Is your church considering a renovation or new building project? If so, you might be in the market for a loan. Unfortunately, the cost of borrowing the money needed for that project may end up being more than you might expect.
As of September 2018, the Federal Reserve raised interest rates for the third time this year. A fourth increase is expected in December 2018 with more rate hikes in 2019.1 Since banks use the rate set by the Federal Reserve to determine the rates they offer for mortgages, mortgage rates are increasing as well.
Worship Facilities sought expert guidance on the topic of current loan considerations in our emerging economy, and reached out to lending expert, Kari Boyce with Thrivent Church Financing. Read our discussion to find answers on how church leaders can successfully navigate this changing landscape.
Worship Facilities: With the Fed increasing interest rates this year (and possibly into 2019), what does that mean for churches looking for a loan?
Kari Boyce: Every church has its unique situation. If it has existing debt and a prepayment penalty plus a balloon payment is coming up, I recommend they look at their prepayment penalty and when they expect their balloon to come due. We anticipate interest rates will continue to go up, but no one knows how long that will last or how high rates will go. How much is the prepayment penalty and at what point does that breakeven if rates continue to climb? It might be worth it to pay the penalty, lock in a long-term rate, and move forward with the current (expected) lower rate. Also, consider looking into options on how to fix an interest rate and be set for the future state for a while and not have to be concerned about rising rates. Thrivent offers long-term fixed interest rates. With a balloon, the church either has to pay off that balance or refinance at then current interest rates. A long-term locked loan saves the church in refinancing fees and certainty over payment amount. An appraisal alone could cost a few thousand dollars depending on the size of the church property, which is likely required with each refinance. If you can find a lender who’ll do a longer-term fixed rate, that’s a path that enables you to be wise with church finances.
WF: What can church leaders do to protect against rising interest rates?
Boyce: The specific terms of the interest rate will have an impact. If it’s a fixed rate, the risk is out of the equation. If it’s variable, the rate could change every 30 days or could be tied to the prime interest rate or other index. Try to get the longest reset period possible or get a fixed rate.
WF: What market conditions, other than rising interest rates, within the last year have changed that are impacting loans to churches?
Boyce: From time to time, we see lenders offering churches a discount on their balance if they move their loan elsewhere. This tends to happen simply because the lender wants to leave the church market. While this sounds like a great deal to the church, that discounted loan will cause a future lender to pause and wonder why the previous lender wanted them to find another lender. Avoid accepting those offers whenever possible. This is a relatively new phenomenon in the market. The risk to the church is that this will be viewed as a default on the loan by future lenders.
WF: What key factors does Thrivent look at when working with a church on a new loan?
Boyce: There are many factors including whether it is a project related loan or a refinance. For all loans, we’ll look at trends in attendance, donations, and expenses. We’ll look at the project and how it fits into the mission and ministry of the church. We like to see a church that evaluates their needs and thinks about the building design that will best suit their needs. We recommend getting 2-3 loan estimates and construction estimates. After all, it’s cheaper to spend a few hours to get competitive offers. We also want to see three years of financial history, giving history, and attendance history. Additionally, if the church has had a significant transition within the last 5-10 years, a lender will want to know the cause and what happened.
WF: For church leaders considering a loan, what would you advise them to do to prepare for that process?
Boyce: If a capital campaign is part of the project, ideally, they would have passed their pledge collection date by at least 60-90 days of when they want their financing (in a perfect world). This helps a lender understand what a church’s commitment is to a specific project. Having this in place can help a church get a lower interest rate. Also, the financing needs to be in place before a shovel goes in the ground. Waiting to start any construction until after you have the financing finalized will save you money by avoiding potential title issues. I’d also recommend having the campaign information ready for a lender to review. If your church has completed capital campaigns before, lenders like to see how successful those previous campaigns went. We recommend hiring a capital campaign consultant to come in who understands your church’s culture and can help with the campaign.
WF: Do you have any additional tips or suggestions for church leaders considering a loan?
Boyce: Yes. Find a trusted resource who can help you evaluate the different types of loans. There are so many features in a commercial loan. It’s much different than a residential mortgage. The terms can be different, and the covenants (what a church has to do during the life of the loan) can vary from lender to lender. Prepayment penalties are the most common covenants. Covenants can look the same on the surface but have small differences in wording that make a big difference for the church. For example, another common covenant term involves the lender requiring the church to alert them before any change in senior leadership. A similar covenant might instead say in the case of a leadership change. Small difference, but with a large impact. If something happens unexpectedly, such as an accident or resignation, that could cause the church to be in default of the loan. Look closely at the covenants and what they mean for the church and how those compare from lender to lender. Finally, covenants can also include what churches cannot do. The church can’t take on debt over a certain amount without first talking with their current lender. Covenants and interest terms are the most common points of misunderstanding.
As you can see, there are several factors to consider when looking for a loan for your upcoming building project. From weighing the potential risk of rising interest rates to comparing the fine print of loan covenants, the process of taking out a loan requires due diligence as you move forward.