There was a time, not that many years ago, when churches were every commercial loan officer’s dream come true. Flush with cash and regarded as an integral part of the community, churches were like Ma Bell — regarded as a ridiculously safe investment, and one where banks had very few questions that even needed to be asked when a loan application came across the desk.
These days, Ma Bell is dead, killed off by her greedy progeny. As a result, telecoms is a very different market environment, with much higher levels of risk. And so it is with churches, where declining attendance and giving, a dwindling role for churches in the community, and a rising tide of foreclosures makes even the most generous loan officer review church loan applications with a jaundiced eye. This, in a commercial loan market that does not have the benefit of Fannie and Freddie lurking behind the curtain.
Into this mix comes Grace Church, poster child of dysfunctional church governance and inept management, looking for more than $500,000 in loan proceeds to get the HVAC back on in the complex. My assessment: It’s going to be an uphill slog for the church, and any commercial loan it might get likely will not be on favorable terms. Here’s why:
Looking first at the numbers, things appear daunting. Since 2014, the church has shed more than 120 pledging units, and we are seeing a sustained drop in Sunday attendance, with no plan in place to address either. Troubling signs to be sure, but not dispositive.
Things then turn to free cash flow, or source of repayment, where things don’t look good either. The church is running a deficit, despite the loss of one full-time exempt employee and the related costs of her compensation. True, December is often a lucrative month for the parish, marked by generous gifts of appreciated stock, but not all income is created equal, and a competent loan officer will ask the question, “What if those year-end gifts don’t happen?” Either way, the church will have difficulty showing how it can cover monthly loan payments. Even a commercial loan with a balloon payment at the end — a hazardous proposition, indeed, in light of rising interest rates and inflation — would require demonstrated ability to cover more than $5K a month in payments.
Banks also will look at unrestricted cash reserves, which in Gracespeak, means funds other than those held for others. (Contrary to Bob Malm’s statements in prior vestry meetings, restricted solicitations, such as those for the columbarium or altar flowers, cannot be repurposed without the express consent of the donor. To do otherwise is to commit fraud.) In this space, the target is to show that the church has enough funds on hand to cover 90 days of operating expenses; in Grace’s case, this would be $250,000. Needless to say, the church has nowhere close to those funds, but rather is periously low on cash reserves. Nor is the Trust a solution: much of the 4 percent maximum draw has already been spent on the HVAC project, and with maintenance and repair already seriously underfunded from income, there’s not much free cash.
Liquidity becomes even more pressing an issue when the church looks at the need to deal with myriad other capital expenses, including:
- Repaving the parking lot.
- Replacing energy inefficient outdoor lighting fixtures.
- Replacing failed double-pane windows.
- Addressing accessibility issues.
- Replacing the failing new narthex roof, now beyond actuarial life expectancy.
- Restoring the stained glass.
- Replacing rotting wood trim and rake boards.
- Addressing interior finish that is at end of life.
Keep in mind, too, that when depreciation and amortization are factored in, Grace Church has been running a deficit for many, many years.
Other factors also are problematic. For example, the church is not incorporated, meaning that members, including clergy, can be individually liable, both in tort and in contract. That’s not good, given the church’s penchant for imagining terrorists behind every blog post out there, as well as its propensity for trying to drag its former members into court. Nor are loan officers likely to look with favor on a prospect that claims to be the target of “domestic terrorism,” for this injects risk into an already difficult equation.
Similarly, according to the vestry’s own minutes, church management has been slipshod at best. For example, when Beth Calaman came on board, the vestry’s minutes reflected the fact that financial reporting was problematic going back at least three years. That raises the question: Why was this allowed to happen in the first place? Similarly, BB&T has repeatedly complained about discrepancies in the church’s bank deposits, but there is no evidence, prior to Beth coming on board, that the church took this issue seriously.
Banks also look at whether a church adheres to its bylaws and canons. Here, Grace Church has issues, given that Bob Malm chooses the executive committee, in violation of church canons, which require that the vestry elect its officers. (As I have said many times, an up/down vote for a single slate of candidates only counts as an election in Cuba, and these days, not even there.) Moreover, to the extent they are aware of it, banks, which are subject to the anti-retaliation priovisions of Sarbanes-Oxley and Gramm-Rudman, are likely to regard Bob Malm’s unilateral efforts at retaliation, as well as his purported authority to unilaterally remove parish officers, with a jaundiced eye. That is all the more the case when these behaviors occur in conjunction with allegations of harassment, as happened in my case.
Nor is the lack of annual audits helpful, or the inferior internal controls. During most of Dysfunctional Bob’s reign, the church hasn’t even been in compliance with the denominational requirement of a current finance manual. Even potential major expenditures, such as the restoration of the stained glass windows, demonstrate a lack of institutional memory; it is well-documented that the windows were examined by Willet-Hauser in 2014, and restoration and repair discussed at that time.
Of course, hand-in-hand with the lack of institutional memory is the church’s feckless approach to budgeting. Every year, it’s another bit of fun and games. One year, rosy predictions on the income side; next year, it’s optimistic predictions that expenses will suddenly decrease. The reality, however, is that the building is more than 70 years old, in some cases very poorly maintained, and with virtually every major infrastructure component at or beyond actuarial end of life. That’s why I shake my head and roll my eyes when people say that the surge in HVAC repairs was unexpected, or that this year’s deficit is caused by the numbers used in the current budget. The latter certainly is true, but it misses the key point, which is that the numbers in the current budget were never realistic, and there have been ample prior warnings to all involved that this was the case.
Then there’s the issue of transparency. Essential in building donor confidence, Grace Church makes far too many of its decisions either at the executive committee, or via Dysfunctional Bob. Vestry members, when was the last time you saw financials with a line-by-line breakdown, for example, of compensation? When was the last time you published financial information on the website? Why can’t the church track donor restrictions on designated offerings? How many of you knew that, in 2014, Bob Malm owed the church $200K, and that the church wrote off $100K of those funds? Parishioners, how many of you knew that the church gave Bob Malm a $100K bonus?
Same for efforts to shift health care insurance premiums back to employees. While some cost sharing is a best practice in benefits management, diocesan policy forbids shifting all costs to employees. And even if this were possible, this sort of regressive internal tax, where poorly compensated employees pay a higher percentage of their earnings for insurance, is unethical. Nor should vestry members be unduly optimistic about next year’s premiums—given the aging demographics of senior clergy throughout The Episcopal Church, it’s a safe bet that costs will continue to escalate sharply.
At the same time, the church has made no effort to save for the future. Years ago, the fig leaf of $5000 a year, or one-half of one percent of gross revenue, being set aside for capital repairs was abandoned, and the church has been drawing on management reserves for ridiculous things, such as Chris Byrnes’ retirement party. Sorry, kids, paying for parties from savings is stupid.
Similarly, the good times continue to roll with the upcoming gala to celebrate the church’s time on Russell Road and more. These are drains on the financial ability of church members to support the parish at a time when they already are stretched thin trying to cover the loss of 120 pledging units, and things are about to get much worse. Even if the church goes for a loan from the school, or borrows against the trust fund, there is reason to conclude that the church’s finances will continue to decline in light of the church’s aging demographics and the fact that Dysfunctional Bob must, as a matter of canon law, fly the coop in less than 5 years. Such a change invariably spells declining attendance and revenue, and all the more so when we’re talking about a rector who has been around since the late 1980’s. They may not have been good years in terms of growth, the quality of management, or the quality or extent of pastoral care, but still, Dysfunctional Bob is the status quo, and it’s a given that churchgoers don’t like change.
On top of everything, banks are suprisingly sensitive to reputational issues, so the wave of negative publicity that Bob Malm has engendered for the church in recent years, including his effort to drag a dying woman into court, probably doesn’t help matters much. Banks increasingly tend towards relationship banking, and wanting to work with people they know and trust, and Bob’s antics don’t do much to inspire the latter, no matter how you parse things. And let’s not kid ourselves: The first thing any good loan officer does is to Google a loan prospect in order to get the lay of the land. Sugarland, here we come!
In short, Grace Church is a hot mess, and there’s very little sign that Dysfunctional Bob, the vestry, or the diocese recognizes the depth and breadth of the problems the church faces. All of this will factor into the decisions banks will make when it comes to reviewing loan applications from the parish.
Below is an excellent article discussing the requirements facing churches when they apply for a commercial loan: