By Dan Mikes
As the business administrator of a religious institution, you don’t need to be an experienced commercial developer to get a construction loan — you just need an expert ministry bank.
You don’t need to be an experienced commercial borrower to obtain financing for your religious institution. However, to do the best job for your ministry and make the way as smooth as possible, you should work with a lender that has a proven track record banking religious institutions.
Not every local banker is able to quickly process a construction loan or mortgage request from a religious institution. Even where there’s a strong and long-standing relationship, banks might be ill-equipped to provide construction loans to religious groups. This is primarily for two reasons:
#1: They lack experience in making loans to religious institutions (which differ significantly from the loans they make every day to for-profit businesses and other entities)
#2: They might expect that the religious institution lacks experience in undertaking a major commercial construction project.
Not all banks have a full understanding of how religious institutions operate. A lender with a track record of serving religious institutions can provide guidance through the entire process, particularly early on when you might want help identifying your borrowing capacity following the launch of a pending capital pledge campaign.
An experienced religious institution banker could also avail your ministry of user-friendly, low-cost loan products tailored to your special needs. For example, you might be able to avoid onerous loan covenants better suited to for-profit entities and which could undermine ministry management autonomy, such as liquidity requirements, minimum debt coverage ratios, and limitations on capital expenditures.
Banks typically offer five-year term loans to commercial borrowers. This means that although the monthly debt service is based on a 15- to 25-year repayment period, the outstanding principal is actually due and payable at five years (referred to as a “balloon payment”). If the bank remains comfortable with the borrower, upon review of a fresh loan application, the loan might be “renewed” for another five years, resulting in the incurrence of another round of closing costs (appraisal, title insurance, environmental assessment, loan fee and so on). To minimize these redundant costs, look for a bank with a successful track record of lending to ministries. It might be willing to take a longer risk, offering a seven- or even a 10-year term duration.
The loan offer might include a requirement to establish a depository relationship. To help get the best pricing on your loan, plan to look for a full-service institution that can meet all your needs, including equipment financing, cash management, merchant processing, electronic giving and commercial credit cards. Discussing deposits can work in the borrower’s favor because the lender will price the loan based on a “relationship yield.”
Prior to the commencement of a construction project, it’s essential that your institution has its financing commitment firmly in place. Never assume that you’ll be able to secure financing after breaking ground. Acquiring land, signing a construction contract, and breaking ground before a lending commitment is in hand can be a potentially fatal financial mistake. Aside from the matter of “broken lien priority,” which could obstruct or block your ability to secure title insurance (a standard loan requirement), you’ll be also fighting an uphill perception of leadership. Lenders will question why you would put your institution’s good name on a contract prior to securing the means to meet the financial obligations tied to it.
Make sure your construction budget encompasses all costs before you break ground. After hard costs (the cost of the building itself) and soft costs (permits, inspections fees, soil-testing, engineering and architect fees), a well-planned budget must also include a margin for error, referred to as contingency. Every project can experience some surprises in the form of additional expense or unanticipated delay. Depending on whether the construction contract is a “Guaranteed Maximum Fixed Price” or a “Cost Plus” contract, the contingency budget should represent about 4 percent to 7 percent of total hard costs. Some banks allow either contractual format; some require the “G-Max.”
A bank-approved construction budget will be attached as an exhibit to the loan documents at loan closing. The approved budget memorializes the scope and the line-item cost of the project.
As projects progress, there will almost always be budget variances. If savings are realized on early stage elements — such as concrete and steel — the lender will allow the surplus from those line items to be held as a reserve for potential to overages on other line items, or for upgrades or change orders. Loan covenants typically prohibit unilateral execution of change orders without prior written authorization from the lender.
If the project is near completion when such changes are presented, the lender might approve release of the remaining contingency as the means of funding the change order. If the project is in its early stages, the lender will be less likely to release a significant portion of the contingency.
A well-planned project, with a good contractor and an experienced lender, can be completed on time and on budget. Your prospects of achieving this outcome increase if you begin by contacting a lender experienced in working with religious institutions early in the process. They already understand that a major commercial construction project is something you might face only once or twice in your entire ministry career, and will anticipate your questions and guide you through the process in a user-friendly fashion.
Dan Mikes is Executive Vice President and National Manager of the Religious Institution Division, Bank of the West, in San Ramon, CA. www.bankofthewest.com