McKnight Group

Over the past several posts on funding your church design, we’ve covered areas that bankers consider, including risk factors and lender calculations. There is another important consideration: appraisals. These are usually required (though we will share an exception) and recent policy changes have impacted what funding is possible.

Understanding the Importance of Church Design Values

The total loan amount granted by a lending institution will generally be about 80% of the appraised collateral value. Different situations, however, can greatly impact the appraisal.

If your church is starting from scratch–say, with an empty field with nothing on it–and you have put together a church design that will cost $1 million to build, you only have the appraised value of the land and the potential value of the building to guarantee your loan. The bank is only going to finance 80% of that, or $800,000. So, you will have to come up with the other $200,000 in cash.

However, if you have an existing church building and property with an appraised value of $2 million, the lender will give you 80% of the appraised value of your existing property, which is $1.6 million. If you’re adding on a million-dollar project, that $1.6 million loan is more than enough to build your $1 million project.

Understanding the Challenges of Church Building Appraisals

The 2010 Dodd-Frank Act also complicates appraisals. It transformed church building possibilities by placing strict guidelines and penalties on appraisers for inaccurate appraisals. Church buildings are classified as one-use buildings and  relatively few churches sell over a given period of time. Both make it difficult to find equivalent sales figures for comparison. When churches do sell, they tend to sell for less than they are worth, usually between 50–70% of their value. This means that an appraisal is likely to significantly undervalue the actual worth of the church building or the cost to replace it.

Returning to our imaginary scenario, if your million-dollar church building is only appraised at $500,000, the lender is only going to loan you 80% of that figure, or just $400,000. This is what churches in America are facing today. The churches that are getting loans are churches that have existing buildings with appraisals worth more than whatever project they are trying to build. Other churches are putting away cash toward these projects ahead of time.

Two More Considerations for Church Building Financing

Fortunately, there is some good news. In May 2018, the Federal Government changed some of these Dodd-Frank lending regulations, loosening requirements for smaller banks. This means that smaller and mid-sized regional banks are probably the best options for church leaders seeking funding for their new church design. 

Second, while it may be difficult to get sufficient funding from banks, you may wish to look at alternate lending options. Some church denominations have programs that will lend church building funds without appraisals. In this case, the funding available for your project would not be dependent on the appraisal value.

There are many moving parts to any church funding process. We share our free i3 webinars with church leaders like you each year, so that you can understand all that’s involved in creating the best possible church design for your budget and constructing a church building that will be an effective tool for ministry. To learn more, sign up for our  today.

Recently we’ve been diving deep into lending institutions’ risk calculations to help church leaders like you understand how much money you can expect to borrow for your church building project. In our prior post, we explained the various risk factors that lenders study to determine how much funding they will lend for a church design and building project. In this post, we will share examples to illustrate what we mean in concrete terms.

Sharing Two Church Building Funding Calculations

In this example we have two different church building funding calculations laid out. This is an overly simple illustration because more factors are involved in each actual case, but they give you the basic idea of how the process works.

These side-by-side examples show two different funding calculations, based on different risk factors. Both begin with the same basic premise: that your church has an average annual total income of $250,000. Lenders generally start with a base assumption that they won’t lend you more than three times that total income, or in this example, $750,000. Up to this point, the two calculations are the same.

Calculating Church Design Funding Based on Annual Revenue

In the left-hand column, the loan funding is based on the church’s annual revenue. Lenders don’t want “debt service payments,” which is the lender’s term for payments on the loan, to exceed 35% of your church’s total annual revenues. You don’t want to exceed this cap either, because it won’t leave you with enough funds to support your existing ministries, pay salaries, and so on.

As shown, this means a maximum total annual payment of $87,500, or a monthly payment of $7,291.67. Adding in the interest rate (which determines the interest you will need to pay) and a 20-year loan length gets a total amount that you can borrow of $1,041,230.55.

Running Different Risk Calculations for Comparison

But lenders don’t stop there. They use other calculations to help them determine the true ability of each church to pay back the loan. In the right-hand column, they figure out a maximum borrowing amount based on the number of giving units (which was also defined in our prior post). They expect that the average maximum that each giving unit will be able to pay each year (in addition to their existing annual pledge to the church to cover operations and mission) is $1,000.

So, if you’ve got 75 giving units in your church, lenders will allocate $75,000 per year to pay off the mortgage. This equates to a maximum monthly mortgage payment of only $6,250.00. With the same interest rate and loan length, the total amount you can borrow is only $892,483.33, which is more than $100,000 less than the other calculation. (We mentioned in our prior post that there were various factors that would decrease the lending figure, and this illustrates what we mean.) With these few parameters you can figure out a range of what your borrowing potential is. This provides you realistic figures to discuss what level of borrowing you are willing to take on if any at all.

It’s always good to begin a church design and construction project knowing what you can afford. Of course, if you have cash on hand that can be devoted to this church building process, that will increase your total projected budget.

Being realistic about the church design you can afford is always a good idea. Helping you stay informed and realistic about what’s possible is why we share our free i3 webinars every year. To learn more, sign up for our upcoming i3 webinars today.

Photo of various stacks and rows of coins with FUNDING concept word imprinted on metal surface

There are always limits on what mortgage lenders are willing to lend. That’s natural and reasonable, and it’s important to understand how those limits are determined. In our last post, we stated that lenders aren’t going to fund more than three times your annual revenue (or at least shouldn’t). That’s the maximum, but it’s not a guaranteed amount. Many churches actually receive less because every church carries a different level of risk.

Here are some of the risk factors lenders consider, and the questions they ask, in order to figure out how much funding they’re willing to loan for your church design and construction. And how much debt you, as church leaders, should be willing to accept on behalf of your church.

Questions about Your Church’s Growth

One category of questions that lenders ask is about your church’s growth in recent years. Is the church experiencing an appreciable pattern of numerical growth and attendance? Lenders want to know if you’re a growing church. Also, they will want to know the following: How long has the present senior pastor been at the church and what has been the pattern of growth for the church during his or her tenor? They want to see that the leadership in your church is solid and that things are going well.

Questions about Your Church’s Financial Growth

Here’s another important question lenders ask: Has the church experienced multiple successful years of financial growth? They want to see that the new people who are showing up for worship and other activities in your church building are also contributing to the financial growth of your organization.

Then there’s growth in what are called in the financial and lending world “giving units.” A giving unit is a group of people that participate together. Usually, this means a family. So, for example, if both parents have jobs and contribute to the church, that’s one giving unit. A teen living in the house might make their own pledge to the church. All of those together are considered one giving unit, and lenders want to see that the church has at least 100 giving units, and that the number of giving units is also increasing over time.

Understanding Reasonable Limits on Financing Your Church Building

Another important risk consideration for lenders is “debt service.” What other obligations is the church paying back currently? The banker doesn’t want the church’s annual debt service payments, including a new loan, to exceed 35% of the total annual revenues of the church. This limit, or “cap,” makes good business sense. If you spend too much on debt for your church building project, you won’t have enough money left for fixed expenses, like paying your pastor and other staff, or supporting the various ministries that support your church vision, which is probably the reason for your growth in the first place.

We hope this all makes sense, but if you’re not sure, stay tuned, because our next post will include a sample calculation to help illustrate these concepts. Meanwhile, sign up for our next free i3 webinars, because these webinars are the way we explain such church building concepts as debt service and financing.

If there’s any chance a new church building project is under consideration in the new year, it’s a good idea to begin to prepare for funding and financing now. If you do, you’re more likely to successfully secure a traditional mortgage (or any other financing) to construct your new church design. Understanding a few important elements of what lenders are looking for can maximize your potential for securing the necessary funds.

Choose a Lender that Understands Churches aren’t Residential or Commercial

It’s very important to work with a financing institution that understands churches. While a church building is certainly not a residence, it’s also not a typical business either. This means your church building project won’t fall neatly into either category. As we’ve explained elsewhere, even the zoning for your church building location typically requires jurisdictional approval, because churches are usually considered “conditional use” properties. If the lender you’re working with doesn’t understand things like this, they are less likely to understand the requirements and constraints you’re working with in your church design and development process.

Why Lenders Need to Understand Church Design

There are other reasons a lender needs to be familiar with church building projects. A traditional lender who hasn’t worked with church leaders might not understand a church’s vision for ministry in the community. They likely won’t understand the differences between the various types of churches, including the very different needs of traditional and modern church design.

But lenders who have worked with churches are will better comprehend the various constraints affecting church design and construction projects, how your ministry needs are going to impact your church design, and how leadership of a church works, that most frequently church leaders are held accountable by a church governing body.

What’s the Most You Can Expect to Borrow for Your Church Building Project?

So, once the right lender is identified, it’s time to come in with the best foot forward. Let’s start with the bottom line. The highest total loan amount you should expect to receive for your church building project is three times your church’s annual revenues. It is also a good rule of thumb on the maximum you should borrow for a project. If a bank is willing to lend you more be very careful. 

In most cases, it’s unlikely three times your church’s annual revenues will be the amount you actually get. The mathematical formulas lenders work with are impacted by your responses to a number of questions about your church, its leaders, your church design, etc. These questions are designed to help them determine how much of a risk it would be to lend to your church. If you don’t have great responses to their questions, they’re going to decrease the amount of money they’re willing to loan for your church building project.

In our next post, we’ll cover in more detail the types of questions lenders ask, and how you can best respond to them. Meanwhile, to keep up with the latest information about church design and building projects, sign up today for our next free i3 webinars.

Finding on-line information covering the details of the church design and building process can be daunting. We started blogging and sharing our free i3 webinars because we wanted to give church leaders the latest and most complete information that we know on every step of the modern church building process.

But there’s another reason why attending our webinars is always a good idea: we have a question-and-answer session at the end of each one. We also like to share the answers to those questions for others wondering the same. During our recent webinar, Mapping the Steps to the Church Building of Your Dreams, a church leader asked a great question. Here’s our answer.

How Is Construction Cost Growth Impacting Church Building Projects?

Inflation has been a frequent news topic lately. Prices on everything are going up. Unfortunately, construction cost growth is impacting church building projects as well as residential homes. Pandemic uncertainty continues to affect many aspects of the economy. Supply shortages of raw materials, manufactured goods and manpower still make it difficult for contractors to confidently develop realistic timelines and firm budgetary quotes.

Inflation Continues, but the Rate Is Slowing

There’s no question that construction costs have risen over the past 18 months, and the rate of increase has been significant. For example, the price of raw steel has increased by as much as 340% over that period, while concrete has risen about 5%. Wood has taken contractors on a roller coaster ride, up and down, up and down, but the overall trajectory has unfortunately been an upward climb.

The only good news is that the rate of these cost increases is slowing. This doesn’t mean that prices are going down, but that they are going up more slowly. As suppliers of building materials get a better sense of what lies ahead the number and frequency of cost adjustments are slowing down. Still, the ability for supply to be able to meet demand will be an ongoing issue for years to come.

What Does This Mean for Your Church Design Project?

Overall, this means that you should not delay any church building project, even if you’re only in the “What if?” stage or just beginning to review church design options that will better support your church vision for ministry in your community. The longer you wait to begin construction on your church building or remodeling project, the higher your costs are likely to climb. Especially if you’re working with a fixed budget, you need to keep the church design process moving forward because every month you delay, construction costs will most likely continue to increase.

This is also why it’s important to keep up with our free i3 webinars. In a constantly changing building environment, you can’t count on any aspect of the church building process to remain unchanged. Instead, keep abreast of the latest ideas, insights, and innovations around church design and construction by registering now for our upcoming webinars—and hang onto your hats, because we expect it will be a roller coaster ride for a while.

Construction on your church building is finally finished. But there are a few more steps to complete before the project is done. Here’s what else you need to do once the contractor has closed out their work.

Completing the Quality Assurance Process

Once the contractor finishes their work, you’ll need to have a final walk-through. Do this with the contractor, looking at every room and all aspects of the church building to make sure everything really is complete. This process is called quality assurance or sometimes just creating a “punch list.” That list includes everything that you believe needs to be finished or corrected before you sign the completion documents and make the final payment.

Moving In and Getting Trained on Your Church Building Systems

Once the punch list is addressed to your satisfaction, it’s time to begin moving into your new or remodeled church building. You will need to set up furniture and get the various systems set up to your specifications. You also need to get the right people trained on all the systems that help your church design function optimally. Obvious systems include your HVAC system and all the various electrical processes, such as audio, video, and lighting for your worship center and any other meeting or activity centers. You may also need to be trained on the Wi-Fi and security systems.

As part of that training, it’s a good idea to put all processes into one “operations manual” for your new church building. This provides an ongoing record of what was installed in the building and how it functions. This manual should also contain record drawings, which are copies of the construction documents marked in red, with all the details where changes were made during the construction process.

The manual should also contain the warranties which you will accumulate during this finalization process. Generally, warranties tend to be good for one year, but warranties for individual portions of the church building, such as the HVAC or lighting units, may have longer periods. All this material is helpful for future reference by the next generation of church leaders and the maintenance team.

Recapping the Church Design to Completed Building Process

It’s been a long while, likely 18 to 24 months, but now your church and its members can rejoice in a job well done. Here again are five major steps undertaken during the process:

1. Church design phase and budget estimates
2. Stewardship, funding, and fundraising
3. Development of construction documents
4. Permitting process and pricing finalization
5. Church building construction and wrap-up

We shared this outline during one of the free i3 webinars we conduct to help church leaders keep up with the latest information on church design and building projects. To learn more and register for our upcoming webinars, click this link.

After the planning and the time it’s taken, you’ve gotten the church design finalized, construction documents completed, and permits obtained. At long last, it’s the moment to make the commitments and actually begin construction! For members of your church building team, that doesn’t mean your work stops. Here are some items and areas that we suggest church leaders keep in mind during the new church facility construction process, or when a church remodeling project is underway.

Finalizing the Church Building Budget and Construction Contract

Once you have a full set of plans, you can get final contractor and/or subcontractor quotes for church building construction. Most of the time, you should be working off a budget, and up until this point, you haven’t been able to get a final price on the total cost. The construction documents will provide the detail to get accurate pricing, and they will help you understand the construction quotes you receive and check them for accuracy. You will use them to determine and finalize the construction contract.

Don’t forget that once the contract is signed, you must allow time for the contractor to mobilize. They also are working on a budget and will need time to finalize their costs, obtain materials, and contract with laborers and subcontractors for your church building project.

What Happens Once the Digging Starts

Again, your work doesn’t stop once the digging starts. A variety of questions will arise that need your attention during construction. These could include anything from which doors are keyed alike to approving materials selections for building finishes and responding to questions about color schedules for different parts of your church design.

It’s why we recommend that selected members of your church building team plan to have periodic meetings with contractor representatives. This way, your contractor knows that there’s a process in place to address items that arise during the church building process. It also gives you a chance to receive updates on a regular basis. This should avoid any unpleasant surprises later in the church building process.

Understanding that Church Construction is Just One Part of the Church Design Process

As you can probably tell by now, the actual construction of your church design is just a part, albeit a crucial part, of a much bigger overall process. While it might be nice to imagine developing your church vision, getting some plans, and starting construction all in short order, church building or remodeling has many steps. Our many blog posts demonstrate it. Once construction has started, there will still be planning to be done and decisions to make, especially around the interior furnishings for your new church building or remodeled sections of an existing facility.

It’s another reason we share our free i3 webinars with church leaders like you. The church design process is complex, and professional guidance is important to help bring a church vision to successful completion. Now that our 2022 lineup of free webinars is available, it’s a good time to review our upcoming webinars and register to learn more about the church building and design.

If you’ve ever put together a child’s toy or assembled a piece of furniture, you know that it’s important to do each step in order. Order counts in the church building process, too. You shouldn’t start construction without the money to pay for it, and you can’t begin building if your church design isn’t finalized. Plus, you need your construction documents finalized in order to get the necessary permits. But, with all of this done, here’s what you need to know about the permit step in constructing your church building.

Getting the Zoning Permit for Your Church Building

Once construction documents are complete, you can apply for your zoning permit. It is very rare that there is no zoning process. Unfortunately, we can’t tell you exactly how that process will look because every jurisdiction is different. Generally, you submit your documents for what is often called an administrative review. You fill out a form and provide copies of your plans. Then, the appropriate administrator in your city or town approves it.

Sometimes, however, you will also have to go through a formal review process, especially if you’re going to need a conditional use permit (which we explain here). In that case, you need to attend a public meeting to talk about your project and have the board approve it. Also note that, many times, your church building zoning permit will be separate from a building permit. Usually, you must have the zoning permit in hand before you can submit a request for a building permit.

The Building Permit Process Comes Next

Once your zoning process is complete, you can apply for the building permit for your church construction project. Again, every jurisdiction has its own process, but generally you submit your application, and the authority has 30 days to respond.

Don’t be surprised if you don’t get your building permit right away. In fact, it’s very rare that approval happens immediately. Instead, the authority issues a letter of “clarification” or “correction,” which just means they have questions about your church design or other aspects of the construction documents. Your church design professional will submit responses to the authority’s letter, and then you wait—often another 30 days —for them to issue the building permit.

Exceptions to Every Rule

It’s no surprise that there are exceptions to every rule, in terms of how long the permitting process will take. One good rule of thumb is: the larger the jurisdiction (city instead of town, large metropolis instead of regional city), the longer the process will take—and sometimes, the more complex the process will be. So, it’s important to remain patient during this process. Fortunately, while you’re waiting, you can finish your fundraising process and complete any paperwork with your lending institution. This is also a good time to use those construction documents to get bids from contractors and subcontractors so that when your permits are all approved, you’re ready to get started on the actual building of your church building.

We can provide insight about this process because we’ve worked with a lot of church leaders in many jurisdictions over the 50+ years that we’ve been building churches. To learn more about all the steps you need to follow for a successful church design and construction process, sign up for the next in our series of free i3 webinars.