Answers to the 3 Most Common Questions About Church Construction Financing

What Are My Options?

1. Cash. Any church leader who’s planning to buy land or add on sometime in the future should immediately begin to accumulate cash. In every instance, paying cash is the least expensive option. If a church pays cash, it won’t have to pay interest or be concerned about what interest rates will do in the future.

Plus, a church that has cash might be able to negotiate better prices and terms for what they’re intending to do. A capital fund-raising program is always a good idea prior to a purchasing land or initiating new construction; it gives members the opportunity to pledge offerings over and above their regular tithes, over a period of time, to help pay for the new building.

2. Denominational loans. Some church groups have funds available to loan to their member churches. Usually, they’re offered at competitive interest rates and reasonable terms. Check with your local assembly or national office.

3. Commercial banks. Banks are in the business of making loans. The place to start is the bank where your church has its checking and savings accounts. Talk to a loan officer to determine what might be available to your church.

4. Real-estate investment trusts. Some investment groups will loan money to church leaders who want to purchase land or build a facility. Typically, real-estate investment trusts are a lot like commercial banks in their qualifying process, but the fact that they specialize in financing real-estate transactions means it might be beneficial to check it out.

5.Church Bonds. Issuing bonds to provide funding for church facilities is an option every church should consider. Essentially, a bond is an “I.O.U.” the church issues to individuals who are willing to loan it money. For the church, the major benefit of a bond program is that a favorable interest rate often can be obtained over an extended period of time.

Christian investment-banking companies in the marketplace can guide you through this process. Usually, state regulations must be adhered to and a regular process followed; however, many churches have built facilities by issuing bonds to finance the projects.

Generally, a church — like individuals borrowing to buy a house — will qualify based upon its income and the value of the property. Depending on the financing source, a church generally can arrange financing for up to three times its annual unrestricted income — income it receives to pay its monthly bills (salaries, utilities, insurance, etc.). It doesn’t include designated funds such as mission offerings or special gifts.

With regards to the value of the property, a financing institution usually will want the church to have some equity in the building. Believe it or not, it’s estimated that about 3 percent of all churches entering into mortgages will default on the loans, in which case the financing institution must take the property and sell it to get its money back. Therefore, a lender wants to make sure there’s a difference between what the property is worth and what’s owed (i.e., equity).

Generally, a church can borrow no more than 70 percent of its property’s market value, the amount of money for which the property can be sold. A financing institution will also want to know the church’s general trends in terms of income and attendance. A church with growth trends in both attendance and income generally has a greater chance of obtaining financing than a church with growth that’s either stagnant or in decline.

How Do I Apply for Church Financing?

The application process is essentially an opportunity for the church to convince the lending institution it should want to do business with it. Usually, the process includes three elements: the application, the financials and the appraisal.

The application answers all questions about how the church is organized and managed. It organizes such elements as attendance, age categories, how decisions are made, and who’s responsible for legally binding the church to a contract for financials or a church mortgage. Before a church begins the application process, it should have its constitution and bylaws reviewed by an attorney to make sure everything is in proper order.

Most churches provide members with an annual financial statement — a detailed accounting of income and expenses. When a church applies for church financing, it’s generally a good idea to hire a CPA to either compile or audit its financials. Financial institutions generally want at least the previous three years available for review.

Almost all financial institutions will require some sort of appraisal. An appraiser’s job is to establish the value of the property that will be taken as collateral. I advise most churches to talk to a certified appraiser to get an idea of the market value of the property before beginning the application process.

Here are some tips to make the process of financing as painless as possible:

Know how much money you’ll need. The reason most church construction projects run into difficulty is because there isn’t enough money to complete them. Make sure you obtain a fixed-price contract from the contractor before you begin the project, or have enough cash on hand to pay for any changes you make.

Know your needs are what you want to do. Some churches know they’re running out of space but don’t have a clue what to do about it. Make sure your church has a well-defined vision and plan in place.

Get your finances in order now. When the accountant begins working, you’ll need an account for every penny the church brings in and every penny it spends. Start now to get those pieces of paper in place.

Check out various church financing options. Rank them. Put them in preferential order: first, second and third. Determine what your best option is, and then pursue it.

In Psalm 20:4, the Bible states: “May he give you the desire of your heart and make all your plans succeed.” That scripture has everything to do with planning. A church must have a plan in place to obtain financing before it begins the process.