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The Changing Landscape for Church Borrowing

The Changing Landscape for Church Borrowing

The money isn’t flowing as freely these days for churches seeking debt financing for capital projects. But loans are there, often at record-low interest rates, for those that have learned to survive and thrive during the Great Recession.

Churches, like all borrowers, have to realize that the free-and-easy lending of the late-1990s and early to mid-2000s was not “normal,” reports Scott Rolfs, managing director and head of Church & School Finance for Milwaukee-based investment banker Ziegler and Co.

“In reality, it was a bubble,” Rolfs elaborates. “There was a unique confluence of events that combined to produce a massive amount of liquidity that chased all types of mortgage loans, from those in the subprime residential market to the church market.”

Post-recession, the important thing to remember is that churches will need to bring more cash to the table when they embark on projects, according to Rolfs. “Lenders are still in the marketplace and good projects are getting done,” he says, “just not at the multiples that took place during the peak from 2005-2008.”

Indeed, given today’s low-interest-rate environment, churches could not pick a better time to borrow, according to Marianne Berlan, vice president and church banking analyst for the Church Banking Division of Walnut Creek, Calif.-based Bank of the West.

Berlan says that churches can help themselves rate better in the eyes of lenders by adapting to the slowdown in revenues that many of them experienced.

“Churches that adjusted their expenses in light of a decline in giving, and now are seeing their giving leveling out or even coming back, are typically the ones that qualify for debt,” Berlan says, adding, “One of the big things lenders look for today is a church that can demonstrate it can support future debt service from current revenues.”

Lenders have money to lend, but most are holding on to their capital, according to David Dennison, principal of Church Mortgage Solutions, a Colorado Springs, Colo.-based company that negotiates mortgage loans on behalf of churches with ministry lenders.

“The few conventional lenders who are committed to serving the church community have tightened up their underwriting guidelines to a point that many ministries cannot qualify,” Dennison reports. This environment will likely continue for the next 12-18 months, he says, with many economists and bankers projecting interest rates to increase by 1%-3% over the next 24-36 months, “resulting in even more difficulty in qualifying for financing.”

Capital campaign and real estate challenges

Changes in how lenders treat capital campaigns and building fund income have also made it more difficult for ministries to qualify for loans.

“Most lenders used to consider building fund income that was associated with a three-year pledge campaign by discounting a portion of the pro-forma income associated with building fund,” Dennison says. But now, “Many lenders have enacted underwriting policies that disqualify building fund income unless it has been consistent for the past three to five years—which typically is not the case with most ministries.”

Lenders are more willing to include some capital campaign income if the church is able to service a significant portion of the mortgage payments out of budgeted income rather than pledge campaign income, according to Dennison. To generate budget savings for debt service, he suggests postponing capital expenses not vital to core ministries; reducing or freezing salaries for 12 months prior to financing; and implementing any other possible expense reductions.

Churches are adapting to a jobless economic recovery that has put the hurt on capital campaigns, Rolfs says. Meanwhile, “Most church finance companies are focusing more on helping churches create a better culture of generosity.” This is important work, he notes.

“Capital campaigns are the engine that drives building projects—without them, churches typically do not have the necessary seed capital to embark on major projects,” says Rolfs.

The volume of traditional three-year campaigns has declined significantly the past couple of years due to the economy, Rolfs reports. “However, we are seeing signs of thawing, as a number of congregations [started] on major campaigns in the fall of 2010,” he says, adding, “The market is still very soft, but you can see things stabilizing, which is a good sign.”

Another major challenge that many ministries face is the sharp drop in property values—making qualifying for financing considerably harder.

“In many markets, we have seen a devaluing of commercial and ministry properties by 25%,” says Dennison. Ministries considering pursuing financing can protect themselves from surprises in this regard by requesting a broker price opinion (BPO), based upon comparable properties in the area, from a real estate agent. “Generally a local realtor will provide you with a BPO for free, or as much as $200,” he says. Ordering an appraisal, which is generally more expensive, would be a waste of money, he adds, “since most lenders will not accept an appraisal ordered by the borrower.”

A couple of tips

Conventional financing will always be a component of ministry financing, Dennison notes, but bond financing is also gaining in popularity.

“Ministries are finding that bond financing offers the most flexibility in underwriting guidelines, longest fixed interest rates (25-30 years), and the greatest opportunity to pool Christian capital together to advance the Kingdom,” Dennison says. Bond financing offers church members the opportunity to invest in their church mortgage bonds at rates ranging from 4%-7.5%, he says, “returns that are unheard of anywhere else through CDs and other deposits.”

Make sure to seek out and work with experienced church lenders, Berlan adds. “And don’t think that just what has happened on the home mortgage front necessarily means that there are not funds for churches to borrow.”

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