The Lending Mess Could Be a Blessing Congregations with cash in hand could reap big savings by building now
By Stephen J. Ferrandi
A loan officer at a major global bank announced at a recent gathering, “We have money to lend, just not to the four R’s – residential developers, restaurants, retail businesses and of course religious congregations.”
The current lending environment can be described simply as banks are risks adverse. They are looking to lend money, just not to anyone who actually needs the loan. Houses of worship pose a particularly interesting dilemma for most lenders. Not only do they have to always face the fear of having a public relations disaster should they ever have to foreclose on the church, synagogue, temple or mosque, but now they have the uncertainty of lending money on a project that may actually be worth less than its construction cost should foreclosure be necessary in the future.
Many lenders who have traditionally lent money to houses of worship are currently sitting on the sidelines. As David Dennison, President of Church Mortgage Solutions a national loan broker for churches explains it, “You can expect to see local banks and other secular tighten their financial guidelines. Faith based lenders who are committed to “kingdom expansion may be a bit more forgiving” Denison continues. “Nowhere is lending as tight as it is with secular institutions, whether a well known national bank or a community lender. That’s why all of my loans are currently being placed with faith based lenders.”
Even those lenders who are making loans have tightened up their lending requirements substantially. In today’s lending environment, it is not uncommon for even the best established, well capitalized congregation to be required to come out of pocket for forty percent of the total construction cost of a project before getting loan approval. Land Acquisition loans will easily require purchasers to post amount equal to fifty or more percent before being approved and still may come with many restrictions designed to protect the lender should the economy get even worse.
What to expect from your lender?
- Expect that your lender will want you to show audited financial statements for the last three to five years in order to demonstrate that your congregations has continued to growing during the economic downturn.
- Expect the see the amount of loan that you will qualify for be reduced to no more than three times annual giving.
- Expect the lender to require 125% of historical debt coverage not including capital campaign income.
- Expect 70% of the total construction cost to be the maximum that you will be able to borrow
- Expect to see limits on debt to income of 30%. This means that no more than 30% of total income is used for the mortgage.
- Expect to see appraisals for land and buildings come in substantially below where they were just four years ago.
- Expect to have your books more scrutinized than ever before. If you have any reason for the loan not to be granted, expect the lender to take it.
For growing congregations the silver lining in this unprecedented recession is now is a great time to undertake a construction project. For those projects that don’t require bank funding, the time couldn’t be better to renovate a sanctuary, modernize a kitchen, or build an addition. Contractors are aggressively bidding projects with minimum profit margins in an effort to avoid laying off their best employees.
Contractors and architects are quick to speak up this difficult of an economy is having them actually search for work rather than wait for the work to come to them. This dynamic will help a growing congregation who has the money or loan commitment to take on a major construction or renovation project find an experienced contractor who is able to dedicate the appropriate manpower to the project, bid it aggressively and finish it on time. Now is a great time to build, renovate or restore.