Fiscal Woes? Not with Well-Structured Partnerships

Trinity Cathedral in Portland, Oregon, draws 3 to 4 percent of its revenue from non-traditional sources, including this "porchlight concert"

By G. Jeffrey MacDonald

On any given day, St. Martin’s Church in Charlotte, North Carolina, teems with people, including many who are not part of the congregation. Parents drop off children at the preschool run by a separate nonprofit that rents one floor. Musicians stop by to borrow instruments from the Charlotte Folk Society, which runs a lending library in a former office space. Artists sell on church grounds several times a year. And more collaborations are in the works.

“Our problem is we’re running out of space,” says the Rev. Josh Bowron, St. Martin’s rector.

Partnering with community groups adds to St. Martin’s coffers — the preschool alone brings a net gain of $40,000 a year — but that’s not the motivation. St. Martin’s has not run a deficit in years, has a $900,000 budget, is a very healthy church, and does not need extra money, Bowron said. At least not at this point.

“What I’m trying to do is build a culture for 20 years from now,” Bowron said. “As the church continues to decline, you want to have these beautiful buildings have a ministry, and it’s going to take some time to build a culture.”

Meanwhile, benefits are already accruing in the form of friendships. Signing contracts to work together leads to “being with” one’s neighbor, Bowron said, in a way that writing charitable checks does not. It injects energy into the parish, he observes, and stirs imagination for “what cool things can we do together?”

He adopted the concept from HeartEdge, an ecumenical movement based at St. Martin-in-the-Fields Church in London, which helps churches reimagine themselves and society. And it constantly leads to new experiments, such as a concert for children that the preschool plans for the fall and workshops for musicians led by Folk Society members.

Pacific Youth Choir at Trinity Cathedral, Portland, Oregon

This type of collaborative thinking is important, in part, because new revenue models are needed, said Demi Prentiss, program director for research and development at the Episcopal Church Foundation.

“Funding your ministry through plate and pledge is no longer realistic,” Prentiss said. “The real opportunity here is for engagement. … Certainly we could supply a worship space for a congregation that’s in need of it, but what partnership might we build with that congregation beyond that?”

As a matter of stewardship, partnering helps ensure that physical spaces are not neglected. It also takes financial pressure off drawn-down endowments, borrowing costs, or generous parishioners whose giving capacity is already maxed out or nearing that point.

But seizing the missional and financial opportunities can require timely and strategic action. Congregations often know their financial situations are worsening, yet they wait to develop new revenue streams, said Kate Toth, executive director of Bricks and Mortals, a three-year-old nonprofit that helps New York City congregations find creative and sustaining solutions to their financial challenges.

“They often don’t know how dire it is until it’s actually too late to do something,” Toth said. “They’re one bill or one COVID away from having the entire enterprise collapse.”

Churches are hearing the message. Across the country, efforts are afoot to undertake “adaptive reuse” for the sake of missional effectiveness, revenue enhancement, and showing other congregations how it’s done.

In the Sustainable Solutions for Sacred Sites (S4) program, 46 churches are embarking on new projects this spring. One is creating a homeless shelter, another a food kitchen, and another has a new rental program.

Their experiences will turn into case studies and success stories with guidance from Bricks and Mortals, Partners for Sacred Places, and Hartford International University. One goal of this Lilly Foundation-funded program is to develop a set of how-to-partner insights for congregations nationwide.

In S4 and other programs, advisers help congregations learn to manage risks, rather than allow risks to prevent action. With strategies and tools, they say, churches can become both more community-engaged and more resilient.

Consider the risk of revenue becoming taxable. Though religious organizations are generally tax-exempt, congregations can lose that status if the Internal Revenue Service determines they’re generating meaningful profit from an enterprise unrelated to their core mission. Fearing this risk, congregations hesitate to diversify their revenue streams, Prentiss said.

“That’s the first thing they bring up: ‘We’ll lose our 501(c)(3) tax status,’” Prentiss said, referring to the nonprofit category in the tax code. “Well, yes, you can if you’re not precise about it, if you’re not careful.”

To protect tax-exempt status, a congregation should keep good financial records and avoid commingling funds, Prentiss said. By doing that, if any revenue becomes taxable, only the non-traditional stream is affected, not the congregation’s giving to its general fund.

What’s more, new income streams often don’t trigger taxation if they’re only a fraction of the church’s income. In Portland, Oregeon, Trinity Cathedral derives 3 to 4 percent of its revenues from non-traditional sources, such as renting parking lots for sporting events and other spaces for musical, educational, and ecumenical activities, said Jerry Brown, the cathedral’s treasurer.

“By sharing revenue through parking-lot agreement structures in place, we have not been subject to UBIT,” or Unrelated Business Income Tax, Brown said via email. Key to that structure is how the church works with a parking management company to handle lot monitoring and fee collections, he said.

Likewise in North Carolina, income from non-traditional sources has not been significant enough to require tax payments, according to Bowrun.

In situations that could trigger taxes, the church need not carry the burden alone. Dominic Dutra, a California Realtor, commercial real estate investor, and author of Closing Costs: Reimagining Church Real Estate for Missional Purposes, provides examples of how it can work.

With a triple-net lease (NNN), the tenant is responsible for base rate plus property taxes, insurance, and maintenance costs. An absolute net lease is similar, except tenants also pay for necessary improvements to make the space suitable for their needs. Both types can help congregations stop worrying and get on with using their space for powerful mission, Dutra says.

“A property tax assessment agency will come in and say, ‘Listen, you’re no longer exempt because half of your building is being operated by a for-profit, so we’re going to tax you,’” said Dutra, who founded 3D Strategies, a Fremont, California, real estate consultancy for faith-based and other organizations. “Your exemption is going to go away from a property-tax perspective. [But the tenant] absorbs that. That’s part of structuring an appropriate lease.”

Not all partnerships will make a dent in budgetary gaps, of course. For instance, renting sanctuary space to a new church plant or a congregation of new immigrants will not go far toward covering a budget deficit, Dutra said. But it can do a lot to build relationships, good will, vitality, and mission-mindedness. Likewise, providing space for recovery groups to meet is commonly seen as entirely missional, with either no fees or only nominal fees.

But closing gaps with new mission revenue streams is possible, especially with certain types of partnerships. Dutra says cash-strapped churches would be wise to explore preschool partnerships. Their services are in demand, they’re always seeking space, and churches are uniquely laid out to accommodate their needs. He suggests meeting with a mission consultant, a Certified Commercial Investment Member Realtor, and possibly an architect before circulating a request for proposal.

“Preschools in general are probably the best opportunity for leasing from a fiscal sustainability perspective,” Dutra said.

For St. Martin’s in Charlotte, running its own preschool for 70 years until it closed in 2021 under COVID pressures had come to require a subsidy from the congregation. The church-owned preschool cost $15,000 more per year to operate than it was bringing in. Only when it shifted to renting the space to a separate preschool operator did having a school on site begin generating $40,000 a year for St. Martin’s.

Congregations with robust partnerships find they can still be missional even in structuring their agreements. St. Martin’s charges the preschool operator a below-market rate, Bowron said. Trinity in Portland likewise gives nonprofits a break on rental rates.

“We use a ‘market rate’ rental schedule for the various-sized rooms/kitchen/parish hall that allows for a discount rate for nonprofits,” Brown said. “Trinity is committed to collaboration and support for our neighbors and our city of Portland. Radical hospitality is our goal; by opening our doors, our parking lots, our pantry, we challenge ourselves to satisfy our diverse spiritual missions.”

In this time, when many congregations can’t afford to do deferred maintenance work on underutilized buildings, and needs are going unmet in the surrounding community, something needs to change, Dutra said. In some cases, he said, a struggling congregation might discern a call to close and let the real estate be used for new missional purposes.

But often, partnerships can improve both a church’s mission effectiveness and financial condition, he said, as long as the church goes about it the right way.

“The status quo is not acceptable. That’s the talent being buried in the ground,” Dutra said, alluding to Matthew 25:14-30. “And the landlord wasn’t too happy about that.”

Correction: an earlier version of this story misspelled the name of the Rev. Josh Bowron.


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