Funding the Local Church: Borrowing for Building with Bonds

No church project I have been involved with has failed when the church followed my conservative guidelines.

Now state and federal regulations have added more registry controls that further safeguard the churches and the investors.

Why do churches borrow with bonds for building?

a. Long-term fixed interest rates are possible with bonds, while most banks offer variable or adjustable rates with balloon balances. The fixed interest rate removes the uncertainty of having to refinance at a higher rate of interest and additional fees when the balloon comes due.

b. Bonds provide the opportunity for members to earn a higher return on their investments than banks pay on certificates of deposit. To the extent that bonds are purchased by the membership of the church, the interest is retained by the church members.

c. A graduated payment schedule is an option. The loan payment can begin low and increase as church membership and giving increase. But the graduated payment schedule would pay all interest and principal within the specified period for loan maturity without a balloon.

d. There is an open-ended deed of trust for future expansion loans. Unlike most conventional loans, if interest rates go up in the future and additional borrowing is needed, refinancing lower interest loans is not required.

e. The need for a construction loan is eliminated. Bond proceeds serve as both the construction loan and permanent loan.

f. The membership can participate in the church’s loan—another encouragement to commitment, service, awareness of the church’s stewardship needs, and unity of the church body.

What types of bonds are utilized?

a. Simple interest bonds provide income to the investor at stated intervals until bond maturity.

b. Compound interest bonds produce growth for the investor to maturity.

What other features are true of church bonds?
a. Registered. The securities agency procures all required federal and state registry of the bond issue.

b. Security. The bonds are secured by a first mortgage, general mortgage, or
general obligation.

c. Negotiable. The investor may sell his holdings prior to maturity.

d. Collateral. Most banks will honor the bonds as loan collateral.

e. Callable. The church may redeem the bonds prior to maturity for prepayment.

f. Increments. Bonds are usually sold in increments of $250, giving nearly everyone the opportunity to participate.

g. Individual Retirement Accounts can now be funded with church bonds. Present IRAs can be transferred into a self-directed IRA that will allow the owner to choose how his money is invested to maximize the return on IRA contributions.

What is a typical procedure for a fully directed bond program?

a. The congregation votes to engage a consultant and firm for the program.

b. The church bond committee meets with the company consultant to plan and organize.

c. The consultant works with the paying agent, trustee, registrar, transfer agent, escrow agent, church attorney, church trustees, and other church personnel.

d. General publicity begins.

e. The bond firm conducts an IRA/bond information seminar at the church.

f. Information/instruction letters are sent to selected personnel.

g. A pictorial announcement brochure is printed and provided to each church family.

h. Bond sales “kick off” Sunday includes training for selected church bond counselors who will participate in the “best efforts” marketing.

i. The formal sale of the bonds begins under the full-time direction of the consultant.

j. Victory Sunday is announced. Any unsold bonds may be brokered outside the sphere of church contacts.