Church Loans

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How much can my church lend? This is an important question for all church leaders to ask before they borrow. In this podcast David Mills of Church-Loans.com meets with Dave Dallenbach, the church loans lending expert to discuss this issue.
Host: We are here with David Dallenbach, and we are talking about church lending. Dave I know for many pastors and for church board members, when they are sitting around talking about the issues surrounding church lending. One of the biggest questions, and probably one of the biggest tensions they are feeling is “how much can we really afford to borrow?” If we look at this new church growth we are experiencing and wanting to accomodate that with new buildings. Dave how much can we really afford and how can we know what the right ammount is?

Dave: Thats a great question, and I also get that question asked all the time. How much can I afford and typically how much is it going to cost each month to pay that back. Construction of course can range from a small project to a large project on how much it will cost. A good starting point to determine how much a church can borrow is the financial statements. That is why it is so important to have them. If a church were to take their annual income and multiply it by three. That is a good benchmark to begin with. So if a church makes around $500,000.00 then they can know their borrowing capacity is going to be somewhere around 1.5 million plus whatever cash they have on hand to put into the project. So if they had 250,000 in cash the starting point would be a 1.5 million dollar loand 250,000 in cash or a 1.75 million construction project. That is a good rule of thumb to be able to use to get started.

Host: Now dave if I look at that same thing from the kind of monthly cash-flow perspective. How do I plan for appropriate cash flow. I know if I have this loan, I love the building that it pays for, but then I have to start paying it back. So how do I start looking at the cash flow, and how it might impact my church operations? What are the concerns and considerations surrounding that?

Dave: The greatest concern that a church has to take into consideration is the fixed expenses. The salaries of the present day staff thats their. So if you have a yearly income of 500k and the staff salaries are 200k. Thats a fixed expense your going to have to maintain. Apply to that the cost of what a mortgage would be on a million and a half, then you want make sure your not exceeding roughly 65% of your total income at that level. If you start to get higher than that you are going to start to impede on other ministry functions that you may want to fund, as well as just paying for the normal operational expenses of the facility. Which would be your utilities, insurances, and maintenances.

So you really want to look at that mortgage payment and what your salaries are and try not to be greater than 60-65%.

Host: Thats a great guideline for us to look at, that 65% that is our fixes expenses primarily salary plus mortgage costs. Now I am assuming that fairly early in the process you would share with the church leaders what the payment range might be for a million and a half loan.

Dave: Absolutely, because if you calculate what the mortgage payment would be on a million and a half loan and how that effects other expenses, you want to see how that plays into the big picture because another calculation you want to look at would be called the Debt to Income Ratio (Debt/Income). We don’t want the mortgage payment to be more than about 33% of the total income of the church. On of the guides that i like to use is, if a church took in 300k in income you don’t want to have more than 1/3 of that income tied into a mortgage. Or 100k, so in this way its somewhat balanced. You can put it together from there.

Host: You know what I think I am hearing from you is a really unique perspective. Not only do you understand the church lending requirements, but you also have a heart and a concern for the health of that church. Of course thats a lending consideration, but in an even bigger way thats a ministry consideration. So I think thats an important thing you are bringing to this discussion.

I am a pastor lets say in a church thats just busting out the walls. We are just growing so fast, and i go through the ratios that you just described, and that doesn’t get me to the building that I really need. Dave as a pastor I want to get as much building as I can, but I don’t want to have to much risk. How do I know how far can I stretch this based on the growth that I expect in my church over the next year.

Dave: You can take the growth that you have experienced historically over the last say three years. And if you were experiencing 15% growth per year, and you anticipate that with the number of new homes and growth in the area that would continue, their is a barrometer right there to say “we need to expand”. That expansion will cost X amount of money that might exceed what the church can afford. Certain lenders “myself included” can put certain structure on the loan to put on an extra ten to fifteen percent of what a church would be comfortable borrowing to give a little extra room to get the nessecary expansion. So they don’t have to say “we can only do this, we will fill that up and go into phase two”. Because very often chuches will phase their construction. What I would say though is never put the cart before the hoarse. The temptation is always going to be their to build more because the the growth happened and the funding isn’t quite their.If you feel you really need to be in that space you may have to pause a little bit and raise some more cash the help fund the difference on what you can afford. The worst thing you can do is get into a building where you have plenty of space but where you are struggling to upkeep your ministry.

God never wants us to expand his kingdom and have ministries suffer because we are to deep in debt or to structured with a facility we can’t afford. Things need to be balanced, that is the bottom line here. When you build in balance thing work out.

Host: So this is part of the conversation that you have with church leaders all the time to help them make really good decisions about church lending. To make sure they are augmenting or improving their ministry and not endangering it.

Dave: Absolutely had one yesterday where a church wanted to build a 70o seat sanctuary. Current attendance was 150. They were in a financing need of seven and a half million dollars to do what they wanted to do. The dificult thing was that the churches income was 400k. When I told the pastor that the mortgage would consume almost 100% of their anual income. I tried to show him that it just wasn’t going to work the way he was thinking. That he needed to go back to a phased approach and lower his expectation of what his next jump would be. Thats a perfect case where a church wanted to take on a loan that would exceed what they took in anualy just to pay the mortgage.

Host: Thats great, your not only trying to be a good lender and help pastors find good opportunities for lending, but to give pastors good advise about borrowing.

This has been really informative, and we will look forward to our next discussion about church loans.

 

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BUILDING PROGRAMS – PART FOUR

We have focused past articles on some key aspects to a successful building project. In this final article, we will address the issues of financing your project.

FINANCING AND FUNDRAISING OPTIONS

When planning for financing your building project, keep in mind that there are typically four major sources of funds available for financing your new building: church operating income, a capital fund drive, sale of existing assets, and borrowing. You can expect to use a combination of all or some of these sources in financing your new building.

Church Operating Income – these funds typically come from your congregation tithes and offerings, and should be directed towards the anticipated increase in operating budgets as a result of increased costs for your new building.

Capital Fund Drive – typically, congregations will want to raise money separately for their building project. Most churches utilize the services of professional fundraisers to assist them in this process. The goal should be to raise all of the construction budget through this fund drive, so careful planning and follow-through is essential for its success.

Sale of Existing Assets – if your church already owns its facilities, you will probably be selling your existing property to partially finance the new one. If this is the case, you should call on the services of an experienced real estate attorney to guide you through this process.

Borrowing – in many cases, the outcome of the capital fund drive and the proceeds from selling your existing property will determine if you will need to borrow any additional funds to complete your project. As a rule of thumb, borrowing should not exceed 34% of your annual operating income and your debt to equity ratio should be at least 70%.

HIDDEN COSTS in Building– WHAT YOU DON’T KNOW YOU DON’T KNOW

As we advised you before your general contractor will be responsible for submitting a budget for completing your building. Your responsibility is to review and monitor progress on this budget. But before you even start this process, there are some established rules of thumb to guide you through the maze of hidden costs.

There are many unforeseen occurrences that can ultimately add to the cost of your building project. Some of these that we have encountered in the past include water issues, including percolation, water quality and drainage problems that crop up during excavation; repairs to mend any displacement to your new neighbors’ property; additional fees from municipalities, including taxes, permits and other items; and, of course delays caused by contractor labor shortages, delays in material deliveries and the weather.

All these and many more factors can substantially increase your costs. Failure to anticipate additional costs can lead to inability to obtain financing, or having to go back to the congregation to raise more money in the middle of the project. In order to build these “unknowns” into your budget, we recommend you add at least 10% to the budget submitted by your general contractor. In addition, make sure your budget includes complete structural, plumbing, HVAC, and electrical schematics. Also, make sure you include all your furniture, appliances, carpeting, wallpaper, light fixtures and other decorative items (including professional decorator fees) in your budget. Plan to budget adequately for your moving costs.

Once you move into your new building, your operating costs will increase, sometimes dramatically. Did you know, for example, that light bulbs in some of the more modern light fixtures can cost as much as $300 apiece? From an operational standpoint, be sure to set up a working budget that includes increases in utility bills, janitorial services and supplies, equipment maintenance, landscaping and snow removal services, and other increased costs that come with a bigger building.

Probably the best advice we can offer in the area of cost overruns is simple. Do your homework, consult with your contractor often throughout the process, and take the time to “pick the brain” of another pastor or organization that has recently completed a new building project. Having recently completed our own building project, we would welcome your questions and are happy to share our experiences with you.

In the next Advance, we will complete our building project series with an article on obtaining financing for your project.

Resources

For a sample construction budget template, go to www.agc.org, or contact us here at the District office at daved@njag.org. For information on operational budgets, contact us at info@church-loans.com

CALLING IN THE PROS – SELECTING AN ARCHITECT, ENGINEER AND GENERAL CONTRACTOR

A building program of any size will require the talents of experts in this process. These individuals are critical to the success of your program and who you select is one of the most important decisions you’ll make. Here are some tips that we hope will help you make the best possible selections:

• Look before you leap –We recommend you really do your homework before hiring your architect, engineer and general contractor. Don’t take the easy way out and hire someone you “know” from your congregation. This decision is very major and deserves careful consideration. Select at least three candidates who have extensive building experience, for consideration.

• Ask for and follow up on references – a very time consuming but important part of your selection process needs to be following up on references. We recommend obtaining three from the candidate, and another two or three from public records (you can obtain a list of projects from the state where the candidate is licensed). Put together a short survey of key questions to ask the clients. These would include questions like, “What kinds of delays and cost over-runs did you experience?” “How effectively did the candidate work with government officials?” “How reliable were the sub-contractors used?” and so on.

• Check out their credentials – ask them for a list of professional organizations they belong to and check them out. Make sure they are in good standing, and check to make sure there are no judgments against them.

• Make sure you consult your attorney before signing a contract with the professional team. Your attorney should be looking out for your interests and should address such matters as who is responsible for time and/or cost over-runs?

BUDGETING – MONEY AND TIME

One of the main reasons to be very careful in selecting your building team of professionals is that they will be creating your budget and timeline for the project’s completion. It is the responsibility of the general contractor to submit a budget that includes all items needed to complete your building. Your responsibility is to review the budget in detail with the architect and engineer to make sure it is comprehensive and that there are no surprises down the road.

Make sure the contractor gives you a project timeline and that you review this regularly. Delays in time often result in increases in costs, so it is important to stay on top of the progress.

Next time: Hidden costs and financing

Resources

American Institute of Architects at www.aia.org

NJ State Board of Architects at www.state.nj.us

Associated General Contractors of America at www.agc.org

American Society of Civil Engineers at www.asce.org

Before you even THINK about building, READ THIS ARTICLE……..

This is the first in a series of blogs aimed at assisting local pastors and congregations who are contemplating a building program. This first article focuses on the preliminary work you need to undertake to begin the process. Future articles will focus on budgeting and affordability, contractor selection, and “hidden” costs and financing.

Congratulations! You’ve grown your church to the point where you need new facilities. But before you celebrate, consider that a building program (whether you are purchasing and renovating an existing site, or starting from scratch) is not for the faint of heart. Your building program can be a time of great excitement, but the challenges are many, you can count on many surprises along the way, and the whole process can be daunting. Here’s some useful advice to consider as you get started.

SETTING UP FOR SUCCESS

Critical to any major building program is planning, and the way you set up your program will determine its ultimate success or failure. Spending adequate time, money and prayer in this stage will pay large dividends down the road. For example, you may fall into the trap of this sequence of events: you locate a building site, hire an architect to design the building, begin interviewing contractors and you’re ready to go. Right? Wrong. You left out the most important FIRST step, which is determining if you can afford to build. You’ve got your sequence out of order and you’ve committed resources you may not even have yet.

Before you even begin with the details of your program, you need to conduct a NEEDS ANALYSIS for your congregation. This is a very important process which can pay huge dividends once you start your building program. Use focus groups (generally done by “coffees” or other small group venues) to lay out the church growth and determine how it will interact with other ministries. If you rely on only a handful of people in your church to determine the needs, you bear the risk if the ultimate building is not adequate or functional. We recommend including lay people in charge of all your ministries, lay people in your congregation who are not active in ministry, and community representatives who are knowledgeable about planning and zoning issues.

Don’t be afraid to form sub-committees, the task of each being to focus on a particular function of the needs analysis phase. Seek persons who can interface effectively with various professionals. At a minimum, you’ll need committees for (1) design and architectural matters; (2) engineering; (3) legal matters; (4) site planning; (5) scope of the project; and (5) community relations. And don’t forget the most important committee of all – a prayer team dedicated to lifting up the building program.

The temptation is to bypass or short-cut this phase, because it is very labor intensive and requires much (if not all) of your congregation to be actively involved.

Next time: Budgeting and Architect, Engineer and Contractor Selection

What does the current credit and mortgage loan crisis mean for church loans? Have you been put off or delayed in your church lending request at your bank? Will the situation on Wall Street affect your church building program? Join church loan expert, David Dallenbach for a free conference call discussing how current credit challenges are affecting church lending and how you can find the best opportunity for your church.

About the Recommended Lender:

Since churches need ministry partners not just a loan broker, Church-loans.com recommends a specialized church lender that exists for the sole purpose of making church loans. Foundation Capital Resources, a private fund that loans only to churches, is in the “ministry of lending” and can provide you with lending support that will match your ministry growth needs with you

Since its inception in 2000, Foundation Capital Resources has emerged as one of the nation’s leading resources for loans and mortgage-secured financing for churches, schools and other faith-based lending organizations.  Formed as a real estate investment trust (REIT) this lender creates custom solutions for church lending. Funds are available through the investments of individuals and organizations that believe in church growth and health.

David Dallenbach is a 20 year veteran of church lending, and after working in Wall Street for many years now works exclusively with churches to help them create structured and flexible loans that allow them to grow effectively. David is a trusted ministry partner for hundreds of churches and helps churches that need to grow to find the right solution for their lending needs. His unique location just outside of the Wall Street community allows David to bring the best of both financial planning and ministry experience.

A lender that gives back:

The team lead by David Dallenbach has helped to finance more than 50 church plants, and is truly a partner that participates in ministry, far more than just a lender. Their contributions to church growth through church planting and other projects demonstrate that the foundation of their church lending work is about ministry not just about lending.

Prepare for your Loan

Being prepared for your church loan is one important way to make the lending process more effective. Many churches experience delays in their building process because they just are ready. Follow these steps to help you get the documents and accounting ready for a church loan.

6 Steps to Loan Readiness

If you have a question about the preparation process

Call or email the church-lending.com service team

info@church-loans.com telephone 888-598-1555

Welcome to our blog. We have been preparing some podcasts for you, as well as some great articles. We are proud to announce the launch of this website. I hope we can be of great help while you’re church is in the market for a lender!