Are Your Finances In Order? (Are You Sure?)
Avoid Unpleasant Surprises by Educating Yourself On the Construction Lending Process

by Dan Mikes

Putting an overly aggressive building plan before the congregation has significant repercussions. People will be excited at the prospect of the new facility, and then become disillusioned if those plans must be dramatically scaled back.

At this point, the only other option is to put the project on hold for months — or even years — while additional cash is raised. However, as time passes, ministry opportunities will be lost, and construction cost increases will likely continue to outpace inflation.

To determine your church’s borrowing capacity, an experienced church lender should be consulted early. While the rule of thumb in church lending is that maximum total debt is about three times unrestricted offerings, plus capital campaign receipts, this is only a rough guideline. Many factors come into play to determine total debt capacity: your church’s growth rate, community demographics, existing debt, capital stewardship programs and more.

Once you know your approximate debt capacity, you can estimate what size building is possible by using standard cost-per-square foot estimates. Check with a few local contractors on what these costs might be. Be clear about whether the rough cost estimate is limited to hard costs, or if it includes architectural, site, furniture and equipment costs. Also try to determine whether your construction project has any special circumstances that could require above-normal soft costs, such as excessive grading, blasting rock oradding retention ponds.

Early on, open a dialogue with the county and/or city providing building permits. Learn whether your proposed project will be predicated on the church paying for certain off-site improvements. Cash-strapped cities and counties are now pushing the cost of adding turn lanes, new turn signals, sidewalks and other improvements to the landowner when construction permits are granted.

As the time to build draws closer and hard costs are refined based on actual bids, don’t forget to allow an adequate budget for furniture, fixtures and equipment.

Most lenders will want the new facility to include all the costs necessary to make the facility fully functional, especially seating and sound. Many churches are well into the budget and design processes before discovering they have woefully under-allowed for these. AV design has become a highly specialized area. Have a clear discussion with your architect regarding your lighting and sound needs early in the design process. Consider engaging a specialist to help you define your plan and related costs.

Other costs to consider are those related to financing. Most lenders charge a loan origination fee — typically 1/2 percent to 1.5 percent of the loan amount. Title, escrow, documentation, environmental studies and appraisal costs are generally for the borrower’s account (though they might be financed). It’s wise to budget 1.5 percent to 2 percent of the loan amount to cover loan fees and documentation costs.

When comparing financing offers, read them carefully and ask questions about any loan terms or conditions that could result in additional costs. For example, some lenders require construction bonds or site inspections, or they might even have a “construction management fee.” Ask the lender to detail all the costs and fees associated with their financing proposal.

Don’t forget to also review the covenants, conditions and features as these can have a very significant impact on future costs. For example, can you reamortize the monthly payment following completion of your capital campaign?

If your only option is to apply prepayments to the back end of your amortization schedule, you won’t have the flexibility of a lower monthly payment after pledges stop coming in. If a consecutive capital campaign isn’t desired, unless you have the re-amortization feature, your only option might be to refinance the loan.

You’ll incur another round of documentation costs and, worst yet, interest rates might be higher.

The question is whether the lender provides valuable benefits that could save you money down the line. If the lender offers high-quality service and beneficial features, it might be worth paying a little higher interest rate or fee.

You simply have to weigh all the benefits of each financing proposal against the costs.

Most often, church finance committee members have little to no experience with financing a large commercial undertaking. Many commercial lenders don’t differentiate between for-profit and not-for-profit borrowers when serving up their loan products and enumerating their financial performance covenants. These disconnects can leave the church prey to costly consequences.

The best way for a church to avoid worst-case scenarios is to seek an experienced lender — one with a long-standing commitment and significant financial investment to establish a reputation within the church lending market — at the earliest point in the design and planning process. Such a lender will value its good name above the opportunity to make good on a single transaction.

Dan Mikes is the senior vice president of Bank of the West in Walnut Creek, Calif. For more information, call 800.405.2327 or visit www.bankofthewest.com/churchlending.