January 2014 IC Report to the Board of Trustees
Potential Borrowing to Support the Third Century Challenge (TCC)
Request by the Board of Trustees The Investment Committee was requested by the Board in January 2012 to advise the Executive Team on cash flow management throughout the campaign and identify potential short-term bridge financing and to analyze different scenarios for long-term borrowing to provide additional funding over and above the pledges received to support the TCC. The IC was requested to report back to the Board in April and July 2012 on its progress. After due analysis the IC reported back to the Board and recommended commercial bank borrowing for both the bridge financing and long-term borrowing. Subsequently in April 2013 the Church membership approved short term construction borrowing of up to $5.5 million and long term borrowing up to $1.5 million.
Potential Lenders The Investment Committee approached three banks with a positive track record in funding church construction projects as well as the Industrial Bank of Washington (IBW) which is the church’s main bank. The IBW did not have the capacity to provide the short term construction financing needed or a long term loan of $1.5 million.
Preferred Potential Lender Phyllis Caldwell has led the process with potential lenders. Following extensive contact with the four banks including presentations by two of them, the Investment Committee recommended and the Board accepted First Virginia Community Bank (FVCB) as the preferred potential lender. FVCB was selected as the preferred potential lender because of a very high level of responsiveness to the Church’s enquiry and because they demonstrated the most flexibility to tailor a loan to the church’s needs in particular regarding the timing of moving from the short term construction financing to the longer term loan and the length of the loan. It is expected that the loan would be signed sometime this spring or summer. The Executive Director is presently preparing and providing the financial documentation needed for FVCB to approve the loan. FVCB also requires to receive and approve the Project Budget and the draft Construction Contract before it is signed.
Loan Terms: FVCB are offering the following loan terms
- Loan Amount – up to $5.5 million during construction period to be paid down to$2.5 million after two years (spring/summer 2016 depending on loan signing).
- Interest Rate – about 4.75% p.a., depending on Treasury Bill Rate when the rate is locked in. The rate will befixed for the life of the loan at the ten-year Treasury Bond rate plus 1.73% which results in a rate of about 4.75% p.a. at present.
- Loan Term – 12 years FCVB were willing to offer 12 years which was longer than expected and contributed to the attractiveness of FVCB
- Annual payments would be ~$94,000 per year starting in Spring 2017, assuming 100% pledge fulfillment reduces long-term principal to $1.5 million and the fixed rate is locked at 4.75%. The loan payments would be based on a thirty year amortization. If only principal and interest payments are made on this loan (with no principal curtailment through bequests or other fundraising), the amount outstanding after 12 years (Spring 2026) would be about $1.24 million. At that point, the which would require refinancing.
Possible Alternative FCVB have indicated that they would be willing to consider an alternative of two separate loans. One loan would be a lower variable rate two year short term construction loan which would need to be paid off at the end of two years (summer 2016). The other loan would be twelve year loan at the same terms as outlined above. This option offers some potential savings possibly as high as $60,000. There are two concerns here. First, is how to split $5.5 million borrowing between the two loans. The higher the short term construction loan the greater the potential interest savings. But, the higher the loan, the greater the risk of the church not having the funds needed to pay off the loan in two years. Second, is the added work of managing two loans including how to balance the use of pledges and loan funding and calculating two monthly interest charges. The Investment Committee will undertake further analysis of this alternative and if the Committee reaches the point to consider it preferable it will inform the Board of Trustees accordingly.
Risks – Pledge Fulfillment. Bob Bonner is working closely with Laurie Lester and Taryn Nall of the TCC that is seeking complete pledge fulfillment. On the one hand there is a need to try and make sure that all pledges are fulfilled – although 100% fulfillment of all pledges is not typical. Present expectations are that the shortfall in pledge fulfillment could be broadly in the range of 3-10% with a likely maximal shortfall of 6%-8%. The Investment Committee is working on financial projections to see the financial impact of pledge shortfalls within this range. Bob and Chuck Dulaney are developing a comprehensive and reliable monitoring system tracking fulfillment of 619 TCC pledges with along with associated annual giving pledges. For example, if Laurie and Taryn succeed in getting earlier payment of pledges construction borrowing and interest payments will be lower than currently predicted.
Cash Flow Management and Risk of a Possible Funding Gap While everyone trusts that there will be sufficient funding for construction expenditures, there is a risk that a gap could arise because of under fulfillment of pledges or higher than planned construction costs. As a matter of prudence, the Investment Committee suggests that the BoT have in place by the time the loan is signed a process and designated authority to track unexpected changes in cash inflow from TCC pledge fulfillment and cash outflow from construction costs. This should help provide for an early warning if things should start to get off track and such a gap were likely to arise.
Decision-Making Authority in the Event of a Funding Gap Given the large size of the cash swings that require the up to $5.5.million construction loan limit, the BoT should carefully consider in advance how they will proceed with decision-making on whether to modify scope of the project during construction if a funding gap larger than some threshold occurs.