I have talked to many churches over the past two and half years who are ready to build but can’t get a loan. The rules have changed since the summer of 2008. Well, actually the rules haven’t changed that much, but some of the qualifications are tighter. I don’t necessarily understand all of the ins and outs of lending so I decided to ask someone who does.
I decided to ask Josh Osborne of Affinity Bank in Atlanta, GA. I have known Josh for 7 years and he has provided me great counsel over the years on a variety of topics related to churches and banking relationships. I contacted Josh to discuss my questions and he was more than willing to answer them.
I hope you find the information from our conversation helpful.
Alan: “What are the similarities in the church lending environment from March 2008 to March 2011?”
Josh: “Banks are still regulated by certain guidelines and ratios that they must maintain in terms of loan to value and loan to cost. You still need 20% down in March 2011 just like you did in March 2008.”
Alan: “What are the differences?”
Josh: “There are fewer banks with the ability to lend right now. Overall, credit across banks has tightened up. One of the primary indicators a lender uses is outstanding debt to tithing. In March 2008 a church could borrow 3 to 4 times their operating budget. For example; if a church had an average $1.0 million budget, lenders would loan the church $3 to $4 million. Lenders in March 2011 will loan 2 to 2.5 times budget; $2 to $2.5 million loaned against a $1.0 million operating budget. That’s a big difference.”
Alan: “Help me understand why churches can only borrow 2 to 2.5 times their operating budget in 2011.”
Josh: “99% of the banks out there today have more problem loans than they did 3 years ago. So, the banks have to reserve their capital to be able to keep their capital to total assets ratio at the levels the FDIC sets. The banks have to keep their extra capital that would have been allocated to new loans. That extra capital is now being allocated to absorb the losses on the problem loans. Until the problem loans are resolved on the bank’s balance sheet or a bank is able to secure new capital from investors, the lending environment will remain very tight.”
Alan: “Do banks look at church loans differently than other non-profit loans?”
Alan: “How so?”
Josh: “Credit criteria is more stringent. Churches are donation/offering driven. When people are not working; giving goes down. Churches are more susceptible to downturns in the economy more so than other non-profits.
Alan: “Are banks issuing building loans right now?”
Alan: “Can churches refinance their current loans right now?”
Josh: “Yes, but it is difficult. If the facilities have been built in the last 5-7 years without significant debt reduction, refinancing will be extremely difficult to obtain.”
Alan: “Why is that?”
Josh: “If a church applies for a loan we are going to do an appraisal of the church property. Real estate values have dropped significantly over the past to 3 to 4 years. This fact makes it extremely difficult to obtain acceptable loan to value ratios for the bank. The church will have to have more than 20% to put down and/or they will have to significantly reduce the debt. The church would have to bring to the closing table enough cash to bring the loan back to an 80% loan to value based on the current, deflated value.”
Alan: “If a church is looking to receive a building loan what is a checklist of items they need to pay attention to and make sure they have in order before they contact a lending institution?”
Josh: “If a church is looking to build it will need to consider the following:
- Must have a minimum of 20% to put into the project.
- Need to have cash on hand. Liquidity was always important, but now is looked at more closely and is a larger driving factor. This is above and beyond the down payment for the project. Banks may look at any of the following for your church:
- 3 to 6 months of operating expenses on reserve.
- 3 to 6 months worth of actual income sitting in reserve.
- Some will say 10% of the annual operating budget on hand.
- The lender will want to have the church’s entire banking relationship.
- Who will the contractor be?
- Is the contractor bondable?
- The bank will look at the financial stability of the contractor.
Alan: “To summarize, what advice would you give a church which is looking to build in the foreseeable future or looking to refinance?”
Josh: “Any church looking to build or refinance should contact their lending institution well in advance of when you want the loan to close. The church will need to know how much cash will be needed to obtain a building loan or refinance the current loan prior to making their final decisions. It is just a longer process today than it was in the spring of 2008.”