Specialized business finance situations such as those experienced with church financing will typically require more advanced commercial mortgage solutions. A church loan will usually involve several recurring commercial real estate loan problems.
Church financing is possibly the most difficult commercial mortgage to arrange. Churches are an integral part of local communities, so it is necessary to improve church financing solutions. In almost all cases financing will require a very specialized commercial real estate loan that is typically not widely available.
Churches are not typical commercial enterprises but they do have substantial business financing requirements. This article will offer an overview of four key church loan financing difficulties and a listing of six practical church financing strategies.
Four Major Church Financing and Business Finance Difficulties -
Before addressing possible solutions for the most common church loan needs, it is important to discuss the typical barriers to obtaining appropriate financing. Historically church financing has been difficult to arrange for several reasons:
(1) Church Loan Obstacle Number One: Church properties are unique. Lenders are therefore concerned that if commercial loan payments are not made in a timely manner and the lender is required to assume ownership of the property, it will be very difficult to find a new owner because of the unique property features.
(2) Church Financing Difficulty Number Two: Commercial lenders usually require individual guarantors for church financing, and this is inappropriate for a church loan. The financial structure of churches simply does not lend itself to a traditional lender/guarantor approach. Many commercial lenders are not comfortable with the potential lack of individual guarantors because of the difficulty of reselling the church property if negative financial circumstances occur in the future.
It is unfortunately very common for church financing to have been secured only after church members have authorized an individual guarantee for church financing. The need for individual guarantors acts as a serious barrier first because church members might be unwilling to do so and second because there might not be individuals who have enough financial resources to provide an individual guarantee for larger church financing needs.
(3) Church Financing Difficulty Number Three: When church financing is obtained, there are frequently unacceptable business finance terms such as very small loans, low loan-to-value (LTV) of 50% to 60%, short-term loans and high interest rates. These onerous terms are tantamount to the church loan being declined, and if the terms are accepted, the church is likely to experience continuing financial difficulties due to unrealistic commercial mortgage requirements.
(4) Church Financing Difficulty Number Four: Construction, renovation and land acquisition are even more difficult for churches to finance than purchases or refinancing. As a result, needed repairs are often postponed indefinitely and new churches frequently take many years to become a reality.
Six Practical Church Loan and Commercial Mortgage Solutions -
There are common-sense financing solutions for the church loan issues described above. Here is an overview of church financing that is now available from some non-traditional lenders:
(1) Church Loan Solution Number One: Non-Recourse Church Loans (replacing individual guarantors). The willingness to eliminate individual guarantors is likely to require a non-traditional church lender. This particular church financing solution means that lender decisions will not be based on personal guarantors in any way.
(2) Church Loan Solution Number Two: Long-term business loans. Church financing will be much more successful when it is long-term instead of short-term (payments will be reduced dramatically).
(3) Church Loan Financing Approach Number Three: Low interest rates (usually a maximum of prime plus 1%). In reality many churches have been taken advantage of and charged excessive interest rates because lenders perceived that they did not have any other realistic options.
With payments limited to prime plus 1% or less, church financing payments will be noticeably reduced. In combination with longer-term loans, the overall payment reduction will make a significant contribution to church cash flow improvements.
(4) Church Loan Solution Number Four: Church loan financing minimum of $500,000. This allows churches to complete most financing in one step rather than piecemeal over a period of years.
(5) Church Loan Solution Number Five: Higher LTV (75%-90% is possible). This results in a more workable amount of 10% to 25% (rather than 40% to 50% with traditional church financing) for the down payment or non-financed portion in refinancing.
(6) Church Loan Solution Number Six: Church financing can now include new construction, renovation, land acquisition, purchase and refinancing. Because of more flexible terms, it is no longer necessary for these vital financing needs to be postponed indefinitely.
Collectively the six church financing solutions described above should benefit a large number of churches by allowing refinancing with much better financial terms and by facilitating the construction of new churches on an accelerated timetable. The six business finance solutions are likely to result in improved financial terms that are conducive to the long-term financial health of the churches which take advantage of these suggested church loan solutions.
Appropriate church financing will almost always be difficult to complete, even with the commercial mortgage and business finance strategies described in this article. Due to the specialized nature of a church loan, unavoidable complications with the commercial real estate financing should be anticipated. As a result, prudent church borrowers should attempt to acquire a better understanding of these complex business loan issues.
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