One of the key questions churches face when it comes to facility renovation or expansion is, “Where will the money come from?”
If you’re prepared, your church has been saving for this day and has a nice nest egg already set aside. But building projects are expensive and, depending on your specific circumstances, paying cash may not be possible. Therefore, it’s almost certain that you will have to take out a loan—at least for a portion of the funding. So here are some rules of thumb to consider.
All lenders have certain criteria that they use when considering a lending candidate. They don’t treat church applicants any differently.
In general, they apply these criteria:
- Loan amount not exceeding 3-4 times annual gross operating income plus net worth (usually in owned property).
- Debt service (principal + interest) not exceeding 25 percent of general operating budget. Total facility costs (including debt service plus property operating costs) should not exceed 35% of general operating income.
- Loan-to-Value ratio tops out at 75 percent of the new facility appraised value for either a conventional loan or a bond underwriting.
- The Loan-to-Cost ratio, which compares the loan amount to the project’s cost, typically tops out at 65 percent. For example, a project costing $1.1 million with $1 million in “loan-able” project costs, could merit a $650,000 loan. Project costs that are not “loan-able” include some FF&E (furniture, fixtures, equipment) and AVL (audio, visual, lighting).
- Debt coverage ratio is the amount that the gross operating income exceeds debt service which must be 110-120 percent. This means that there is positive cash flow sufficient to make the loan payments.
- Liquidity reserve. Every church needs a “rainy day” fund to cover six months of operating expenses.
- Church history. Lenders expect a future client to have been in existence for a minimum period of time. Many banks will not loan to a church that is less than 10 years old. Further, lenders will look to the tenure of a church’s senior pastor, expecting a minimum of five years.
- Capital campaigns. If these monies are to be used in underwriting a new loan, the lender will expect a third-party organization to be involved.
- Project Manager. Many lenders expect a church to contract with a third party professional with project/construction management experience.
- ·Congregant giving. Most experienced church lenders these days are seeking annual contributions of at least, on average, $2,500 per giving unit. A “giving unit” is based upon the demographic data for the area. Generally there are between 1.5 and 2.8 persons per household. (Note: We prefer to use giving per attendee, having observed that giving ranges from $1,100-$1,500 per attendee for area evangelical Christian churches.)
Obviously, each church we work with has unique circumstances. And every church wants not only a great, accessible facility, but also a lasting legacy of wise management.
As your advocate, our goal is to help you obtain the best loan possible, as well as to counsel you in prudent and sustainable debt resources.
Development Advisors provides A to Z services for churches seeking to expand their facilities. If you would like more information about our church real estate and church development services, please contact Scott McLean at 303-534-3344 (x 103) or at scott@developco.com.