Churches require a very specialized type of commercial real estate financing. Churches are certainly not a "typical" business or small business, but churches nevertheless have very real and substantial financing needs.

FOUR MAJOR CHURCH FINANCING DIFFICULTIES

Before addressing possible solutions for the most common church financing needs, it is important to discuss the typical barriers to obtaining church loans. Historically church financing has been difficult to arrange for several reasons:

(1) 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) Lenders frequently want "personal guarantors" for church loans, and this requirement is not appropriate for church financing. The financial structure of churches simply does not lend itself to a traditional lender/guarantor approach. But most lenders are uncomfortable with the potential lack of guarantors (especially because of the previous observation about the difficulty of reselling the church property should it become necessary).

(3) When church financing is obtained, there are frequently unacceptable 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) 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 SOLUTIONS

There are common-sense financing solutions for the issues described above. Here is an overview of church financing that is now available from some non-traditional lenders:

(1) Non-Recourse Loans (instead of guarantors). As noted above, the willingness to forego traditional guarantors does require a non-traditional lender.

(2) Long-term loans (up to 30 years). Church financing will be much more successful when it is long-term instead of short-term (payments will be reduced dramatically).

(3) Low interest rates (usually 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 based upon a rate in the range of prime plus 1%, church loan payments will be reduced dramatically (and in combination with longer-term loans, the overall payment reduction will make a significant contribution to church cash flow improvements).

(4) Minimum loan size of $500,000. This allows churches to complete most financing in one step rather than piecemeal over a period of years.

(5) High LTV (75% to 85% is available). This results in a more workable amount of 15% to 25% (rather than 40% to 50% with traditional church financing) for the down payment or non-financed portion in refinancing.

(6) Church loans can now include new construction, renovation, land acquisition, purchase and refinancing. Because of more flexible church loans, it is no longer necessary for these vital church financing needs to be postponed indefinitely.