Previously, we talked about what to expect when looking for a lender to finance your church building project. The church funding scene has changed a lot in the past few years. The still-recovering economy and the Dodd-Franks Act have put the squeeze on church building projects because of the way churches are appraised. In this post, we want to talk specifically about how lenders have developed church financing guidelines and what that means for your church vision and future church building projects.
Determining Debt Service
One of the first church financing guidelines that many lenders focus on is your debt service capacity. This is the amount of money lenders believe your church can reasonably put toward repaying a loan for your new or renovated church building project. The standard amount is a percentage of your total annual revenues or annual budget, and that is 35%.
The math: To help you understand what that might mean in real terms, let’s say you’ll need to pay $10,000 per month toward debt service. The lender will expect you to have annual revenue of roughly $360,000 to afford an annual debt service payment of $10,000 per month. Or, $120,000 per year which is one-third (roughly 35%) of $360,000.
You can look at it the other way and take your known annual revenue and multiply that amount by .35, and then divide that number by 12, which will give you a rough estimate of the payments you’ll be able to afford according to your lender.
In short, this means that the lender doesn’t want you to spend more than a third of your budget on paying off your church building mortgage.
Church Financing Determined by Giving Units
Some lending institutions care less about your annual budget than they do about the number of giving units that will be contributing toward that debt service. As we’ve discussed before, giving units are specific groups or individuals who give to your church on a regular basis.
A lending institution sees giving units as a financial indicator of the size of the church and its ability to pay on debt service. Usually banks will not allow debt service greater than a thousand dollars per giving unit per year.
The math: This means that if you have a hundred giving units in your church, the maximum annual debt service a lender would allow is $100,000 per year. As you can see, this is significantly less than the $120,000 in the first scenario, which is another reason why it’s important to shop around and compare lending institutions and their requirements.
Financing the Entire Church Building Package
Because of the appraisal restrictions created by the Dodd-Franks Act, churches are often valued at about 50% of the cost to build a new church building from the ground up. As a result, many churches today are finding that renovation or expansion of existing church facilities is much easier to manage from a financing perspective.
For example, if you’re building a million-dollar church from scratch, the bank will appraise that new building at half, or 500,000 and only loan you 80% of that value, or $400,000. This means you must come up with $600,000 cash. On the other hand, if you renovate or expand on a five-million-dollar existing church facility, you might be spending a million, but the bank is going to appraise the existing facility at $2.5 million and you’ll have plenty of borrowing capacity at 80% value.
Bottom line—church financing is complicated, which is why The McKnight Group is a full-service church building company that has team members available to help you understand the financial side of things as well as the construction side. It’s also why we offer a variety of free i3 webinars each year. These informative sessions help you understand complex issues like church financing and many other things that come in handy to church leaders. We’ve got some great new webinars coming out in 2017, so keep an eye on our website because registration will open soon!