Most brokers don’t know how to package church-related deals, yet these are easy transactions to broker. “They’re very simple transactions, once they get the financial information correct,” says John Kucey, president of Concord Acceptance Corp., a mortgage bank and securities agent that specializes in religion-related financing.
Why church financing is an open niche
On a recent $550,000 loan to the Double Rock Missionary Baptist Church in California, the broker earned two points, or $11,000. Demand for religion-related financing is growing, which gives brokers a real opportunity in an untapped niche. There are over 400,000 churches and other religious institutions in America, according to Dr. John Vaughn, Director of Research at Church Growth Today, and the number is growing.
Church financing no longer means just loans for construction or renovation. Religious institutions are taking a bigger role in their communities, so their financing needs increasingly include equipment leasing, day-care centers, kindergartens, schools, senior-citizen homes and summer camps. Here are some tips to help you secure financing for these deals.
Underwriting basics: records, income and value
Insist on three years of financials
Work with a church that has at least three years of historical financials. Incomplete bookkeeping is the main obstacle to brokering church financing, says Kucey. “Pastors’ wives and untrained volunteers often keep inadequate financial records.”
That was the case with a 10-year-old church in Seattle. “I took it to a CPA and he just threw up his hands and said, ‘I can’t reconstruct the records out of this,’ and we had to turn it down.”
Kucey blames this lack of financial savvy on churches’ tax-exempt status. “They’re not under the pressure that small businesses are to keep adequate records, and that’s probably their downfall.” That spells opportunity for a broker who can overcome the hurdle.
Keep debt within four times annual income
Look for churches whose requested debt does not exceed four times the church’s annual income. “That’s pretty much the standard in the industry,” says Frank Poe, vice president of Security Church Finance, Inc., of Houston, Texas. “You’ve got a church, say they took in $100,000 in tithes and offerings, not one-time requests. Multiply by four. That’s their maximum debt level.”
Keep the first mortgage at 75% of value
The first mortgage should not exceed 75% of the property’s value. If the LTV is borderline, perhaps 80%, most states allow the lender to issue second mortgage bonds purchased only by church members. Check with your state’s regulators. A few states, such as Arkansas and Louisiana, do not allow it.
Choosing the right church to work with
Look for at least five years in operation
Work with a church that is at least five years old. Established churches are more likely to have kept adequate records, Kucey says. “That kind of knocks off all the start-ups, the guys with a vision who want to build St. John’s Cathedral, and think the people will come.”
“Breakaway” churches from large parishes are also a good bet. Although the church is new, it keeps the stability of its parent church. Churches still led by their founding pastor are even better.
Favor well-kept facilities
Work with a church that has maintained its facilities. Investors won’t put money into graffiti-covered storefront churches. “They don’t have to have a steeple and a cross, but they have to be respectful,” Kucey says. “And the quickest way to a turndown is to say, ‘This can’t sell.'”
Target large congregations
The larger the congregation, the better. Kucey accepted the Double Rock deal partly because it had a large congregation of 3,700 members. “It made it that much more attractive.” Churches with fewer than 150 people attending services each week usually can’t afford the loan payments. Concord’s minimum loan of $250,000 at the time often ruled these smaller churches out.
Building the loan package
Photos and documents
Lenders usually require three or four color photographs of the property, and good photos can be an effective selling point. They should show the interior, the front of the building and the parking lot. The fourth can show whatever angle the church considers most attractive.
Lenders will also require documents including title insurance, an appraisal, articles of incorporation and bylaws.
A short church history
As with other commercial real estate, lenders like to know the story behind the property. Ask the church historian, or the oldest or most active members, to write a short history of the church. It should cover when it was founded, former pastors, where the church has been located and its denomination.
“It helps us to market the bonds,” Poe says. “If you’ve got a church that’s 100 years old, that’s very impressive to investors. A one-year-old church may not be.”
Watch for lawsuits and liens
Look out for litigation against the church, mechanics’ liens or any other legal problem. You may have a strong church with good income, but if it is suing its construction contractor, for example, you may find yourself without a commission. “That might be one we might turn down,” Poe says.
Best-efforts versus firm underwriting
Make sure you understand whether you’re dealing with a best-efforts underwriter or a firm underwriter.
- Best-efforts firms sell bonds to church members and the community (who sometimes buy them for IRA accounts), then sell the remaining bonds to their own clients. They don’t guarantee they’ll sell all the bonds, but they usually do, often selling 70% to 80% of an issue within one month, Poe says.
- Firm underwriters package the transaction, write the church a check less their fees, and then sell the bonds to their clients.
Best-efforts firms cost churches less. But church members may become upset if they don’t understand the difference and expect you to guarantee them a loan.
Growth areas: Korean congregations and leasing
Korean churches
You may want to pursue loans for Korean churches, which Kucey says have generous congregations. “These churches tend to have more than adequate debt service income,” he says. “They give a lot to their churches, so the collateral is rarely a problem. You talk about a 10% rule for tithing; the Koreans are closer to 15%. Those are easy deals.”
These churches are a small share of American religious institutions, but Asian-Americans were the fastest-growing minority group in percentage terms, according to the Population Reference Bureau. The Korean population in America grew 125% from 1980 to 1990. There were over 500 Korean churches in California alone, Kucey says. “They just don’t like banks. And they’re very religious people.”
The domino effect of referrals
Closing one Korean church deal successfully can start a domino effect, Kucey says. These churches are close-knit and rely on each other’s advice, so when one church has a good experience with a broker or lender, word gets around. That happened with Concord’s $1 million loan to the Korean Philadelphia Presbyterian Church in Los Angeles. “It was a breakthrough into that group,” Kucey said.
These deals may especially suit people who are bilingual or know Korean culture. If a church’s financials are written in Korean, consider working with a bilingual CPA who can translate.
Equipment and building leases
Take advantage of growing demand for church furniture and equipment leasing. Typical equipment includes chairs for newer worship centers, fixed pews, air conditioning units, fans, office furnishings and photocopiers. Sound systems are also popular. “A church will build a $1 million building and won’t have any money left for a sound system,” Kucey said.
Concord negotiated with a cramped Georgia church for a seven-year lease on a 60 x 70 foot modular building to house the church’s office, Sunday school and recreation facilities. “That’s no little chicken shed,” Kucey says. “That’s bigger than some of the churches. And they’re in business literally in a couple of weeks.”
