Bond Programs Explained
A bond program is a financial vehicle by which a church or non-profit organization can construct a new facility to house its ministry, can expand its current facility, can renovate its current facility, can purchase an existing facility, or refinance its current indebtedness.
A bond program utilizes church bonds to accomplish the church’s capital needs. Church bonds are debt securities or other evidences of indebtedness of the church which obligate the church to repay a stated principal amount and to pay interest to investors. The bonds are typically issued in series with various specified maturity dates and interest rates. A disclosure document, the prospectus, provides investors with material information about the church and its offering of church bonds.
A bond program allows church members, family members, and friends of the church to invest in the capital expansion of the church with funds that cannot be given to the church but can be loaned for a specific amount of time. Church bonds generally pay more interest than some other investment vehicles so that the investment benefits both the church and the investor.
A bond program is conducted by the financial institution underwriting the bond issue. A registered representative of that firm informs the potential investor as to what a bond is, how it works, what bonds are available for investment, what backs the investment, how the investment is repaid, and how much the investment will earn. This process is not the responsibility of the church but of the underwriting financial institution.
Similar to church mortgages a bond program allows the church to obtain a long-term, fixed-rate interest rate on its loan from the bondholders. A bond issue can be obtained for up to 25 years.
A bond program allows the investor to obtain an investment of six-months up to twenty-five years depending on the investor’s financial need. There are maturity periods every six months over the life of the bond issue.
A bond program pays a competitive interest rate in today’s current economy. The longer an investor waits for his principal to be returned, the more interest the investor will earn. The bonds are, however, subject to early redemption by the church, and investors have no right to require the church to redeem any bond before maturity.
A bond program provides two investment choices in bonds. A compound interest bond allows the interest to compound every six months until maturity. The investor receives no interest until the bond matures (or upon early redemption), at which time the principal and accrued interest are paid to the investor. A simple interest bond allows the interest to be paid each six months until maturity or early redemption, when the last six-month interest and the entire principal are paid.
A bond program is secured by a first mortgage lien on the church’s property and building(s). It is much like a mortgage on a person’s home. The character of the pastor and leadership, the cash flow of the church, and the collateral value of the church’s facility are the strengths of the bonds that the investors purchase.
Certain risks are associated with investment in church bond offerings. Potential investors should carefully consider the risk factors as set forth in the prospectus for the offering. Outlined below are certain selected risks associated with church bond offerings in general:
- The issuer (the church) is dependent on voluntary contributions for its operation and for payment of the principal and interest of the bonds of the offering. There is no assurance such contributions will increase or remain stable. Failure to achieve an anticipated amount of contributions could adversely affect the issuer’s abililty to repay the bonds.
- Properties that serve as collateral for church bond offerings are for the most part special purpose facilities for which there may be a very limited market. There is no assurance such properties can be sold for stated values.
- If the offering involves the construction of new facilities and such facilities are not completed as anticipated, the value of the property that serves as collateral for the bonds could be adversely affected as well as the issuer’s ability to repay the bonds.
- There is no secondary market for the bonds nor are the bonds rated by any nationally-recorgnized statistical rating organization.
- The bonds are subject to early redemption by the issuer. Investors have no right to require the issuer to redeem any bond before maturity.
- The issuer’s senior minister/pastor typically serves a significant role in the leadership, management, growth, and viability of the issuer as a church, and the loss of such person’s services could have a material adverse affect on the issuer’s ability to repay the bonds.
- There are no income tax benefits upon the purchase of the bonds.
- When bonds are sold on a best efforts basis, there is no assurance all bonds of the offering can be sold and all purposes of the offering completed in full.
There are other risks to be considered that are more fully described in the prospectus for the offering. Investors should read the prospectus carefully before investing and consider any potential investment based upon their individual financial situation, investment objective, and risk tolerance.
A bond program is a viable financing vehicle for churches and non-profit organizations.