Church Financing and Stalled Building Projects

During the last 18 months I’ve had multiple opportunities to speak at seminars and conferences in different parts of the county. In most instances, there have been in the audience architects, builders, general contractors and other professionals who serve churches and faith-based ministries through the construction industry .

During Q & A sessions and one-on-one conversations, the prevailing discussion centers around church financing. The common reason for stalled building projects among churches relates to the client’s inability to secure financing for their project.

In 2005 – 2007, a church considering an expansion initiative would have likely had multiple lenders in line, all interested in funding the project. Much like the residential mortgage environment at that time, the church lending waters were easy to navigate and the borrowing options were plentiful. Today, that is definitely not the case.

However, all is not lost. There is still money available to lend. Those institutions who have a tradition of being prudent in their practice have weathered the financial crisis and are coming through in a strong position.

(During those years of “fat thinking” in 2005-2007 when money was easily available, these lenders were viewed as “tight” because of their tough underwriting standards. Today they are seen in a totally different light – wise advisors whose conservative lending practices have kept the church’s best interest at heart.) I don’t know about you, but those are the types of companies (and people) with whom I desire to partner.

I recently had the opportunity to sit down with Mark Thomas to talk about the current state of church lending in the US. Mark is a vice president in the Church Banking Division with Bank of the West. He is a trusted colleague and friend and has served many of my personal clients during my tenure with Generis. Here is the content of our conversation:

Mark, is there money available for those considering a capital project?

While the events of the past couple years have significantly altered the number of viable lending institutions willing to lend to churches, there still are quality lenders willing to partner with healthy ministries on their expansion projects.

How has the lending landscape changed in the last 18-24 months?

Several broader economic factors have significantly impacted the commercial lending environment. Over the past decade American consumers & churches have been lulled into an “easy money” mentality regarding lending. It’s been said that all that was needed to qualify for a loan was being above room temperature & having a pulse. Not so any longer!

Churches seeking financing should be prepared for a very detailed & rigorous underwriting process, as well as a risk-averse lending environment. Whereas lenders used to apply higher multiples of annual revenue to determine maximum borrowing limits, today they are not only using lower multiples but are also more restrictive with regard to the sources of income they will include in their calculations.

For instance, it wasn’t uncommon to see lenders apply a 4 times multiple to all sources of church income (general, rental, campaign, missions, daycare, etc.). The current reality is that lenders will cautiously applying a 3 time multiple, and often only to general-undesignated income.

At the end of the day if the church qualifies for a loan it will most likely be for less than what was anticipated.

How can the church position itself to be seen in the most positive light with their potential lender?

Prepare 3 to 5 years of comprehensive/detailed financial statements. These must include balance sheets & income/expense statements for all funds/accounts. These don’t necessarily need to be CPA prepared financial statements, however, if the church cannot produce & explain their financial world, they will virtually eliminate their ability to qualify for a loan.

After more than 20 years of exclusive partnership with America’s church, I cannot overstate how significantly a professionally orchestrated stewardship/generosity campaign positively influences an experienced church lender’s view of the church & their request. This has become even more significant over the past couple years.

What is considered a reasonable level of debt when compared to annual income?

The short answer would be not more than 3 times the church’s annual income. However, that’s the short – and most inaccurate & potentially misleading – response. Maximum borrowing capacity as a multiple of income is only one of several filters a prudent lender will factor in the maximum borrowing equation.

What percentage of annual income should be considered as the ceiling for debt service?

Great question! This is another one of the factors lenders will consider when establishing maximum borrowing limits. It’s generally accepted that a ministry cannot operate & grow in a healthy manner when they are directing more than 25-30% of their annual income to debt service (principal & interest payments).

The only instances in which this can potentially be higher is if the church is involved in a professionally orchestrated stewardship/generosity campaign, has received 6-12 months of giving to the campaign and is fully engaged in the importance of subsequent campaigns.

If the church is considering a project that will require incurring debt, what should they be doing today to prepare for future debt service requirements?

There are 2 “first steps” that should be done in close proximity to each other.

One would be to have an experienced church lending specialist conduct a no-obligation debt capacity analysis. By providing a few pieces of historical information the lender can provide a base-line of borrowing capacity, point out potential financial limitations and provide guidance with regard to the impact of a campaign & the significance of its timing in the overall process.

The other would be to engage a highly qualified stewardship strategist to conduct a generosity audit.

Combined, this consultative feedback assists the church in moving forward with a more realistic view of what they should be prepared for as they explore the next phases of ministry expansion.

Should the church keep building debt out of the annual ministry fund (budget)?

I’m not sure there’s a right or wrong answer to this question. It depends largely upon the debt management philosophy of the ministry and their focus – or lack thereof – on stewardship and generosity campaigns.

With inflationary trends and and rising interest rates in our future, should a church with debt obligations evaluate their options?

Absolutely! This is an unprecedented time in our economic history for churches with existing debt to re-evaluate their current loan situation. With long-term fixed interest rates at historical lows there are savings available to the attentive church. Incredible stewardship opportunities are available in the market today without the church having to ask one of their attendees to give an additional dollar. Rates have fallen and the church should be maximizing every Kingdom resource to its fullest potential!