Church Financing Myths
By: Christopher Farrell and Chris Sanders
With today's complicated financing market riddled with stories of lenders closing their doors, followed by thousands of layoffs, is there any reason to believe the same challenges couldn't present themselves in the faith-based lending as well? Is it possible that the difficulties that plague the subprime residential market could creep into the commercial market? Given that more and more churches are applying for "hard money" loans and the number of private sales of churches increases every year, this is not only a possibility; it's becoming a reality.
With that in mind, the following list offers some frank advice and clears some common misunderstandings in an effort to prevent churches from making uninformed decisions.
1. Any mortgage broker can get our church a loan.
True. But, not all brokers should. Faith-based lending is best served by companies and direst lenders that tailor their services specifically to non-profits. Both churches and schools require an enormous amount of time and effort, as well as skill and experience. While the number of faith-based lenders is small, it takes an experienced hand to know where to take your application for the quickest response and best offer available.
2. We're a solid church with years of history. Any bank would love to lend to us.
Perhaps. But, many national banks don't lend to churches. While a local, smaller bank may initially fund a new church, when the congregation numbers improve such that a newer, larger facility is required, often local banks don't have the resources available to meet the church's growing needs.
3. Once the lender gets our application, we should be able to close in a week.
False. Faith-based lending approval is a pretty unique process, as compared to other types of lending. While every lender has specific criteria that must be met, each loan will be reviewed on a preliminary basis. Based on the church's statement of faith, loan to value, plate offerings, attendance and other elements, a lender will issue a "Letter of Interest," which will offer a rate and fee range. If accepted by the church, the lender will request additional documents and perhaps an appraisal. Once the entire loan package is complete, the loan goes through several layers of underwriting and reviews and often will be voted on by a board. After their approval is given, a term sheet is presented along with a commitment letter to the church for their acceptance. Upon acceptance, title work is ordered, and an expected close date is determined. The entire process usually takes 30 to 60 days from the day a complete loan package is submitted.
4. Our Building Fund (Capital Campaign) will cover everything; we don't need a new loan.
If so, congratulations. But, if the amount is too large and the time is too short, a loan is the best solution. And, one of the best ways to get a great rate on the loan and prove the church's vitality is to commit the funds of the campaign to lower your amount or to cover closing costs.
5. The pastor/priest/bishop/minister is the only one that can talk to the broker.
While most people believe this to be true, it is not the case with every church. Many congregations believe that given the pastors' position in the church, he and he alone is best suited to deal with the new loan. But, what most are unaware of is the small army of people behind their pastor, including a building fund committee, a youth ministry, men's/women's ministry, the board of directors, etc. As such, it is best to establish early in the process a member of the church whose function it is to collect all the necessary documents for the loan application, keeping the pastor informed of every step.
6. Mortgage brokers may have additional and/or undisclosed fees.
While it is difficult in one article to cover all the possible fees a church would pay for their new loan, the best advice is to ask and have the broker confirm all of his fees upfront. If an engagement fee is required, review the documents related directly to that fee. While many of these fees are not refundable, there may be a portion that could be refundable under certain conditions. Most of these fees cover the cost of the broker taking the loan application to several lenders/banks to get the best terms possible for the church. In some cases, an exit strategy is also created by the broker to ensure the church is solvent for not only the immediate future, but in years to come. Some fees are taken to cover third-party costs such as an appraisal. However, it is best to pay this cost directly to the appraiser and never before the lender orders it.
7. Banks don't have upfront fees, so why does a broker?
It is true that banks do not have upfront fees. However, a bank can only offer their own conforming rates. In order to get a true analysis of what each bank could offer the church, an application would have to be completed and interviews would have to be done with each and every bank in the area. The same effort would need to be undertaken for each faith-based lender as well as private lender. In addition to this, many private lenders aren't well known, and some will only deal with brokers. Given this, a church could spend many months hunting down a loan that a broker may take only a few days to complete.
8. Why is our Statement of Faith so important to faith-based lenders?
Unlike residential or commercial lending, faith-based lenders have fairly strict criteria as to who they will accept as customers based on the customer's Statement of Faith. As long as the church's beliefs coincide with the lender's own, they will consider the loan. While Christianity on itself is a broad definition of faith, it often comes down to how the church practices its faith. This will determine the initial eligibility for consideration of funding.
9. Our church has a voting board for our governing body and all decisions must be approved by the board. Who should we nominate as the liaison for our loan submission?
The liaison should be the person best suited to getting all the documents necessary in the quickest amount of time possible. This is often not the leader of the church, as he has a great number of items on his daily agenda as it is. However, the liaison doesn't have to make any decisions about the loan. He merely facilitates the collection and forwarding of documents. The faster this can be done, the sooner the church can get its loan.
10. We are a few months behind in our payments, so no one can help us.
Depending on how far behind the church is, this may not be true. However, if the church is behind, they need to do everything possible to get caught up. Should the church require an unconventional loan, or "hard money," the first step is to establish what is known as an "exit strategy" or a plan on paying back the new debt. Hard money loans are typically offered for 12 to 36 months. With this, it is critical to deal with an experience broker that understands the nuances of what churches can do to improve revenue and increase their cash flow.
11. We are a few months behind in our mortgage payment, but our lender won't foreclose on us; we're a church.
False. There is a tired phrase in the lending industry about lending to churches that says, "Why does no one want to lend to a church? Because no one wants to foreclose on God." While that was true in years past, recently this seems to no longer be the case. Churches are one of the fastest-moving property types on the market today. In many cases, they never get "on the market" because the selling church has already identified a buyer before they even contact a real estate agent. And, foreclosed churches can go even faster. As an example, many churches today are located in what is known as "multi-use" facilities, which is essentially a commercial space that does not have the outward appearance of being a church. As such, this space can and often will be leased to virtually any business imaginable. If a church were to get behind in payments in such a facility, it would take little effort to replace it with a rent-paying tenant.
12. Our church looks like a church. The only business that could occupy this space would be another church, so our lender wouldn't be so quick to evict us if we were foreclosed upon.
Perhaps. But, in today's market, lenders have taken a new approach to foreclosed churches; they sell them outright to other churches. As banks and lenders look for ways to keep their books as clean as possible, recent trends indicate the best way to do this is to sell off under-performing assets. Should a church go into foreclosure and a "Lis Pendens" is issued, note holders are beginning the process of finding a new buyer themselves. Once all legal opportunities for the church to bring itself current have expired, the lender will locate a new buyer (a congregation that needs a larger facility) and sell the property to them. While this is a rare occurrence, it is becoming more and more common among private lenders.
Christopher Farrell and Chris Sanders are co-owners of Sanctuary Lending, www.SanctuaryLending, a brokering service that specializes in institutional lending for churches, schools and other non-profit facilities throughout the country.