A church bond is a certificate of indebtedness (I.O.U.) or a note that serves as proof of debt. The borrower is the church, and the lender is the bond buyer. Investors who purchase bonds are lending money to the church for a set period of time at a set interest rate. The bonds are designed to pay investors the full amount of money they originally financed the church, plus interest, when the bond ends, or “matures,” at the set agreed date. A mortgage on the church property is generally used to secure bonds. In other words, the church property is pledged as collateral for the loan so that if something goes wrong and the church is unable to make its debt payments, investors will be protected.
Investors typically have two options when investing in church bonds: simple-interest bonds and compound-interest bonds.
- Investors receive interest from simple-interest bonds on a regular basis. An investor would anticipate to get an interest check every six months or once a year, for example.
- When a compound-interest bond matures, the interest accrues and is returned to the holder together with the principle.
Yes, church bonds are classified as a security and are controlled by state security agencies, which examine the bond offering to ensure that it complies with certain requirements. Each bond offering should meet the most stringent qualification standards in order to protect investors’ interests first and foremost. For the length of the bond issuance, churches must get liability, title, and casualty insurance on the church facility.
- Financials – The church must reveal its income and expense reports to ensure that it has enough money to pay off its debts. Having an accountant usually a certified public accountant prepare income/expense statements and balance sheets for up to three years is usually a good idea for the church.
- A church can normally borrow up to three times its unrestricted income through bond financing. Unrestricted income is money that isn’t set aside for a certain purpose, such as missions contributions or birthday gifts.
- The church must determine the value of the collateral it is pledging. Most companies that work with church bonds will demand an assessment from an MAI or a state-certified appraiser.
- Furthermore, the church will very certainly be obliged to have an attorney review its Articles of Incorporation, Constitution, by-laws, and other legal documents to ensure that everything is in order.
How do you go about purchasing church bonds?
Bonds can be purchased through your broker-dealer and are kept track of and documented at GoldStar. Church bonds with maturities ranging from 6 months to 30 years can be purchased for as little as $250 (depending on the broker-dealer).
Are church bonds exempt from taxes?
ABC Prep School is a K-8 private school owned and operated by a secular nonprofit organization. The school has 200 kids, modern facilities, a dedicated faculty, involved and wealthy parents, and a well-connected board of trustees. The school provides a diverse curriculum, as well as after-school activities and athletic teams. ABC is around a mile away from XYZ Religious School. It, too, is a non-profit that runs a school with 200 students. It has a faculty, board, and parents who are all equally committed. XYZ fields athletic teams that compete against ABC’s rivals. Similar high school preparatory courses are available.
The XYZ school, on the other hand, has a significant religious component, which sets it apart from the other institutions. At XYZ, students and faculty are chosen in part based on their religious beliefs; classes begin with a prayer; students are required to take a Bible study class and attend daily religious services at the on-campus chapel; all members of the board of trustees are leaders of the church with which the school is affiliated; teachers have no academic freedom protections; and the school’s stated mission includes teaching religion and assisting students in their spiritual development.
Both ABC and XYZ have 30 acres of land next to their campuses on which they want to establish a high school. ABC’s board of trustees decides that the most appealing financing for the high school is a “The transaction is known as a “tax-exempt bond.” The trustees move on to other matters after passing a resolution on the finance. One of the trustees reports at the XYZ meeting down the road that tax-exempt bonds would offer XYZ the lowest interest rate of all the financing possibilities. XYZ’s lawyer, on the other hand, wonders aloud whether the school is merely a ruse “Because of the First Amendment’s clauses respecting separation of church and state, they are “too religious” to be used.
XYZ may have had to use more expensive conventional finance at one point. However, recent Supreme Court judgments, as well as those of other federal and state courts, imply that XYZ should look into the First Amendment difficulties to see if they may get tax-exempt bonds. The merits of tax-exempt bonds as a financing method are discussed in this article, as well as the current condition of the law regarding the issue of such bonds for religiously affiliated businesses.
What is tax-exempt bond financing?
A local government institution, usually a development authority, issues bonds to finance facilities for a private group in a standard tax-exempt bond transaction. The bonds are purchased by investors, and the funds are used by the development authority to make a loan to the organization or to acquire facilities for the charity to lease. The nonprofit promises to make payments in sufficient amounts to cover bond debt service. The fundamental advantage of tax-exempt bond financing is that the nonprofit borrower pays reduced interest rates. The bonds issued by the authority for the benefit of 501(c)(3) organizations may be tax-exempt, and the lower interest rates are passed on to the nonprofit borrower. Interest on these bonds is normally free from income taxation in the state where they are issued. Nonprofit organizations can direct their fundraising activities into endowment and other projects, as well as debt reduction, using capital facilities financed by low-interest, long-term bonds. For nonprofit organizations without a religious component, such as the ABC Prep School, tax-exempt bond financing is well established.
Tax-Exempt Bonds for Religious Organizations
If the transaction is correctly structured, a nonprofit organization eligible under Section 501(c)(3) of the Internal Revenue Code may employ tax-exempt bond financing for any capital assets it acquires and uses for charitable or educational purposes. 1 When considering a bond issue for a school like XYZ Religious School, however, federal constitutional law, as well as state and local law, must be examined to see if the financing is legal.
Constitutional Considerations
The United States Constitution states that Congress may not pass any legislation that establishes a religion. 2 The United States Supreme Court devised a three-part test in Lemon v. Kurtzman3 in 1971 to determine whether state aid to religious institutions violated the Establishment Clause: first, the legislation authorizing the aid must have a secular purpose; second, the primary effect of the statute cannot be the advancement of religion; and third, the statute may not lead to excessive entanglement between government and religion. 4 Only once has the Supreme Court expressly explored whether bond financing for religious schools is a form of state aid that violates the Establishment Clause. The Supreme Court applied the Lemon test to a bond transaction in Hunt v. McNair5, in which a South Carolina public body sold revenue bonds to support a Baptist school. The Court determined that the relevant legislation had a secular aim by permitting bonds to be issued for all institutions of higher learning in the state. The Court applied the “pervasively sectarian” criteria to the advancement prong of the Lemon test:
Aid is typically believed to have a primary effect of spreading religion when it flows to an organization where religion is so entrenched that a significant percentage of its activities are subsumed in the religious mission, or when it funds a specifically religious activity in a largely secular society.
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The Court looked at things including religious qualifications of professors and students, enforced attendance at religious services, and academic freedom before ruling that the institution was not overtly sectarian.
As a result, the Court did not interfere with the bonds that had already been issued.
Later Supreme Court rulings, according to some commentators, have weakened the “pervasively sectarian” criteria.
7 The standard, on the other hand, has never been overruled by a majority of the Supreme Court. The Sixth Circuit has considered two issues involving the issuance of tax-exempt bonds for religious schools in the last three years. The first instance, Johnson v. Economic Development Corp.8, ruled that the school in question was sectarian, but not pervasively so, and allowed the financing to proceed.
Steele v. Industrial Development Board9, a subsequent Sixth Circuit case, held that, notwithstanding the fact that the school in question was a pervasively sectarian institution, the indirect character of the funding washed away any constitutional issues. A bond was provided by the Tennessee Industrial Development Board to help David Lipscomb University with a substantial campus redevelopment. The bonds, according to taxpayers, violated the Constitution’s Establishment Clause. The lower court agreed with the taxpayers, ruling that the University was deeply sectarian and that the help it received was illegal. On appeal, the Sixth Circuit overturned the decision. In light of recent Supreme Court decisions, the Court questioned the “pervasively sectarian” test’s viability. 10 Most importantly, the Court was able to get over the “persistently sectarian” criteria. Even if the University was deeply sectarian, the Court decided that the tax-exempt bonds gave only a limited type of assistance, “analogous to an indirect financial advantage granted by a religiously neutral tax or charitable deduction.” 11 The Industrial Development Board did not supply any tax monies, as is customary in such bond offerings, and the University, not the Board, was responsible for bond payments. The transaction was financed by private investors. The transaction did not imply that the University was endorsed by the state. Rather, the Industrial Development Bond served as a channel for general economic development by issuing bonds on a nonreligious basis for the benefit of both religious and nonreligious businesses. “The Board no more approved Lipscomb University in issuing industrial revenue bonds than it did Wal-Mart,” the Court wrote. 12
The case was not taken up by the Supreme Court on appeal. While it’s easy to read this as an implicit affirmation of the Sixth Circuit’s decision, the application of the “pervasively sectarian” criteria to tax-exempt bond issuance remains a source of constitutional difficulty. No other circuit court of appeals has had to rule on a tax-exempt organization.
State and Local Law Considerations
In addition to the federal constitutional limits, state constitutions may put further restrictions on tax-exempt bonds issued for religious groups. Such clauses must be carefully scrutinized. The State of Georgia’s Constitution, for example, contains a section titled “Church and State Separation,” which reads:
No funds from the public purse shall ever be used, directly or indirectly, to support any church, sect, cult, or religious denomination, or any sectarian institution.
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This rule should not be considered to put additional constraints on bonds issued for religious institutions in Georgia because no public money are involved in the regular bond transaction. While the exemption from Georgia state income tax on these bonds results in lower tax collection for the government, no payments go from the government to the borrower.
The ostensibly “A bond issuer’s “enabling law” may also limit the types of projects for which the company can issue bonds. Most of the time, these laws are enacted to promote development in a neutral manner, regardless of the type of the recipient. A nonprofit entity may be able to pick between two or more bond issuers in some cases, and its enabling legislation should be evaluated to choose the best issuer.
Role of Bond Counsel
Nationally known bond counsel should be retained in a tax-exempt bond transaction. Bond counsel is responsible for evaluating municipal and state laws, as well as federal tax and constitutional law, in order to provide a legal opinion that the bonds were properly approved and issued, and that the bonds’ interest is tax-free. Due to the threat of the “pervasively sectarian” test, bond counsel will usually wish to learn as much as possible about a religious institution seeking bond funding. The “pervasively sectarian” test is based on the premise that a school’s secular and religious duties are so linked that they can’t be separated. This is not the situation in many religious schools. Although a school’s governance structure and curriculum are generally secular, it may have an adjacent chapel or other religious edifice on campus. Alternatively, a school may have designated classrooms for religious instruction. Bond counsel may be able to assign tax-exempt bond profits to secular structures and classrooms, while religious space, such as a chapel, is funded by gifts, the school’s own finances, taxable bonds, or other conventional financing. Only funding secular assets adds an extra layer of defense against any Establishment Clause claim.
For many religious schools, such as XYZ Religious School, the distinction between secular and religious is more difficult to draw.
Following the Steele decision, even widely religious schools under the Sixth Circuit’s jurisdiction (Tennessee, Michigan, Ohio, and Kentucky) should be allowed to acquire tax-exempt financing if no state or municipal barriers exist. Based on recent positive court opinions, some bond counsel in other jurisdictions may believe that financing pervasively religious institutions is appropriate. Others may argue that Hunt is still sound law, doing the typical “persistently sectarian” examination and erring on the side of prudence until the constitutional waters have cleared.
Legal Challenges
First Amendment groups analyze religious borrowers’ bonds from time to time, and they may be more likely to be challenged in court. If this is the case, even if the lawsuit is finally determined favorably, the huge cost savings of tax-exempt funding may be reduced or eliminated entirely. A lawsuit can be filed before or after bonds are issued, and the remedies sought in a case can differ. A lawsuit filed prior to the issuance of bonds will almost certainly seek to prevent them from being issued. A lawsuit brought after the event may seek to invalidate the bonds. The plaintiffs in the Steele case sought a permanent injunction against the Industrial Development Board, which the district court granted, prohibiting the Board from issuing any new bonds on behalf of any other “pervasively sectarian” entity. 14
Careful Analysis Still Required
Religiously affiliated organizations, such as the XYZ Religious School, should not rule out the possibility of using tax-exempt bonds to fund capital improvements. Bond counsel that is knowledgeable with state and constitutional problems can help. By failing to accept the Steele case on appeal, the Supreme Court squandered a chance to give much-needed clarity in the tax-exempt bond industry. However, the current Supreme Court, as well as other state and federal courts, appear to be taking a more nuanced and lenient approach to the Establishment Clause in state assistance cases in general, and if Steele becomes the pattern, religion in the tax-exempt bond environment will largely disappear. However, until the Court intervenes, XYZ Religious School and its relatives should not be completely locked out of the market, but should exercise greater caution than their neighbors at ABC Prep School.
Are bonds issued by churches?
For more than a century, churches in the United States have issued bonds. A deed of trust on church real estate or other property is frequently used to secure the bonds. Most of these bonds have traditionally been sold as private contributions to genuine members of the church congregation.
Are bonds issued by private companies?
Private sector bonds, often known as corporate bonds, are bonds issued by firms to raise funding for projects. Private sector bonds are issued by both public and private firms. Private sector bonds include a wide range of qualities for investors, including credit ratings, maturities, and yields.
Are trustworthy bonds secure?
Keeping your money in an FDIC-insured online savings account or a CD is regarded a lower risk than investing in Worthy Bonds. Worthy Bonds, on the other hand, offer a larger return in exchange for taking on more risk. Worthy investments are potentially safer than stock market investments.
Is a church’s endowment necessary?
Endowment funds are a great method for churches to be good stewards by ensuring that the gifts they receive will be used to benefit the church for years to come. Creating and developing an endowment fund, like being a good steward, takes meticulous planning and attention to detail.
Is investing biblically acceptable?
The basic objective of biblical saving and investing is the same as the purpose given to everyone who has put their faith and trust in Jesus: to love God and to love others (Matthew 22:36-40). It is to provide for our families and those in need that we save money. In our excess, we provide shelter, food, clothing, and a safe haven for others. We donate our time, energy, and concern to those who are in need of a friend if we do not have money resources. We may sow seeds with our investments, and future generations will reap the benefits. Our savings and investments are not for our own kingdom, but for the Lord’s, just as Jesus came not to be served but to serve (Mark 10:45).