The good news is, after a long drought, lenders are ready to lend again. But don't make the mistake of thinking we're back to the pre-financial-meltdown days of summer 2008: this time around, lenders want to see more of your money in the deal, lots of evidence that your financial house is in order, and proof that you are ready, willing and able to pay back every dime they lend youplus interest, of course.
Prepare to get a loan
The first step in securing a conventional loan for your new construction or rehab project is knowing what today's lenders are looking for.
As is the case for any potential borrower, "With any loan, lenders will look at the debt-to-income, or the multiple-of-income ratio to determine the amount of money the church may qualify to borrow," says Song Quichocho, loan officer for Fredericksburg, Va.-based Griffin Capital Funding.
A general rule for church loans is that no more than 85% of its income should go toward paying essentials
like utilities, debts, and salaries, he notes, adding, "The other 15% gives the church a comfortable cushion [that] they may choose to save, or use for missions work or community projects."
Quichocho continues, "For a few months prior to applying for a loan, it is a good idea to start saving on a monthly basis an amount equal to the proposed payment of the new loan." This will give the church the ability to feel what the new payment will be like, Quichocho says, pointing out that if the church is currently paying rent, they only need to save the difference between their current rental payment and the new mortgage payment.
In addition, churches should look at the stability of their incomeand the likelihood of current income continuing, increasing, or even decreasing, Quichocho suggests.
"It is a good idea for a church to begin saving money towards the purchase of a property long before they have identified the property or even formalized a plan to purchase a property," he says. "A church that has money saved is in a good position to come up with the down payment necessary for a purchase, as well as having the additional benefit of showing an underwriter that they have excess income."
what bank lenders want to see.
"One of the most important things we look for is that all the funds necessary to complete the project have been accounted for," says Therese DeGroot, market president for the Community First Financial Resources division of First Bank in Lake Forest, Calif.
Cash on hand and the approved loan must equal the construction budget, she notes, adding, "Expecting, hoping and praying that pledges will be collected while the project is underway is just too riskyespecially with the recent economic cycle." Another important consideration, DeGroot says, is securing a guaranteed maximum (GMAX) construction contract, and determining that the contractor has the financial wherewithal to complete the project.
How do you present this type of information? The proof is in the packaging ormore specificallythe loan package.
Loan packages, according to DeGroot, should always include a concise explanation of the purpose of the loan; the church's history, mission and vision statement; and the last three full fiscal-years-worth, plus the most current year-to-date, financial statements for the church.
Packages should also include membership/attendance/enrollment figures; a budget for your project; a sources and uses matrix; information on your capital campaign; overview of your ministry and outreach programs; and background on your pastoral staff. And, DeGroot says, "There should be a summary review of any trends evident in income, expenses and attendance/enrollment."
BOND DEPARTMENT NEWS
If your project is in the $1-million-or-greater range, you may want to consider financing your project with bonds.
"Churches are still finding it more difficult to get a loan than it was several years ago," reports Martin Northern, vice president and branch manager of Great Nation Investment Corp., an Amarillo, Texas-based investment banking firm that specializes in church financing.
At the same time, with interest rates at historic lows and many investors looking to put their stock earnings from the recent Wall Street highs to work in fixed-interest investments, "There is more demand for bonds than there is supply available," Northern reports.
That helps make bonds a better and more economical way for many churches to finance long-term capital projects, according to Northern. And as opposed to conventional loans, which typically have adjustable interest rates and shorter terms, the fixed-rate nature of bond financing protects the church from fluctuations in interest rates [over] a 20- to 25-year period.
SOURCES OF HELP
At first glance, navigating the world of church capital project financing and getting helpful information can appear to be a formidable undertaking. But there are a number of places you can startand continue fromto get your bearings and, hopefully, get you going.
"Thanks to the Internet, it is easy to find church financial providers online," says DeGroot, "as well as some excellent church administration associations, church provider directories, and church conferences available to consider."
Research at its simplest begins by Googling terms such as "church financing," "church lending," "church bonds," etc. From there, you can progress to searching the online archives and reading through the back issues of specialty publications such as Worship Facilities Magazine, which will also provide information about who is lending these days, and on what kind of projects, and how to go about applying.
In particular, check out "What items are needed to initiate a loan application?" at
http://www.worshipfacilities.com/go.php/editorial/getting_the_ball_rolling_on_a_new_loan. This is an impressive checklist of 11 tips, developed by Charlie Daniels, founder and CEO of Broken Arrow, Okla.-based Churches by Daniels Construction, on what lenders need to make a preliminary evaluation of a church's borrowing capacity.
Financial institutions specializing in serving churches can provide a wealth of information, as well. One particularly good example is Evangelical Christian Credit Union (ECCU). In addition to what you can glean by talking with one of its representatives, the website of this Brea, Calif.-based organization contains a series of white papers on multiple aspects of church financial management (https://www.eccu.org/resources/whitepapers), as well as a recent webinar entitled, "How to Look Like a Healthy Borrower," covering the whys and wherefores of today's lending market, at https://www.eccu.org/resources/webinars/2013/healthyborrower.