Understanding Church Loans

By Stephen Bush

Church financing is possibly the most difficult commercial mortgage to arrange. Since churches represent an integral part of most communities, it is clearly desirable to improve church loan options if at all possible. In almost all cases financing will require a very specialized commercial real estate loan that is typically not widely available.

Churches are certainly not typical business organizations, but churches nevertheless have very real and substantial business loan needs. This article will provide an overview of four primary church financing difficulties followed by a discussion of six practical church loan solutions.

Four Major Church Financing and Business Finance Difficulties -

Before addressing possible solutions for the most common church loan needs, it is important to discuss the typical barriers to obtaining appropriate financing. Historically church financing has been difficult to arrange for several reasons:

(1) Church Financing Difficulty Number One: Church properties are unique. Lenders are therefore concerned that if commercial loan payments are not made in a timely manner and the lender is required to assume ownership of the property, it will be very difficult to find a new owner because of the unique property features.

(2) Church Financing Difficulty Number Two: Lenders frequently want personal guarantors for church loans, and this requirement is not appropriate for church financing. The financial structure of churches simply does not lend itself to a traditional lender/guarantor approach. But most lenders are uncomfortable with the potential lack of guarantors (especially because of the previous observation about the difficulty of reselling the church property should it become necessary).

As a result, it is common to find that church financing has been obtained only after one or more church members have provided a personal guarantee. The requirement for personal guarantors acts as a severe obstacle because church members might be unwilling to act in this capacity and because there simply might not be individuals who have sufficient net worth to provide a personal guarantee for a large church loan.

(3) Church Financing Difficulty Number Three: When church financing is obtained, there are frequently unacceptable business finance terms such as very small loans, low loan-to-value (LTV) of 50% to 60%, short-term loans and high interest rates. These onerous terms are tantamount to the church loan being declined, and if the terms are accepted, the church is likely to experience continuing financial difficulties due to unrealistic commercial mortgage requirements.

(4) Church Financing Difficulty Number Four: Construction, renovation and land acquisition are even more difficult for churches to finance than purchases or refinancing. As a result, needed repairs are often postponed indefinitely and new churches frequently take many years to become a reality.

Six Practical Church Loan and Commercial Mortgage Solutions -

There are common-sense financing solutions for the church loan issues described above. Here is an overview of church financing that is now available from some non-traditional lenders:

(1) Church Loan Solution Number One: Non-Recourse Loans (instead of guarantors). As noted above, the willingness to forego traditional guarantors does require a non-traditional lender. This particular church financing solution means that lender decisions will not be based on personal guarantors in any way.

(2) Church Loan Solution Number Two: Long-term loans (up to 30 years). Church financing will be much more successful when it is long-term instead of short-term (payments will be reduced dramatically).

(3) Church Loan Solution Number Three: Low interest rates (usually a maximum of prime plus 1%). In reality many churches have been taken advantage of and charged excessive interest rates because lenders perceived that they did not have any other realistic options.

With payments based upon a rate in the range of prime plus 1%, church financing payments will be reduced dramatically. In combination with longer-term loans, the overall payment reduction will make a significant contribution to church cash flow improvements.

(4) Church Loan Solution Number Four: Minimum church financing of $500,000. This allows churches to complete most financing in one step rather than piecemeal over a period of years.

(5) Church Loan Solution Number Five: High LTV (75% to 90% is available). This results in a more workable amount of 10% to 25% (rather than 40% to 50% with traditional church financing) for the down payment or non-financed portion in refinancing.

(6) Church Loan Solution Number Six: Church financing can now include new construction, renovation, land acquisition, purchase and refinancing. Because of more flexible terms, it is no longer necessary for these vital financing needs to be postponed indefinitely.

Collectively the six church financing solutions described above should benefit a large number of churches by allowing refinancing with much better financial terms and by facilitating the construction of new churches on an accelerated timetable. The six business finance solutions are likely to result in improved financial terms that are conducive to the long-term financial health of the churches which take advantage of these suggested church loan solutions.

Regardless of the practical business finance and commercial mortgage strategies that have been described above, it is appropriate to emphasize that arranging appropriate church financing will almost always be difficult. With a specialized church loan, the commercial real estate financing will usually have some unavoidable complexities. As a result, prudent church borrowers should attempt to acquire a better understanding of these complex business loan issues.