The Co-investment Housing Option for Churches and Pastors

In the early 1990s, Jeff Palmberg got an offer he could not refuse.

He and his wife had moved to Connecticut, where Palmberg had accepted a job as a youth pastor. The church wanted them to live nearby. But housing prices were more than they could afford.

So, the church offered to help. The congregation had recently sold off their parsonage and had some extra money in the bank. They offered to let Palmberg and his wife have $50,000 to use for their down payment on their first home.

If they ever sold the house, Palmberg and his wife would pay the funds back, with no interest.

Everyone would win in the end.

“We thought it was the smart thing to do,” he recalled.

Things went fine until Palmberg got a new job right as the housing market tanked. Suddenly the house he and his wife bought for $150,000 was worth $90,000—which was barely enough to pay off their mortgage, with no money left to pay back the church.

“All of a sudden, we thought, What are we going to do?” Palmberg said.

It took four years to sort things out. The Palmbergs borrowed some money from family to help pay the church back and rented their house for years while waiting for the market to rebound.

They eventually sold the house at a short sale, paying about $15,000 to finally get free.

The church had the best intentions, Palmberg said. But in the end, partnering with the church on buying a house set his family behind financially for years.

Buying a home can be a complicated process in any case. When a pastor and church team up, things can go well. Or they can easily become a mess.

And these partnerships aren’t that uncommon—especially in high-priced communities. Churches want their pastors to live nearby to make ministry more effective (that’s one reason why churches owned parsonages in the past). But pastors sometimes lack the financial resources to afford a home in a high-priced area.

So they turn to a partnership. Sometimes a church and its pastor will purchase a home together as a joint investment. Other times a church will loan its pastor money for a down payment in the form of a second mortgage. In some cases, the church will give a pastor funds for a down payment with a handshake deal that the funds will be repaid when the house is sold.

Rob Hall, vice president of real estate services for Chicago-based National Covenant Properties, said these kinds of partnerships between a pastor and church can work—if all the details are clear from the beginning.

He said that pastors—especially a new pastor who wants to make a good first impression—may agree to a joint purchase with a church, even if they don’t understand all the details.

It’s crucial that a pastor and a church get wise legal counsel before purchasing a property together, Hall stressed.

“Attorneys are trained to ask, ‘What is the worst-case scenario,’” he said. That’s helpful, Hall added, because both pastors and churches can be too optimistic when they decide to purchase a home together.

In some cases, churches and pastors will agree to jointly invest in a property. When and if the property is sold in the future, they split any profits.

That’s great if property values have gone up, Hall said. But churches haven’t always thought about what happens if property values go down—and that may not be spelled out in an agreement between the pastor and the church.

If it’s not spelled out, the church may want its initial investment repaid—leaving the pastor holding the bag for any loss. That places additional strain on the pastor’s finances—and it also means the pastor has no equity to use for a future home purchase.

Editor’s note: For further information on saving toward a home for retirement, see the “Helping Your Pastor Build Home Equity” in the December 2018 edition of Church Finance Today.

Details like maintenance and improvements should also be hammered out. Say a pastor invests $50,000 in improvements to a house, causing its value to go up. When it’s sold, how should the church and pastor account for the value of those improvements?

It’s important to talk about those details ahead of time.

“In general, if you replace or repair one window, the pastor will pay for it as ordinary maintenance,” Hall said. “If you replace all the windows—that’s an improvement and the church should probably split the cost.”

Partnerships between pastors and churches work best when the pastor stays a long time, the property goes up in value, and the two sides part amicably, Hall said.

A long-term pastorate increases the chances of property values going up, he explained. And the goodwill generated during such a pastorate makes it easier for the church and pastor to work through any disagreements.

When there’s conflict—or a pastor leaves before the property has had the chance to appreciate—things can go badly, Hall said.

He’s seen both cases. And in both situations, having a written agreement helped.

In one case, he said, a pastor bought a house in partnership with the church, then left due to a conflict. The agreement gave the pastor six months to sell so that the church could recoup its investment. Church members who were angry wanted the money sooner, Hall said—but the agreement gave the pastor time to sell and repay the money without the pressure of having to leave right away.

And what if a pastor can’t repay the funds? That can get tricky, Hall said. He’s seen a few cases where a pastor decides to leave after a conflict and wants the church to forgive any funds owed to the church. In those situations, the church has complied rather than trying to force the pastor to repay by going to court.

But, granting loan forgiveness can easily turn into “an excessive benefit transaction” and subject to sanctions from the Internal Revenue Service.

Even with the various complications that must be addressed, Hall said that partnerships between pastors and churches can work. And he thinks they may become more common if the rules about the pastoral housing allowance change in the future.

Palmberg agrees.

After leaving Connecticut, Palmberg was eventually called to a church near Seattle, in a community where even a modest house cost more than $750,000.

The church wanted to help Palmberg purchase a home. This time he knew what questions to ask, ensuring both sides would share any risks and rewards. (When the time eventually came for the Palmbergs to leave the church, both sides broke even on the arrangement.)

Living in that community made ministry much more effective, Palmberg said. As a parent with kids in the community, he was welcomed in the schools, rather than being seen as an outsider. And he was better able to build close relationships with church members.

“Without the church’s help, I don’t know where we would have lived,” he said.

He said churches that want to help their pastors buy a house should take a holistic approach. Help them connect with someone who understands the financial, real estate, and legal issues—so that they can make wise decisions, he said.

“If you are going to do something for your pastor, have a whole team looking out for them,” he advised. “That way, they’ll know what they are doing.”

For a deeper look at the many legal and tax issues related to loans and housing co-investments, see “Should a Church and Its Pastor Co-Own a Home?” in the December 2018 edition of Church Finance Today.