Church Executive Roundtable: Church Lending & Finance (Part 2)

By RaeAnn Slaybaugh

Our Roundtable Panel

MMBB Financial Services: James R. Cook, CFP®, National
Outreach Manager
Bank of the West: Dan Mikes, Executive Vice President
Christian Community Credit Union: Scott Reitsma, Senior Vice President, Ministry Development Group (Remote participant)
AcctTwo: Tammy Bunting, Director of Not-for-Profit Services
First Bank: Therese DeGroot, Managing Director, Community First Financial Resources
Evangelical Christian Credit Union (ECCU): Randy Marsh, Ministry Development Officer

This summer — at the National Association of Church Business Administration (NACBA) annual conference — Church Executive hosted a live roundtable on two top-of-mind topics for church leaders: lending and finance.

How has the lending climate for religious institutions evolved in the past year, specifically?
Mikes: Pretty much all at once, the stark lack of construction activity has turned on a dime. Eighty percent of the loans we’ve made year-to-date are for construction, whereas 80 percent of the loans we made last year were renewals of other lenders’ notes.
DeGroot: We’re also seeing a lot of activity in the construction area, which makes sense — now is a good time to do it; rates are still low.
Reitsma: From our perspective, for many financial institutions, church lending basically disappeared from the landscape during the Great Recession. Only a few of our colleagues that were formerly very aggressive church lenders remained actively lending during the downturn. So today, it’s generally a more thorough and rigorous underwriting process for a church to secure financing.
DeGroot: Another shift we’ve seen is away from a megachurch business model a multisite approach. Churches are “leaning into” how they expand. I think that’s very pragmatic, frugal and smart.
Mikes: From a risk management perspective, I agree that lenders like this shift. If a church falls on hard times, operations can be scaled back via satellite closures.
Marsh: It lets you spread your risk over more collateral and a broader membership base.
Bunting: What’s really great about this approach is that a church doesn’t have to hire a new staff. Satellite locations function using resources from the main church; therefore, a church can expand its reach at a lower cost.
Marsh: With multisite, I’m seeing a lot of churches purchasing existing buildings — some times, existing churches.
DeGroot: We’re actually seeing more leasing before purchasing. That way, if the same kind of property within that community comes up for sale, the church buys.

What do you think the church lending climate will look like a year from now?
DeGroot: I think there will be a lot more banks jumping in to church lending. Intellectually, they know churches want to pay them back, and yet they don’t know how to finance a church. So, whether it’s smart money or not remains to be seen.
Marsh: I agree; but, for churches that might have been on the bubble of qualifying for a loan, that bubble broke. There’s money out there, but it’s not easy for those churches to get it. I think that’s mostly driven by regulations. So, for the well-qualified church, lenders will be lined up at the door. For the not-so-well-qualified church, not so much.
Bunting: I found there was a lot more equity required to get a loan this time than ever before. The bank was more intentional in our investment in the project.
DeGroot: Yes, but I think a year from now, property values will have increased enough that there will be a little more equity in the properties. Banks might loan them 75 or 80 percent of the loan value, and the recessionary cycle could start all over again.
Mikes: For experienced lenders — and even newer ones who’ve done their homework — I think they’ll probably be a little bit more focused on governmental structure this time. For those of us who’ve been around for a while and are paying attention to foreclosure headlines, we know these churches. We know they’re very centralized in their decision-making. Usually, there’s not a diverse board of directors to which the pastor is accountable. Nine of out 10 times, they’re pastor-driven.
Marsh: Yes. We test for an independent board, making sure the congregation is aware of the loan and has accepted the terms. We try to be sure they’re following their bylaws. As a lender, if the only person you get to meet with is the pastor, that’s not a good sign.

What steps can a church take to position itself as a better loan prospect?
Reitsma: A church should be a transparent lending candidate. It should be able to articulate the vision and purpose of its project well, in terms of community impact. The church should have ministry growth metrics to share with the lender that demonstrate historical capacity to support the level of debt requested. The church should be able to articulate who they are, who they want to be, and how the proposed financing will impact the surrounding community.
We are also seeing a “deleveraging” trend among the ministries we are serving — in other words, these churches are moving toward operating with more reserves and
less debt.

DeGroot: During the recession, the value of property went down (and with it churches’ borrowing capacity), as did tithes and offerings. If you’re underwriting on a cash flow basis, the tithes and offerings are what we pay more attention to, frankly, than the value of the property.
Marsh: It really is ultimately all about cash flow.
DeGroot: And cash reserves.
Mikes: Additionally, a church needs to be prepared to discuss its post-capital campaign level of indebtedness and means of debt servicing. Although capital campaigns do, to some extent, enable a reduction in the debt from the “high-water” mark during the construction phase, they don’t typically bring it all the way back down to a level where, if there is no growth, the church could service the debt from operational cash flow as it appeared in the year prior to the project. As lenders, we need to know the contingency plans and the church’s willingness to potentially do a debt service capital campaign.

If reductions in compensation and benefits are necessary, how are churches making the decisions about who those will affect?
Marsh: The most common denominator is that churches wait too long to make that choice — until they absolutely have to.
DeGroot: We help churches make those decisions as we’re monitoring their quarterly statements. We really try to work with the church’s CPA and bring it down the road in terms of the next steps, should those become necessary.
Mikes: As Therese mentioned, we have to make that phone call to the church if we see its cash reserves have dwindled. That data allows us to play the bad cop and incite those in leadership to make good business decisions in a timely fashion.
DeGroot: When reductions are in order, we’ve seen senior pastors step up and say, “I’ll take it.” And, rather than making key staff take salary reductions, they’d rather lay off more junior staff and ask key staff to take on more responsibility. These churches are depending more on volunteers.
Reitsma: We, too, have seen pastors forego compensation, and (on rare occasion) even loan their churches the money to ensure staff salaries are delivered on time. On the other end of the spectrum, of course, unfortunately we’ve seen staff cuts that dramatically affect how ministry is delivered in some churches. It is our objective to help the ministry to identify those necessary adjustments as early as possible.
Cook: Around the recession, we too saw a lot of senior leaders foregoing raises, sometimes for several years, so their key staff could have increases.
Now, as there’s a little bit more money available, churches are allocating increased compensation to more junior staff in recognition that they’ve likely endured three or four years of no raises. From a benefits standpoint, one of the things you can do in the church world (that you can’t do in the corporate realm) is to segment your staff. In this way, the church can actually offer a lot more benefits and put together an attractive benefits package to staff at all levels.

This insightful discussion began in our Sept / Oct 2014 issue.


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