INEVITABLE: certain to happen; unavoidable.
Capital reserve planning is not an “if” matter. It is a “when” and “how much” retirement planning. It is planning for the inevitable.
We all know we need to plan for retirement. We set up retirement accounts, take advantage of tax-free plans, and determine how much we’ll need to comfortably live once we retire. (Well, that’s what we’re supposed to do anyway.) Have you ever considered that each aspect of your church facility will — at some point — need to retire?
That HVAC system you’ve had for 10 years will retire itself soon. It’s the same with flooring, light fixtures, windows, the pavement, and more. To be ready for the retirement of these items, you’ll need a fully funded capital reserve account.
What Is Capital Reserve Planning?
Capital reserve planning is the process of setting aside money today to fund major replacements and repairs tomorrow.
Most churches handle daily operations well—utilities, payroll, ministry expenses—but neglect long-term capital repair planning. Yet every system and material in a facility deteriorates at a predictable rate. Without a reserve plan, small issues compound and become major expenses.
In over three decades of working with churches, schools, and nonprofits, our team has seen that the lack of capital planning is not just common—it’s nearly universal. Organizations build beautiful spaces, but few prepare for the inevitable lifecycle costs of ownership.
Capital Reserve Fund Defined
So, what’s next? What is a capital reserve account? Is it different from a sinking fund? Or a contingency fund? Excess annual budget?
Capital Reserve is a type of account of an organization reserved for long-term capital investment projects or any other large and anticipated expense(s) that will be incurred in the future. This type of reserve fund is set aside to ensure that the organization has adequate funding to at least partially finance the project.
The Cambridge Business English Dictionary defines a Capital Reserve as “an amount of money that a company or organization keeps in a special account for future needs.”
Did you catch the three keywords in that definition? Let me break it down for you:
- Money: This is cash, not the promise of it. We are talking cold, hard cash.
- Special Account: The account is not a slush fund and not an excess balance in the budget. It is a fund set aside for a purpose.
- Future: This money is not for the immediate. It is for the future.
In short, a capital reserve account is set up to pay for major capital expenditure (replacement, repurposing, etc.) when its effective life is over. If you spend $100,000 on a new HVAC system today, how much should you set aside in a reserve account for 15 years?
The Importance of Capital Reserve Planning
Besides being good stewards of what God has entrusted us with, there are several reasons this type of planning is essential.
Fact #1: All Buildings Deteriorate
According to the International Facility Management Association (IFMA), building components naturally deteriorate 1–4% of their replacement value per year. Ignoring this reality leads to deferred maintenance—and ultimately higher costs.
Fact #2: Deferred maintenance accelerates the deterioration
Left unaddressed, the rate of deterioration will accelerate. It can even become exponential in growth. For example, if you do not re-caulk your windows as recommended by the caulk manufacturer, this allows gaps and cracks to grow and expand. Water that should be diverted by the caulk will migrate into these crevices and find its way inside your wall. That water will rot the surrounding wood, grow mold, and damage insulation. The lack of attention given to relatively minor maintenance can be the root cause of a significant issue.
Fact #3: The cost of operations far exceeds the cost of acquisition and construction
Over a 40-year life cycle, 71-85% of total facility ownership cost will be attributed to operational costs. Compare that to the initial costs of sticks and bricks being 15-20% of the cost during that 40-year duration. That is a pretty large disparity.
State Farm Insurance found that they spend about 80% of the total cost of ownership of commercial buildings on operational costs over 40 years. Further, a book published in 1969 by The American Institute of Architects, Life Cycle Cost Analysis 2: Using It In Practice, by David S. Haviland states:
“The initial design and construction of a facility comprises about 15% of the total cost of a building over its 40-year lifespan. The remaining 85% is made up of the building’s operations and maintenance costs.”
So, What Costs More: The Initial Cost Or The Cost After You Occupy?
The numbers speak for themselves. Do we invest the same amount of time and energy in planning our operational costs as we did when we developed our master plans and floor plans? Why do we get frustrated about an architect charging 8% instead of 5% or the construction partner charging 10% instead of 6%? The fees that encompass only 3% of the total cost of ownership feel so important when we pay them. However, the decisions this team suggests and implements will be with you for the life of your buildings. Do we have our eyes on the real cost of facility ownership?
To answer those questions, we must take these intentional steps:
- Address Deferred Maintenance: If you have any deferred maintenance, you must develop a plan to bring things up to “snuff” based on their age and expected life. You will always be playing catch up if that is not done before setting the ongoing Capital Reserves.
- Research Current Replacement Value: Determine what it would cost to replace each major component today. Use local pricing or online resources to estimate accurate values.
- Estimate the Expected Life: Identify how many years each asset has left. HVAC systems might last 15–20 years, roofs 25, parking lots 10–15, carpet 8–10, et
- Determine Annual Inflation: Plan for annual cost increases (typically 2–3% per year). This ensures your savings keep pace with future price changes.
- Develop an Annual Budget: Divide replacement costs by their remaining life span to determine what to set aside annually. Adjust annually as prices or conditions change.
You can project the total replacement cost and the annual amount needed by addressing these five simple items. You are smart enough to know that this simplistic approach is not 100% foolproof. But it will get you close.
There will be times when the inflation percentage will be off, or the years of life could be misjudged. Regardless, you will have set aside money to help you cover the cost instead of having to do a capital campaign just to replace the carpet or buy new HVAC units.
So, How Do You Get Started with Capital Reserve Planning?
Start by prioritizing which items you’ll eventually need to replace based on the following categories:
Category #1: Largest Line Items
- HVAC Systems
- Roofing
- Asphalt / Parking Lots
Category #2: Operational Impact
- HVAC (see a pattern)
- Building Envelope (Windows, Caulk, Doors, Insulation, Air/Water Intrusion)
- Lighting/Electrical
Category #3: Visual Impact
- Parking and site concrete
- Floor finishes
- Wall Finishes
- Lighting
From there, look at our Life Cycle Calculator and eSPACE as part of your Facility Condition Assessment. This tool is an inexpensive way to:
- Track all physical assets
- Set current replacement values
- Project inflation impacts
- Set budget amounts on an annual basis for all items and assets
- See a dashboard of dollars needed each year
- Set reminders and alerts for key milestone dates related to the replacement of these items
- Interface with the eSPACE Work Order Management to further increase efficiency and effectiveness.
Churches using proactive facility management software reduce operating costs by up to 40% compared to those without structured plans.
The Stewardship Perspective
God has entrusted your church with more than a building—He’s entrusted you with the responsibility to manage it wisely. A capital reserve plan is not just a financial tool; it’s a stewardship practice.
“The earth is the Lord’s, and everything in it.” — Psalm 24:1
Planning today ensures your facilities continue to serve your mission tomorrow.
Next Steps
If your church has never created a capital reserve plan, now is the time to start.
- Evaluate your major systems and identify replacement timelines.
- Set up a dedicated reserve account.
- Use tools like the Life Cycle Calculator to build your first forecast.
Your investment in a capital reserves account will make it easier to replace vital components of your church facility. When your parking lot must be repaved or the HVAC dies (not if, when), you’ll have the money readily available to handle those purchases. That’s good stewardship of church finances and facilities.
Free Resource: Church Facility Budgeting eBook
Download our free Church Facility Budgeting eBook to access templates, lifecycle calculators, and practical guidance for funding future facility needs.
Start planning today—so when the roof leaks or the HVAC fails, your ministry doesn’t.
