Real Estate

“There is a time for everything, and a season for every activity under the heavens – even your HVAC System” (NCP paraphrase version of Ecclesiastes 3:1).

All parts of your church have a useful life. When the HVAC system breaks or the roof starts to leak or the church van breaks down, it is not a surprise; it is the natural cycle of things. In Part 1 of this series, we discussed the importance of routine maintenance. In this second part we will talk about establishing capital reserve to help your church to save for replacing capital items that reach the end of their useful life.

Routine/preventative maintenance will extend the useful life of a capital item, but you still need to plan for replacement costs. National Covenant Properties (“NCP”) is always willing to provide loans to churches for capital improvements or system upgrades. But there is a simple truth: It is less expensive to use your own funds than to borrow from NCP.

The first step in establishing a capital reserve is to get a baseline condition for your current systems and their anticipated useful life. If you are doing routine maintenance on items such as your HVAC system, you can ask your provider for an estimate of the useful life of the system. For other items, such as your roof, you may need to have a professional inspection done to determine its condition. You can also engage a company to do a Property Condition Assessment (“PCA”), which will evaluate the condition of your building, estimate useful life and will provide you with a capital reserve Schedule, which we will discuss more later.

The second step is addressing any deferred maintenance items. If you have not been making minor repairs or periodic upgrades with the goal of extending the useful life of these items, you should undertake those now. Another way to think of it is that a $1 dollar spent today on deferred maintenance will save or at least delay the spending of $4 on capital renewal in the future.

The third step is establishing a capital reserve Schedule which will:

• List all the capital items for the church;
• Estimate the useful life of each item;
• Anticipate their current replacement cost;
• Apply an annual inflation rate;
• Calculate how much you will have to save each year to ensure you have cash on hand to replace that item when it reaches the end of its useful life.

The fourth step is using the capital reserve schedule to budget an annual contribution to your capital reserve. This budget line item should be in addition to what you already budget for routine maintenance and minor repairs. Your board or leadership team should then designate these reserve funds only to be used for capital replacement or major repairs. The Capital Reserve Schedule also helps you to anticipate when you will need to draw from the Capital Reserve.

Many churches put their Capital Reserve in investments offered by NCP such as a Demand Investment Certificate or one of NCP’s term investments (12-month, 30-month and 5-year). Investing the capital reserve with NCP separates the funds from your local accounts, and NCP’s investments are just as accessible as your local savings accounts.

Church buildings are tools for ministry and an asset that needs to be preserved and cared for. The NCP Real Estate Services division can work with you to identify what you should be listing on your capital reserve Schedule as well as help you to locate a company to do a PCA for you. We can also share a simple spreadsheet that can be used to build your own capital reserve Schedule. NCP exists to serve all Covenant churches, not just those who have loans with NCP; do not hesitate to reach out to us for facility coaching. We would appreciate the opportunity to serve you with your building needs.