Preparing to borrow

By Mark Winterroth

Whether it’s a first-time build or new phase of expansion, embarking on a project elicits both excitement and apprehension even for the most seasoned church professional. Thankfully, many common pitfalls can be easily avoided with the help of some careful navigation and planning on the front end.

When establishing a building committee, expertise counts. No matter how large or small the project scope, lenders appreciate a strong leadership team.  Before you begin your journey, form a panel of lay professionals with diversified backgrounds, such as finance, real estate, construction, accounting, law and property development. A group of professionals will not only provide depth and experience to realizing your vision, but show potential lenders the level of talent that resides within your ministry. Be mindful, however, not to include the contractor or any other project-related vendor on the decision team. Although well-intended, this action can be easily perceived as a conflict of interest through the eyes of the church body or financing source.

Ask questions and know your limits. Can you imagine a first-time homebuyer shopping without knowing his or her budget limitations? Significant decisions require careful and deliberate planning. All too often a church will make a mistake by engaging an architect without ever consulting with a lender as to how much they can realistically afford. By adopting a “financing first” approach, your team can make strategic planning decisions based on actual lending standards.

For years, many inexperienced church lenders have suggested debt levels to borrowers that are too high. Although the additional dollars may appear to be a blessing on the surface, the end result, however, can be expensive with irreversible side effects. This is where lender selection is essential. Look for a knowledgeable lender who can evaluate your current financial picture and provide you with clearly defined borrowing levels based on their extensive experience in the marketplace. Ask them about their approach. Do they have a proven track record? Are their qualification standards clearly defined?  Do they have flexibility in loan structure or offer long-term rates?

Details, details, details. When evaluating a loan request, a lender will expect to see a detailed budget that includes a balancing of all funding sources against the total cost of the project. Understanding this concept is critical and may even require several discussions with your representative. Said differently, if the project cost exceeds your cash on hand, be sure your financing is safely in place before ever breaking ground. Signing your name to a project is a big step and should not be taken lightly. By not having the means to fulfill an obligation, it can jeopardize your organization’s good name and could easily result in reputational damage or even litigation with the builder.

Most lenders also require a 25 percent minimum cash equity contribution of total project costs, so plan accordingly. While a capital campaign can provide supplemental assistance to a ministry’s bottom line, pledge receipts that are specifically raised for a project will have to be deposited with the lender at loan closing to balance the sources and uses of funding for the project.

Prior to approaching a lender for a loan commitment, the church management team should have an understanding of what level of debt the operating budget can sustain. Leadership should ask the question: Will we be able to manage our obligation from our operating budget once the capital campaign is over? In other words, how dependent is the church on the existing campaign to service the debt in place? Relying on future growth projections and anticipated pledges is certainly conventional thinking; however, there should also be contingency plans.

Allow enough time. Underwriting, appraisal, environmental, title work, permits and documentation – these components all consume valuable time in the building and financing process. As an example, a standard church appraisal may take as long as four to six weeks to complete. In order to keep your project timeline on track, consider jumpstarting your application process and apply to lenders at least three months before your projected start date. Your lender decision should be made at least 60 days before breaking ground.

Put your best foot forward. When submitting an application, be prepared to include at least three years of accurate financial statements, a detailed budget, critical timeline, and outline of all project-related information. Capital campaign details, both present and past, will also be required.  Lenders will also want to become familiar with the church’s management team.  A detailed and well-organized package demonstrates thoughtfulness to the lender and saves time during the evaluation process. As the old saying goes, “you only have one chance to make a first impression” – so do your best to make it count.

Mark Winterroth is vice president and relationship manager in the religious institution division at San Francisco-based Bank of the West.


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