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.