Are Your Eyes Bigger Than Your Budget?
Avoid Disappointment Down the Line By Asking a Handful of Financing Questions First
By Russ Priddy
It happens much too often in the building process: The church planning committee meets for months, surveys the congregation to find out what they want, interviews architects and builders, and, finally, makes a decision about that new building. The architect completes his or her plans, the construction company signs the contract, and the price is set. All parties are anticipating a groundbreaking service.
And then the committee learns that no one will finance the construction because the figure is too high. What happened?
In a construction project, the most common mistake church leaders make is not getting the financing in place first. Much heartache and wasted effort can be saved if they do. Here are some questions to ask before the building process begins:
How Much Can We Borrow?
Generally, a church can safely assume it can borrow up to about three times its annual “unrestricted” income – money that’s given for the general purpose of meeting the church’s routine expense, such as salaries, rent, maintenance, utilities and insurance. Many financial institutions won’t count special or “restricted”-use income as money that’s available to service the mortgage.
Church leaders should deduct mission offerings, birthday offerings and other special offerings from the church’s total income when attempting to figure out how much they can borrow.
What Financial Institutions Should We Approach?
Depending on your geographical location, the church can seek funds from local banks, credit unions, denominations or church affiliations, investment banks, mortgage companies and individual investors. Let’s consider each individually.
Local banks – If your church has a relationship with a local bank, that’s probably a good place to start. After all, who else knows your financial situation better than your local banker? Banks can advise on rate and terms, and some will even make long-term loans. The primary advantage of working with your local bank is that you’ll be working with someone who knows you. It’s probable that some of your members have accounts at that bank, so that will be seen as service to the local community.
Credit unions – These are a good place to seek long-term financing as well. Usually, credit unions are not as restrictive in their loan activities as commercial banks and might be able to make your church an attractive offer.
Denominations – Some church groups and denominations have money that they’ll loan to churches. If yours belongs to a larger church group, check with your headquarters to find out what might be available. The primary advantage of denominational loans is that they usually aren’t restricted by legal guidelines. They might be able to be more creative and generous with the terms of the loan.
Investment banks – Investment bankers bring investors to the table to finance a church construction project. They raise the funds with the sale of real-estate investment bonds. Investors buy the bonds – in effect, an IOU – and the church uses the money to complete its project. As the church makes its monthly payment, the investors receive the interest attached to their bond. Usually, a bond company can offer a fixed-rate mortgage for 10 to 20 years.
Mortgage companies – These companies offer real-estate mortgages for residential homes and are an excellent place to seek financing. Mortgage brokers have sources of money with whom they do business on a daily basis, and some of them might be willing to consider a church loan.
Individual investors – A church I know of in Florida borrowed money from members to build its new worship center. It was able to locate some wealthy congregants who weren’t happy with the interest rates they were receiving, so a deal was made: They loaned their money to the church to build the new worship center, and both the church and the investors benefited from the arrangement. Your church might have some members who would be willing to loan money to the church in return for an attractive interest rate.
Should We Do a Capital Campaign?
Every church can benefit from a capital fundraising campaign to help fund its new building project. One of these will raise funds through pledges over and above the tithes to assist in paying the cost of new construction. Usually, these funds can be added to the amount of money to be borrowed, enhancing the new-building program.
What About Interest Rates?
The truth is that long-term interest rates are probably as low now as they’re going to be for a while. Most experts say they believe interest rates will begin to rise before the end of the year.
If your church is concerned about interest-rate risk, the time to lock in financing is probably now. When choosing your financial partner, make sure you understand how they arrive at the interest they’ll charge you to borrow the money and under what circumstances those interest rates may be raised.
Can Our Loan Be Sold?
A common practice for mortgage companies is to loan money and then sell the loan to another organization. In other words, the organization that loans you the money might not be the organization to which you’re paying back the money. Make sure you know beforehand if your loan can be sold.
The average church loan exists for seven years; that means most loans are either repaid or refinanced in that time. Your financial partner and you will be together quite some time, so make sure you know who you’re doing business with.
Russ Priddy is the Lead Consultant for Ascend Stewardship and Consulting. He has a B.B.A degree in marketing from Marshall University, an MBA in finance from the West Virginia University College of Graduate Studies, and a Master of Divinity from Midwestern Baptist Theological Seminary.