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Finance & lending trends: time to expand to new location(s)?

FINANCE AND LENDING TRENDS ICONAs unemployment has declined and consumer confidence has grown, it appears that the post-meltdown reluctance to solicit donors for capital pledges for religious institution expansion is abating.

This is giving way to pent-up demand for worship space.

By Dan Mikes

Other accommodative factors — such as recovering real estate values and relatively low interest rates — might also be contributing to an increase in worship facility expansion, facilities acquisitions, and the launching of leased satellite locations.

In recent years, banks have continued to anticipate a faster rate of economic expansion.  Consequently, loan volume targets continue to exceed demand. Qualified religious institution borrowers are finding no shortage of willing financial partners.

Historically, the conventional approach to religious institution expansion was to purchase land, build a larger sanctuary, and relocate. In more recent times, congregational expansion strategies include the leasing of facilities with associated tenant improvement costs, purchasing and converting an existing commercial structuCHURCH ADDITIONre, or the merger of a strong and growing congregation with another religious institution which might be in transition or distress. Each of these approaches carries its own subset of lender focal points.

For example, if your religious institution is planning to acquire land now and build later, you should know the lender’s advance rate against undeveloped land will be lower. The Interagency Guidelines for Real Estate Lending Policies provides guidance to banks on advance rate limits for various categories of commercial real estate. For instance, the loan offer to your religious institution might be limited to the sum of 75 percent of the appraised value of your existing facilities, plus 60 percent of the appraised value of the raw land.

When growth puts pressure on existing space limitations, another common approach is to lease a facility along the perimeter of the current donor-commute circumference. Improving a tenant space can be a cost-effective and scalable way to relieve some pressure on your current site while also availing yourself of growth from outside the religious institution’s current draw perimeter. The lender will consider the lease duration. Is it short enough to accommodate a subsequent relocation if growth should warrant, yet long enough to justify the dollar cost of tenant improvements? There is no set rule in this regard. However, lenders are unlikely to be receptive to a plan to make a multimillion-dollar investment in tenant improvements to a facility with a short-term lease. The inclusion of an option to purchase the property might mitigate this concern.

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The lender will also want to understand the religious institution’s overall vision for satellite expansion. Typically, once the satellite congregation reaches sufficient size, with stable or increasing year-over-year attendance and net cash flow, the lender will entertain a request to purchase or build a facility. Conversely, if the religious institution plans numerous additional long-term leased satellite locations, the lender might become sensitive to the percent of total contributions coming from leased locations. If the location(s) secured by the bank’s mortgage(s) generate the majority of total revenue, the lender is more likely to remain confident that in the worst of times, the religious institution will make every possible effort to sustain operations at the collateral site.

Examining church mergers

In the wake of the economic downturn, there has been an increasing incidence of expansion by way of merger. Larger, financially stable congregations are being approached by smaller, faltering religious institutions. This can result in a mutually beneficial outcome.

The merger is often accomplished by rolling the assets of one corporate entity into the other, and then dissolving the smaller 501(c )3. However, if the congregation which your religious institution plans to acquire has debt, be sure to discuss the plan with your lender in advance. Your legal counsel might advise that retaining separate corporate entities will shield the parent organization from the liabilities of the other congregation. While this might be correct, your lender might have other concerns.

Your existing donor base would likely view the two organizations as one, with a single spiritual leader and leadership team. If the merger does not succeed, your religious institution could suffer widely publicized reputational damage, thereby having an adverse impact on attendance and revenue. In a worst-case scenario, if the acquired congregation defaults on its debt and the other lender forecloses, the local media will likely tie the good name of the parent organization to the financial failure.

At that point, your donors might not take comfort in the technicality of the two separate legal entities. Some portion of your donors might fear for the solvency of the parent organization and decide not to “throw good money after bad.”

Lenders are risk managers. They are compelled to consider worst-case scenarios. Nevertheless, if your religious institution is contemplating acquiring an indebted, struggling congregation, your lender will likely be supportive if your organization has a history of stable revenue, strong net cash flow, and ample reserves.

After pausing for a few years following the downturn, it’s great to see physical plant expansion return to the religious institution arena. The diverse strategies for accommodating congregational growth will be familiar to an experienced religious institution lender.

While there might be numerous banks competing to support your congregational growth, in the long term, you will be better served by an institution with a track record of supporting diverse religious institution models.

Dan Mikes is Executive Vice President and National Manager of the Religious Institution Division, Bank of the West, in San Ramon, CA.


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