church-financing-lending-lawsIf you owned a house in 2008, you’re well aware of what happened that year—with the bursting of the mortgage bubble, your house most likely lost a significant portion of its value. While you might know that regulators have put new strict guidelines in place to prevent a recurrence of that home-value freefall, you might not realize that those guidelines have also had a significant effect on church financing.

The Dodd-Frank Act

The guidelines put in place to prevent another housing bubble are technically called the Dodd-Frank Act, after the names of the lawmakers who were largely responsible for creating the bill. While most of these federal regulations had to do with Wall Street, some of them have also had a major impact on Main Street, including the area of appraisals.

Among those responsible for the housing bubble in the first place were unethical appraisers who would value a property at whatever number would make a deal happen—even if that number wasn’t based in fact. The Dodd-Frank regulations now mean that appraisers must strictly base their evaluations on what are called “comparables”—a comparison of comparable properties that have recently sold.

Appraising Churches

At first glance, that seems like a reasonable law. The problem comes when it’s applied to churches. Most churches, especially older, traditional ones, are hard to resell, because there’s generally only one kind of buyer: another church. Plus, since church communities usually don’t have a lot of money, it often follows that church buildings sell for a pretty low value per square foot.

This means that if an appraiser compares your proposed new church building design or renovation project with the recent resale values of nearby churches, you’re likely going to be surprised at the value of your church. The appraiser is forced to use those low numbers in evaluating your brand-new building, and it will appear to be worth a lot less than it costs to build.

A Church Financing Example

Let’s say you’re constructing a new church building that’s projected to cost $1 million. A lender could be expected to loan you 80 percent of the value of the building—which would be $800,000.

However, since an appraisal is part of the church financing process, and the typical appraiser knows that churches only sell for 50 cents on every dollar of what it would otherwise be worth, they’re going to appraise your brand-new building at $500,000, and your bank is only going to give you a loan for $400,000.

Multipurpose to the Rescue

Fortunately, that doesn’t have to be the end of the story. Modern church buildings are truly multipurpose—not just for the church itself, but also in terms of what uses those buildings could have in the future.

If you work with a financing institution that understands churches, they will realize that your new church building could easily be repurposed for office use, city use, or use by a number of other types of nonprofit organizations. When those types of comparables are added to the equation, the appraisal will come out much more in line with the value of the building—and so will your loan.

Staying Ahead of the Curve on Church Design Issues

The bottom line of this story is that appraisals matter—a lot—in a way that they hadn’t just a dozen years ago. This is one reason why we share our i3 webinar series every year: to help you keep up with what’s happening in the church building industry.

For more on this and other church financing issues, simply visit our website. There, you can sign up for our webinars. They’re absolutely free!