Shepherd Capital Partners

Financing Religious Institutions is Big Business

This article was origianally published in Scotsman Guide’s Commercial Edition, July 2008.

Mortgage financing for churches and other religious institutions is big business. According to a 2006 Lambert Edwards Analytics report, refinances, purchases and construction financing in the church-lending market will reach $40 billion annually by 2010.

Despite this, the church-lending business is extremely fragmented. Because national lenders’ underwriting criteria are rigid, local or regional banks often handle church loans. But banks are reluctant lenders at best. They generally don’t have staff trained to underwrite church loans, and they are understandably concerned with headline risk — it’s bad press to foreclose upon a local religious organization.

Thus, nontraditional, private-money lenders are a rapidly growing force in church financing. Understanding who they are and what they are looking for is the key to establishing yourself as a successful broker in this niche.

Finding the loans

Networking is the key to finding church-lending opportunities. Whether or not you are affiliated with religious institutions, you may have more access to them than you realize. In addition to the clergy, most churches have volunteer board members who also are professional service-providers. Here are some of the primary referral sources for church-loan requests.

* Contractors
* Architects
* Attorneys
* Certified public accountants
* Insurance agents
* Local banks

Get the word out that you arrange financing for religious institutions. You’ll be surprised how many of your neighbors, friends and others know a church needing to upgrade its facility or refinance a loan. Most churches are at a loss as to where to turn for financial help, so make sure your market knows about you — and how you can help.

Working with the ministry

Real estate is a relationship business. This is especially true when working with religious institutions.

Most often, church leaders focus on serving their congregation and their community — not on operating a business. Your primary client may be the lead clergy, professional staff member or volunteer board member. Regardless of your primary point of contact, you must view your role as an important adviser to the ministry and not just as a mortgage broker.

Be prepared to explain complex loan terms and their implications to people who have no financial or real estate backgrounds. Decisionmaking often is much slower than with individual property-owners, and final decisions may be made by a governing board that meets infrequently.

Classifying the loan

Not all loans meet national church lenders’ requirements. To qualify for their programs, your borrower generally must meet the following criteria:

* Loan amounts of $1 million or more
* Well-established history, usually at least five years of existence
* Proper corporate organization with professional administrative staff, accounting systems and credentialed or experienced leadership
* At least 150 members, ideally showing membership growth
* Mainstream denomination
* Situated in growing metropolitan area
* Well-located, high-quality real estate

Don’t be put off if your borrowers don’t meet these criteria — many won’t.

The fastest-growing segments of the church business are smaller churches, often not part of mainstream denominations. These churches also tend to purchase or develop facilities that are more multi-use in design and function. This is important because finding a new buyer for a “steepled” property — a single-use asset — can be difficult down the road. Private-money lenders are less concerned with this risk and can customize loan structures to meet borrowers’ needs.

Considering your client

There are various other issues of which to be aware in procuring church financing.

Many religious institutions own multiple properties, including houses for clergy and land for future use. Private-money lenders have the flexibility to consider these additional properties to cross-collateralize the loan, if necessary.

Because of the service and personal nature of religious institutions, their success or failure often hinges on one or two key people — typically, the head clergy. Many lenders will require key-person insurance, naming the lender as beneficiary in the unlikely event of the death of that person during the life of the loan.

You also will need a different perspective to understand nonprofit organizations’ financial statements. Churches are budget-based organizations and typically spend what they bring in. It’s important to understand the institution’s sources of income. A lender will want to know the trends in contributions to the church, including the concentration among members. If the top 10 contributors account for more than 10 percent of giving, there may be concern about the stability of those revenues.

In addition, be aware of any large one-time gifts that may make a church’s revenues look stronger than they really are. A lender is likely to discount these gifts in its underwriting because they do not represent recurring sources of income.

Depending on the administrative depth or budgeting strength of the church, a lender may require a few months of loan-payment reserves to be deposited in an interest-bearing escrow account.

Packaging the loan submission

Preparing a church-loan package for submission is not much different from preparing any other commercial loan submission. With private-money lenders, your chances of funding the loan will improve if your package is thorough and well-organized. At a minimum, your initial submission should include:

* At least two full years of income statements, plus year-to-date statements within 90 days, which should include all church-owned enterprises such as day cares, schools or any for-profit activities;
* Balance sheets for at least the two most-recent fiscal years and a snapshot within 90 days of submission;
* An overview of the church’s history;
* Biographies and résumés of all current church leaders and ministry;
* A schedule of real property with descriptions, including all church-owned property;
* Pictures of the inside and outside of the property;
* A recent appraisal, if available; and
* A completed loan-request form showing “sources and uses.”

Most private-money lenders will have a submission form to fill out. If not, make sure you include a statement detailing the loan request, its purpose and the exit strategy.

Private-money lenders will focus on the exit strategy. They generally provide loan terms of no more than a few years and will want a clear, plausible plan for repayment.

Hard Money Loans Are Not Just for People with Bad Credit.

I’ll bet you ‘d be surprised to know that the American national anthem, the Star Spangled Banner, is actually set to the tune of an English drinking song (”To Anacreon in Heaven“). Most people are also surprised to learn that hard money loans are not just for people with bad credit. Why would some with a good FICO score need to use an expensive hard money loan?

Surprisingly, the majority of hard money loans are not made to people with serious credit problems (although we do lend money to the credit challenged as well.) Savvy real estate investors and developers, for example, frequently use hard money and and make a ton of money despite the generally higher cost of these loans. Here are just a few reasons why.

When Cash Flow Isn’t Your Friend: Experienced real estate investors know that you make your money on the buy, meaning you need to buy a property for less than it is potentially worth, then raise it’s value to its potential. Often this means buying a property that has a low DSCR (debt service coverage ratio) or even negative cash flow. Conventional lenders have strict underwriting guidelines, so even if you’re buying the property for half its potential value the bank won’t lend you the money because the cash flow isn’t there now! We will lend you the money because we recognize the loan is backed by a property worth significantly more than you are buying it for. This fact, along with the equity the borrower is putting into the deal, makes it a safe loan in the private lender’s eyes. When the investor improves the property and it’s cash flowing nicely he can refinance with traditional lenders at a lower cost. As a California hard money lender this is a situation we see often.

Owner Occupied Properties: Many banks and mortgage lenders don’t like owner occupied commercial properties because they feel they’re taking a risk on the borrowers business as well as the real estate itself. This is faulty logic at best and the hard money lender corrects the error. If it’s a good property we can value it based on what it would rent for on the open market and lend up to 65% of that value. There is business risk associated with any commercial property and if the owner-occupier’s business doesn’t hold up the property can be rented to another business and do just fine.

The Need for Speed: Smart real estate investors also know that moving quickly is sometimes the biggest advantage in acquiring quality properties at below market prices. Traditional lenders can take 45to 90 days or more to close a loan; hardly a competitive advantage for the investor. As a hard money lender we can close loans in just a few weeks, sometimes in as little as a few days. The property can then be refinanced with a conventional lender over the next couple of months, but without the hard money lender the investor wouldn’t get the property at all.

Development Difficulties: Most banks assume that a builder who runs out of money is simply bad at managing a budget. Hard money lenders view it differently. In this era of rising material and labor costs and plunging housing prices many good builders find themselves in a financial bind. A hard money lender will look at the value of the project when it’s finished and provide the builder additional funds as needed to get there. Funds will be dispersed through inspection based draws. (The hard money lender will evaluate the builders however, to make sure they do know what they’re doing.)

These are just a few of the many reasons for using hard money. The bottom line is a good hard money lender can and will evaluate ever deal individually. If you’re looking for a special situation lender, hard money is the place to look.

Personal responsibility in the mortgage debacle

Since the 1950s there have been warning labels on cigarettes making it clear that smoking is bad for us. There have been ad campaigns, public service announcements, educational films, not to mention a lot of high profile law suits against the tobacco companies. Yet as the first decade of the 21st century nears an end, there are still octogenarians filing lawsuits claiming they didn’t know that puffing down a daily pack or more for sixty-five years might cause a health problem or two. I have no great love for the tobacco companies, but gimme a break! How about a little personal responsibility!

So what do cigarettes have to do with personal finance? Everything! Today in the US we’re facing one of the worst financial meltdowns since, arguably, the crash of 1929. Liquidity has all but disappeared; paragons of the financial world are going up in smoke - no pun intended; and politicians are creating all manner of knight-in-shining-armor plans to protect the American debtor from…from what? From their own irresponsible behavior.

I ask you, where is the personal responsibility? If I buy a house I can’t afford, and take out a loan I can never pay back, why should I expect the government or corporate America to bail me out? Yes, it’s true, the mortgage industry and Wall Street carry plenty of blame for being blinded by greed and creating all sorts of mortgage backed products that even they don’t seem to understand, (the Frankenstein monster gone wrong) but is there anybody surprised by that today? The average American consumer invests 400%-500% more time planning a vacation than evaluating their financial decisions, and a mortgage is by far the largest financial transaction most Americans will ever make. I’ve been working in real estate finance for almost ten years and shockingly few residential borrowers, even the most educated and business savvy, have any real interest in understanding the full implications of the loan they are taking. Their only real concern is “what’s my payment next month?” We got addicted to easy money, and when a meth lab blows up nobody should feel sorry for the cook – he knew the risks he was taking.

Anybody with children knows all too well that if you don’t teach them to be responsible for their own decisions you’re going to end up with some pretty messed up kids. If there are no real consequences for bad behavior that behavior will never change. This is equivalent to American consumers expecting a paternalistic government to step in save them from their own bad financial decisions. Yes, losing your home or filing bankruptcy is tough duty, but certainly not life threatening. Besides, what the press rarely talks about is that all these foreclosures are not resulting in legions of new homeless people across the nation. They lost their homes because they made very bad financial decisions, not because they lost their job. So now they’ll go rent a home for a while, and when they’re ready to buy a house again maybe they’ll think beyond next month’s payment before signing on the dotted line.

The Real Estate Mortgage Crisis is the Perfect Investment Opportunity.

New Years is coming, and on January 1st there will be a lot of bleary-eyed people downing Alka-Seltzer, holding their head in their hands and swearing they’ll never drink again. (Right!) But for those that kept their wits about them this is the perfect opportunity to get a jump on the New Year while the rest of the world is too hung over to pay attention.

The same is true in real estate. For the past five years or so real estate markets have been binge drinking on free flowing credit. But the party has ended, the tap shut off, and the financial hang over is a doozey! Should we swear off real estate forever? Absolutely not! In fact, now is the perfect time to get a jump on good real estate investments while the rest of the world is nursing that hangover. Here are four key reasons why.

A basic principle in the real estate profession is that you make your money on the buy. What this means is that if you pay too much for a property it’s unlikely the market will make it up to the point that you achieve a reasonable return on your investment. Property prices across the country have been dropping steadily for the past year, and this trend is likely to continue for at least another one to two years. With property prices down and investors nervous about real estate we’re entering a buyer’s market that makes it much easier to find a strong value investment.

You’re probably wondering: “why should I invest now if you’re telling me prices might continue dropping for another year or two?” Simple: because precise market timing never works. If we knew exactly when the bubble was peaking millions of people wouldn’t be in such dire straights now. (And if New Years partiers knew exactly when to stop drinking they wouldn’t have such a hangover.) When the absolute bottom becomes clear to the market as a whole, it will turn into a feeding frenzy and the odds of overbidding for low quality assets increases. Besides, real estate is a long-term asset. You should have at least a five year time horizon - which brings me to point number three.

Over the past few years the cheap debt available for real estate made a lot of lower quality properties seem like they were performing well. It didn’t matter as much if rents were not keeping up with the market or if operating costs were running a little high. Today real estate valuations have shifted back to the fundamentals: can the property attract and keep good tenants who’ll pay good rents, and still keep operating expenses low? The property needs to stand on its own, without excessive debt. So now you can look for fundamentally good real estate to hold for the long-term without the irrational bidding wars of recent years.

Finally, what’s often lost among all the headlines lately is that the basic character of real estate hasn’t changed. People still need a place to live, and a place to work; businesses need to manufacture and store their products, and retailers need a place to sell them. Most importantly, this country continues to grow. The U.S. population grows by about 1% every year, or over 3 million people. That’s like a new city the size of Chicago popping up out of nowhere every single year, with all the corresponding roads, houses, jobs, schools, factories, and commerce. Wouldn’t you like to get in on the ground floor of that growth? And that’s before any productivity growth which only increases your opportunity for building wealth. Of course this growth is spread across our vast nation but with the right knowledge and a little work you can find the properties that will bring you great financial rewards in the coming years.

The opportunity to invest in real estate has never been better, but with such a wide variety of investment options, how do you choose? What’s the best way to evaluate a real estate investment? Evaluating a real estate investment starts with evaluating yourself. So this New Year make your resolution to truly evaluate your investment objectives and see how real estate can benefit you - and of course to come back and read my discussions about how to perform these assessments and what types of real estate you should consider.

HAVE A VERY HAPPY NEW YEAR

Take Me Out to the Ballgame | How To Identify High-Growth Regions for Land Investments

So you want to take a vacation to some place new and exciting. I’ll bet you’ll spend quite a bit of time researching the area: where to stay, where to eat, how to get around, what’s going on in the area. Would you spend the same amount of time investigating an investment opportunity that could provide you with a comfortable retirement years down the road?
The key - well, one key anyway - to successful pre-developed land investing is identifying high growth areas before the growth arrives. As discussed in Money Doesn’t Grow on Trees, this land banking strategy is known as being in the path of growth.
But this is a big country, with a lot of open land. How do you know where the path of growth is? Of course you can never know with 100% certainty, but there are a series of fundamental characteristics you should look for in any land banking area. These are the qualities that keep the growth moving down a path toward your land.

1. Population centers. The best place to start looking for growth is, quite simply, where the people are now. These are dense population centers that, in order to keep growing, need to expand beyond their current boundaries.
2. Affordable housing. When people can’t afford to buy a home inside the population center they move to the more affordable outskirts. Ideally you’d like to find an outlying area with housing prices roughly half of average housing costs closer in.
3. Level, usable land. This is the land that gets developed first. Hilly, mountainous terrain, or land with other natural barriers to building, is usually the last to be developed, if at all.
4. Available water supply. It’s been said that water is the oil of the 21st century. You need water to support a growing population and, if it’s not there, the people won’t be either.
5. Transportation accessibility: freeway, train, air. Look for existing transportation infrastructure and serious plans for expansion. You may find a good deal in the middle of nowhere, and your great grandchildren will thank you for it.
6. Adequate utilities. In addition to water a growing population needs electricity, gas, telephones, cable, etc. The cost of developing this infrastructure is tremendous so utility companies forecast their budgets well into the future.
7. Educational system. New growth is generally led by families, and families won’t go where they can’t educate their children. Look for well supported primary education system as well as advanced education and training opportunities. Also, look for plans to build new schools over the next 5 to 10 years.
8. Proximity to large, metropolitan areas. New population centers don’t just spring up in the desert. (Las Vegas aside.) They radiate out from existing metropolitan areas. Ideally you should be within commuting distance - say 100 miles or so.
9. Existing and planned industrial and commercial base. Jobs. Jobs attract people, simple as that.
10. Existing and planned residential and commercial development. In real estate we say that retail follows rooftops. Builders won’t go into an area unless their research tells them there is demand.
11. Master plans for community. While we live in a free economy, it is ultimately the local government agencies that decide what will be built, when and where. Most communities are required to have a master plan for growth looking out at least ten to twenty years.
12. Authoritative population projections. There are actually people who spend their lives studying population growth. They’re called demographers and you can find their work at the census bureau, which provides population and economic data on the state and local levels as well. In addition, many local government agencies and economic associations produce well researched growth projections.

These are the principal characteristics to consider in land banking. If a region is missing the mark on a number of these points I would put it in the “not in my lifetime” category. Making sure these fundamentals are in place will definitely help you get into the right ballpark. A closer look at the actual stadium (i.e., which land parcels to consider) will be addressed in our next land banking discussion.