By Robert Erven Brown, Esq.
(This article first appeared in Church Solutions Magazine on April 1, 2003.)
Many congregations miss an important opportunity to help protect their campuses from unjust or excessive legal judgments before they buy land or build their facilities, resulting in the loss of said properties. But you can help your building committee avoid repeating this fundamental mistake–one that could plague your congregation for years to come–with six important steps.
1. Build your professional team now.
Every church building committee should include both a seasoned real estate attorney and certified public accountant (CPA) experienced in dealing with Internal Revenue Service laws governing non-profit corporations. These advisors can help your committee avoid tax traps involving the use of mortgages. In addition, by properly positioning the ownership of the land separate and apart from the company that operates the church, an important safeguard can be built into the most basic legal structure of your church.
If such qualified professionals are not available within your congregation to serve on a volunteer basis, consider retaining paid advisors. In Arizona, you can obtain a list of certified real estate specialists from the Arizona State Bar website at www.azbar.org, and in other states, you can contact the state bar association for similar guidance.
If your church does not have a regularly retained attorney, consider taking this important step now. (It is unnecessary to pay the attorney monthly. The important point is to establish a relationship with legal counsel and to include him or her at least in your annual meetings for loss prevention purposes.)
2. Consider using two companies.
Many large commercial corporations do not own the land and buildings in which they operate. By placing ownership of the land in a separate company that is legally separated from the operating company, you can build an important legal shield to protect the equity in the land and buildings from claims that arise from the operating company’s activities. How?
Company A (the “land-holding company”) will acquire the title to the land.
Company B (the “operating church”) will hire employees, operate the church and conduct all activities that involve interfacing with the public.
3. Consider using a ground lease.
In this situation, the operating church obtains the legal right to use the property by signing a long-term ground lease with the land-holding company equal to the amount necessary to maintain the premises. (Be sure to consult with your CPA on this part of the ground lease!) Your attorney will draft this important document. Consider recording a Memorandum of Lease in your local recorder’s office to give the public notice of this arrangement.
4. Consider using deed restrictions.
Another important safeguard to ensure that the church campus will be used for worship (and not taken by some excessive plaintiff’s judgment and converted to use as a drive-thru restaurant!) is the use of deed restrictions.
A deed restriction is created by inserting restrictive language into the deed by which the land-holding company acquires title. These restrictions allow worship activities on your campus but prohibit ownership and operation of the premises by a non-church entity.
Consult your attorney prior to writing these deed restrictions. Be sure to allow sufficient latitude for operation of items such as the church bookstore, incidental food service and other non-profit and for-profit uses incidental to the mission of the church. Check these deed restrictions with your potential or permanent or construction lender.
5. Consider filing a deed of trust before you build.
If your congregation does not require a loan to acquire the property or to construct the improvements, you have a large amount of equity in the property to protect. In this case, it is still worthwhile to establish a line of credit with a third-party or institutional lender. Be sure this loan is secured by a mortgage on the property. It is not necessary to draw against the credit line. The recording date on the deed of trust will be important in preventing the campus from attack by third-party creditors.
Placing this lien on the property well ahead of any claims strengthens the argument to protect the campus from the creditors. Consult with your local attorney about additional details for implementing this process.
6. Review your insurance coverage now.
Have a planning meeting with your attorney, CPA and insurance advisor to conduct a comprehensive review of your coverage. Be sure to check the terms of your primary liability policy, and inquire whether an umbrella policy can be obtained to add low-cost, additional protection. These days, minimum coverage for churches is $5 million. I recommend acquiring at least twice as much insurance protection as equity in the property. (If the equity in your property is $1 million, for example, you should have at least $2 million in liability coverage.)
America’s churches and Christian schools are facing an alarming rise in insurance claims as well as uninsured claims leading to litigation. In an increasingly litigious society, many pastors and their church leaders have concluded that good stewardship demands asset protection considerations be part of the planning process for new church campuses.
To learn more about the topics covered in this article, contact Bob at (602) 992-6725.
