Our last post discussed how traditional lenders calculate a church building loan amount by analyzing factors like cash flow and annual giving. But there’s another evaluation metric that church leaders must understand when starting a church building or church design project—appraisals. Specifically, how the Dodd-Frank Act changed appraisal standards and made financing church buildings more difficult.

How Financing Changed After the Dodd-Frank Act

After the 2008 financial crisis, the U.S. Congress passed the Dodd-Frank Act to tighten regulations on lending and protect the financial system. One major change was in how real estate appraisals are conducted. Under the new rules, appraisers must follow strict guidelines and are held to stiff penalties if they deviate from them. This has had a significant impact on church lending.

Unlike traditional commercial properties, churches are often classified as “single-use” properties, meaning they don’t have a broad resale market. Because of this, appraisals tend to come in much lower than expected, regardless of a church’s strong cash flow or giving history. These lower appraisals can drastically reduce the amount a church can borrow.

What Determines How Much Less a Church Can Borrow?

Even with strong cash flow and many giving units, traditional lenders now will likely only lend up to 80% of the appraised value of your church building project. This difference can be a game changer.

Let’s use an example: suppose you plan to build a new church building with a $1,000,000 budget. Based on an annual cash flow of $300,000, 100 giving units and the right answers to all the questions presented in our last article, you’d expect to borrow $900,000 (three times cash flow), and your church would need to provide $100,000 in cash.

But here’s the problem—because churches are appraised as single-use properties and historically resell for less, your appraised value might come in far below that budget. If local church sales show resale values at only 50% of their original cost, your $1,000,000 building may only be appraised at $500,000. Now the lender will only offer 80% of that value—just $400,000. That means that your church would now need to raise $600,000 in cash to move forward.

Appraisals Favor Additions and Renovations Over New Church Designs

This appraisal requirement makes it easier for churches to add on to or remodel existing buildings instead of starting from scratch. Renovations and smaller additions don’t cost as much as a new building, so they are more likely to fall within a range that appraisers and lenders can support when evaluating the worth of an existing church building.

An Appraisal Workaround

We understand that a less than desirable appraisal may sound discouraging. But don’t worry, there are strategies that can help to overcome this hurdle. In our next post, we’ll explore an appraisal workaround that some churches are using to secure the funds they need.

Meanwhile, we invite you to check out our free i3 webinars, where we cover topics like church design, remodeling strategies, budgeting, and navigating the lending process. Visit our website to explore topics, sign up, and take the next step in your church building journey.