Life of “zero” years as having reached the end of its Useful Life.

The Capital Plan also serves as the church’s cash flow management plan, crafted to provide funding that allows for “timely” repairs and replacements. “Timeliness” in a Capital Plan means making a repair or replacement within the year when a component’s RUL reaches “zero” years.

The end of a component’s Useful Life (UL): 3 failure categoriesThere are three general ways components reach the end of their Useful

Life (UL). Understanding these differences will help you make a wise and appropriate decision about executing the project in a “timely” manner, per the Capital Plan schedule, or — wisely — deciding to wait.

#1: Catastrophic failuresThis category includes components whose intended function is

essential to the health, safety or comfort of people. Boilers, fire alarms and AC systems might — based on observed age and deterioration — have reached the end of their Useful Lives, but could still be serving their intended functions.

However, they could fail “at any time” and cause significant expense, disruption or liability exposure. As such, it is wise to make repairs and replacements in a “timely” manner, as opposed to waiting for a catastrophic failure to occur.

#2: Slow, gradual failuresAsphalt, paint, fencing and roofs fall into this category. The component

might be at the end of its Useful Life but still be serving its intended function due to mild weather, low use, enhanced maintenance, or simply good fortune. There might be an opportunity to delay this repair project, on the condition of annual inspections and re-evaluation.

However, in the case of wood painting and asphalt seal coating — where the repairs or replacements protect the underlying construction material — “timely” repairs are essential! Delays in these cases might void a warranty or cause significantly increased future repair or replacement expenses.

#3: Obsolescence Components facing technological or aesthetic obsolescence have Useful

Lives that outlast their “value.” The shag carpet in the fellowship hall, the dated appearance of the elevator interior, and the ancient message board with press-on lettering are good examples. Even though the RUL might have reached zero, waiting for the component to actually fail has little consequence. People can survive a week, months or years until the item is repaired or replaced.

However, while the church can generally postpone these types of repairs after the RUL has reached zero, deferring indefinitely is usually not in the best interests of any organization that wants to remain relevant in the eyes of its members, and wants to be appealing to visitors.

Everyone loves saving money, cutting back, and reducing expenses. However, sometimes there is a tendency to focus on the wrong things, which makes it easy to neglect the larger picture.

Understanding the different ways a component serves the mission of the church — and the implications of its eventual failure — helps church staff make wise decisions. It is crucial for a church to be aware of all the components in its Capital Plan that have reached the end of their Remaining Useful Lives and make wise, informed decisions about when (or when not) to embark on the repair or replacement project.

Matthew Swain, RS, is Worship Facilities Specialist at Calabasas, CA-based Association Reserves. [ www.ARCapitalPlans.com ] He is a certified Reserve Specialist and has been preparing capital plans for non-profit organizations across the country for more than a decade. Swain currently serves as the national representative for AR Capital Plan’s worship facility clients.