By Mark Thomas
Some fundamental “mechanics” can help a religious organization determine if it’s prepared to borrow.
There seems to be a recurring question in the religious community: Is this a good time to borrow money for expansion projects? The answer has less to do with the market and more to do with the dynamics of the specific institution.
Over the past several decades, religious institutions in America have grown, built and borrowed in every economic cycle. During the double-digit interest rates of the ‘80s, religious institutions in our portfolio grew, built and borrowed. More recently, we experienced the Great Recession, with interest rates falling to historic lows — and religious organizations still grew, built and borrowed.
So, the question is best answered by assessing each religious institution’s preparedness, not by assessing the market.
Is your religious institution ready to borrow?
On a recent trip to Florida, my family and I stayed at a resort near a golf course. While there, my youngest son discovered a new pastime: golf ball hunting. Each evening, about an hour before sunset, he walked the perimeter of the fairways looking for golf balls — those that didn’t end up where their owners thought they would when they put them on the tee.
He returned one evening with about 75 golf balls. As he was counting and cleaning them, he asked, “Why do so many of these end up off-course?” I could have struggled with a novice’s response. Instead, I chose to pose the question to a teaching pro. His answer was swift and simple: mechanics and timing!
He paused for a moment to emphasize more clearly the importance of fundamental mechanics. He said he could often tell if the ball had a chance of making the fairway before the swing was started. A flawed approach will likely be “in the rough, at best — and possibly out of bounds.”
The resurgence in the religious institution construction market, coupled with the current economic realities, has elevated the importance of understanding and implementing good “mechanics and timing.”
Here are some fundamental Balance Sheet/Financial Statement questions you should be prepared to answer:
Does your institution have two to three months of general operating reserves? Carefully differentiate between operating reserves and cash on hand designated for the construction project.
What’s your current equity position? Most lenders will require a “market value” appraisal of your existing buildings and an “as-complete” valuation, which is based on the architectural plans for the proposed new buildings. Loan commitments are typically limited to between 70 percent and 75 percent of the combined values. Further, “market value” appraisals must take into consideration both the cost to build the new structures (or replace existing buildings), as well as actual recent sales of other religious properties.
Consequently, the depressed property valuations of recent years will result in your new building being valued at less than your cost to build. This varies by market, as some regions were hit harder than others during the economic downturn. Prudent early planning should assume a valuation 10 percent to 20 percent below actual cost.
How much debt can your institution service based on the current excess operating cash? If your institution doesn’t have enough excess cash flow to qualify for the desired additional indebtedness, what’s the plan for boosting cash flow?
If your religious institution plans a generosity initiative (capital pledge campaign), will the effort be internally directed, or will you engage a professional fund-raising consultant? In either case, you should determine the optimal length of the generosity giving cycle (one, two or three years) and whether the context of the effort will be focused exclusively on physical plant expansion or encompass total institutional operations.
What amount of designated cash-on-hand will you require yourselves to have prior to starting construction?
Finally, remember: “There is safety in a multitude of counselors.” Ideally, all the above assumptions would be based upon both the expertise within your leadership team and considerable input from seasoned market specialists. Lenders with deep experience in lending to religious institutions, as well as experienced fund-raisers, can help you to anticipate best- and worst-case scenarios, including factors such as higher-than-current-market interest rates and lower-than-expected fundraising outcomes.
What about timing?
Depending on the size and scope of the project, a religious institution can invest 12 to 24 months in design-development before it can stick a shovel in the ground. One aspect that seems to be underestimated when considering a construction start date is the timing of the fundraising and loan approval.
Usually, seasoned fund-raisers will encourage an institution to begin planning for a generosity initiative at least nine to 12 months prior to the date by which pledged contributions will begin to be received. Also, lenders often want to see how fundraising efforts are performing prior to approving the loan. Prudently, construction would not begin prior to an additional four to seven months to allow for sufficient demonstration of donor commitment.
The best way to assure your institution lands in the fairway — and avoids ending up in the rough — is to get the mechanics and timing right. Consider these factors before your swing, and your flight will be true, your project on course.
Mark Thomas is Vice President and Relationship Manager in the Religious Institution Division at Bank of the West, a $66-billion-asset bank based in San Francisco. Thomas has more than 13 years of experience in banking and finance. Opinions rendered in this article represent the author, not Bank of the West.