Every business (and culture, for that matter) develops jargon that’s specific to its group, organization, or industry. For example, we have church building jargon here at The McKnight Group. As readers of this blog, you’ve learned about “cost per square foot” and “interior design,” about “multi-ministry” and “church vision.” Those are just a few examples of “church building speak”—a language that combines the worlds of construction and ministry, in order to explain certain concepts that are particular to those worlds.
Banks have their own set of jargon. When you applied for a home loan, you most likely learned about “points” and “amortization,” “prepayment penalties” and “contingency.” When it’s time to consider a new church building or renovation project, church leaders need to learn the “bank-speak” that comes with a commercial loan application process.
In this post, we’ll highlight some of the jargon you will need to understand in order to put together the most effective loan package for your church building project.
Commercial Institutions and Annual Revenue
Let’s begin by clearing up one important, and frequent misperception. From the bank’s perspective, churches are considered “commercial,” even though churches are not-for-profit organizations. This is because banks divide lending into two separate categories: commercial and residential. Since churches aren’t homes, they are lumped into the bank-speak category labeled “commercial.”
When it comes to commercial lending, banks won’t loan an organization more than three times its annual revenue. So what’s “annual revenue”? This is the amount of money your church receives in a year. Usually this is money given by those in your church, but it could include income from other nonprofits that use your building, or birthday parties and other community activities that you offer.
Growth in Attendance and Giving Units
That “three times revenue” figure we just mentioned is only the starting point, however. The total loan value will likely go down from there based on other factors.
For example, banks look at “numeric growth” in church attendance and something called “giving units” to decide how much of a risk your church is for making its loan payments. If your church’s weekly attendance has been steadily growing for the past several years (in addition to growth in attendance, banks want to know how long attendance has been growing), then a bank probably won’t deduct much, if anything, from that “three times” value.
But banks also look at whether giving units have increased. A giving unit is an individual or household that regularly gives a significant amount to the church. Now, “significant” is one of those bank-speak terms that’s a bit harder to define, and will vary in different parts of the country, but we figure that a good round number is $1,000 per year.
If the giving unit number—of individuals or families who give at least $1,000 per year to the church—grows each year, the bank will say you’re a “good risk.” That essentially means you’re a “low risk”—a church that’s likely to be able to pay back its loan.
Church Building Loan Annual Debt Service
Another key bank-speak term to understand is “annual debt service.” This is the amount that your church will need to pay back during one year’s time. From a bank’s perspective, this should not exceed 35 percent of your church’s annual budget or annual revenue. Otherwise, the bank fears that you won’t be able to pay your other bills, and might start defaulting on loan payments.
Some banks actually look at the giving units in addition to budget or revenue to determine this annual debt service number. They might say that your annual payment can’t equal more than the giving units could cover in a year. (This doesn’t mean that you have to pay it all back in a year; it just means they won’t loan you more than a year’s worth of giving unit income.)
Ready for More?
While these are some of the major bank-speak terms involved with preparing a church building loan application, there’s more you’ll need to know. For example, banks will also be interested in how long your senior pastor has been in place, because they’re looking for an idea of how stable your church is. To learn more about what banks are looking for and more about church design and building, visit our website and sign-up for our informative i3 webinars—they’re absolutely free.