Jul 07 2008
Take Sanctuary in the Church-Lending Market
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.