An emphasis on changing its culture to reach a younger generation has helped the Copper Pointe Church in Albuquerque, New Mexico, quadruple in size in recent years.

The evangelical church—with ties to the Assemblies of God—has grown to more than 2,500 people at its weekend services.

Copper Pointe’s seeker-friendly approach has helped fill the pews but created a financial challenge, according to David Gaona, a longtime lay member who serves as the church’s treasurer.
“You’re reaching out to a segment of the population that has no concept of tithing, for one,” says Gaona, a certified financial planner. “And secondly, they don’t have a lot of money.”

Despite lean coffers, particularly before the economy improved, the church was able to buy an existing warehouse and expand its facilities to accommodate the burgeoning flock. And this year, Copper Pointe renegotiated its mortgage to save hundreds of thousands of dollars in interest.

The church’s annual interest rate of 5.5 percent was lowered to an average of 3.45 percent for two bank loans negotiated by Nathan Artt, principal of Ministry Solutions, a consulting firm based in Atlanta, Georgia.

“Banks have really opened up,” says Artt, assessing the state of the church lending market in the wake of the 2009 recession. “The challenge the church has is getting the banks to understand their financial statements. But if you can do that, you’ll have a myriad of options available to you.”

Other experts interviewed by Church Finance Today echoed Artt’s positive assessment, with a few caveats.

“Right now, interest rates are really in 50-year lows,” says Scott Rolfs. Rolfs works with not-for-profit religious clients as a managing director for Ziegler investment banking, based in Milwaukee, Wisconsin. “And for borrowers of any kind—whether it be the church or commercial enterprise, home borrower, whoever it is—if [you have] good credit quality, good credit risk, you’re able to get financing today. So I think right now it’s a fairly healthy market out there for churches.”

An abundance of credit with “aggressive terms” is available to churches and anyone else, says Dan Mikes, executive vice president and national division manager for religious institution banking for Bank of the West, based in San Francisco, California.

“The banks are sitting on a lot of cash, and they’re all desperate to make loans,” Mikes says. However, he adds, “in the recession’s wake, a decline in appraised values of some existing properties can hamper churches. Depending on where you are in the country, the evaluation you might get [could] restrict what you can get. The limitation is that the banks will lend you up to 75 percent of the appraised value.”

At the same time, a number of religious institutions buckled under the weight of excess debt during the bad times—contributing to lingering cautiousness by church leaders.

“We’re seeing churches far more attentive to the fundamentals of their financial stewardship,” says Mark Holbrook, president and CEO of the Evangelical Christian Credit Union, based in Brea, California. “We’re seeing much greater debt aversion—not opposition, but real care and thought going into a church (asking) should it take on debt or additional debt.”

While interest rates are lower, many churches—particularly smaller ones—struggle with less financial wherewithal, according to Scott Reitsma, senior vice president of the Ministry Development Group for the Christian Community Credit Union, based in San Dimas, California.

“A small church in Tennessee outlying the Nashville area has a significantly different economic profile and demographic profile than even a large church right in the center of Nashville,” Reitsma points out. “And they weathered the recession differently. I would say, on the whole, those larger churches are probably doing better today. The smaller churches are lagging. The recovery is slower in those sectors, in my experience.”

For churches seeking a loan—or considering that possibility in the future—the experts offered practical tips:

Get your financial house in order.
“By that, I mean your financial reporting systems,” Rolfs says. “When we look at a loan application, if it has very confusing, long-form financial statements—the sort of things where you almost think [everything was brought in a] shoebox—those are hard to put together and figure out as a lender.

“Conversely, if we are presented with a loan application package where the financial statements have been prepared by a CPA or an outside accountant, those are really easy to understand. It gives us as a lender—all lenders—a lot of confidence in a church’s ability and the accuracy of their numbers.”

Reitsma offers similar advice: “Starting at the most rudimentary level, [have] a clear, consistent financial accountability that’s immediately available to your leadership and is transparent to your congregation and easily understood. The first thing that any perspective lender is going to want to see is how you are doing and what your capacity is projected to be going forward.”

Talk to experienced church lenders early in the process.
If you’re investing money into a building, “it’s very easy to talk to an architect first,” Mikes says. “It’s okay to have the conversations simultaneously, but there’s a common scenario where there’s maybe a little bit too much building and not quite enough borrowing capacity. So talk to an experienced church lender early because they’ve got a very well defined template” that will help your church plan.

Put any discussion of debt into the context of the church’s overall ministry stewardship.
“[New debt] needs to be carefully planned for, in understanding the benefits and the downsides,” Holbrook explains. “I think getting outside counsel is important for most churches, especially smaller churches, [as is] determining where [the debt] fits into the ministry priorities. Is [the best option] to build a bigger building? Is it to improve what they have? Is that the best and wisest use of funds? Are they willing to make a commitment that will leverage the church and place the church in debt over the next 10, 20, 25 years?”

Consider the long-term ramifications of any loan.
“The one that we think about today is future interest rates, and understanding the structure of the loan: not just what that payment and cash flow would be today, but what could it be 3, 5, 10 years from now if interest rates rise and rise significantly,” says Mike Koch, ECCU’s vice president of finance. “You need to ask yourselves, ‘Is your church in a position to absorb that payment increase?’

“Longer-term fixed-rate loans are relatively rare on the marketplace. So, [churches are] looking at either a loan renewal requirement or a rate reset in the term of most loans. So that has to be taken into consideration.”

Create your church’s project based on what’s best for the congregation, not the lender.
Just because a key church leader works for a bank doesn’t guarantee that he or she can get the best deal or rate, Ministry Solu-tions’ Artt points out.

“I call it the ‘We have a guy’ syndrome,” Artt says. “Even if youassume that he has the absolute best intentions at heart, it doesn’t mean that [your guy’s bank] is able to do what’s best for you. Different banks have different lending amounts, and they have different levels of flexibility.

“It is your responsibility to create the box, the strategic plan, understanding how decisions impact you from a budget perspective,” he says. “Go into debt with the strategy of how you’re going to get out of debt. When that plan is in place, you need to use a competitive process in order to make the banks compete to get you the best deal.”

Churches seeking a loan will discover a variety of options, from commercial banks to denominational lenders, and from bond underwriting firms to Christian credit unions.

With interest rates low, churches may find locking in a five-year fixed rate on a bank loan appealing. But what happens if the interest rate skyrockets and the church finds itself faced with a much higher payment in a few years?

” … if you’re a church, and the cost of your loan pay-ments or your mortgage goes up substantially due to market increase, you can’t necessarily go to people and say, ‘Well, you need to tithe 20 percent more for the next five years because our loan rate went up.'”

“If you’re somebody like General Motors, and your cost goes up—say, steel for the cars—you can usually pass that along to the consumers in the form of a higher sale price,” Rolfs explains. “[But] if you’re a church, and the cost of your loan payments or your mortgage goes up substantially due to market increase, you can’t necessarily go to people and say, ‘Well, you need to tithe 20 percent more for the next five years because our loan rate went up.'”

The Second Baptist Church of Elgin, Illinois, a historically black church northwest of Chicago, chose to lock in a 25-year fixed rate on bonds purchased through Ziegler.

Despite paying a higher interest rate, the 2,800-member church satisfied its goal of avoiding a loan renegotiation every five years, Pastor Nathaniel Edmond says.

“We don’t have to worry what our mortgage is going to be in 25 years,” Edmond explains. “We don’t have to worry about inflation going through the roof after five years. So it was stable for us.”

But other experts argue that bond fees and interest rates are so much higher than bank loans that the cost difference can be huge. “On a bond, the interest begins accruing from day one, while a bank loan accumulates—and the principal on which the interest is paid—ramps up as the money actually is spent, typically over 12 to 24 months of construction,” says Bank of the West’s Mikes.

“Banks charge half a percent to 1 percent to make you a loan, and yes, that’s every five to 10 years,” Mikes points out. “The bonds charge you 6 or 6 ½ percent upfront. And so if a church gets out of debt in 10 years, and they don’t need the 25-year product, well, they’ve still paid for it. … The fee difference is substantial.”

“In most cases, interest rates would have to rise well beyond their long-term averages to justify the extra expense on bonds,” Mikes goes on to explain.

Leaders also need to read the fine print of any loan agreements. CCCU’s Reitsma warns against any financing arrangement that penalizes churches for prepayment.

Prepayment penalties can become costly if a church pays off a loan early. Some lenders include this in their fine print, and penalties can, for example, cost churches a percentage of the loan’s balance. For example, if you borrowed $2 million for a mortgage, and the lender has a 4 percent prepayment penalty rule, then you will end up paying $80,000 in prepayment fees if you pay off your mortgage before the set period of time (usually between three and five years) is over.

It’s also important to beware of refinancing penalties. If you refinance an existing loan that gets paid off in order to take a new loan at a better interest rate, you might fall into the same penalty as you would if you simply paid it off early.

The 15,000-member Enon Tabernacle Baptist Church in Philadelphia, Pennsylvania, has undergone three refinancing processes in the last seven years.

Demonstrating the church’s financial health helped ECCU secure its rate, says Everett Richardson, Enon’s director of finance.

“We’re talking about good ratios. Your loan-to-value ratio should be reasonable,” he adds.

Lenders want to see a loan-to-value ratio of 70 percent or less. A loan-to-value is the ratio of how much you’ve been loaned versus the amount the property is actually worth. Lenders feel more at ease, and will generally give you a lower mortgage (specifically based on the fact that less risk means they don’t need to incorporate private mortgage insurance into your mortgage payments).

Richardson goes on to remind churches, “Your liquidity levels should be at reasonable levels. That is, if you’re going for a mortgage the size that we were—$23 million—you shouldn’t have $50,000 in the bank.”

Rather, the church needs at least three to four months of operating funds in its bank account and a history of positive cash flow, he says.

But if the church has significant long-term debt outstanding, they should have at least one year’s worth of debt payments in reserve. Such a “debt service reserve” can provide the church with critical breathing room in the event of an unexpected cost or revenue downturn.

Without a debt service reserve, such an event could cause immediate default. (As a side note, churches should be cautious about reserves when negotiating bank loans. As a condition of a loan, banks sometimes will require the church to maintain, at all times, a debt reserve fund of a certain minimum amount. While that may seem reasonable at first, the reality is that if a church needs to use the reserve for its intended purpose—making payments during a time of tight cash flow—then spending it down below a required minimum level will become an event of default.)

Each church governing board should determine a reserve level and management should work on a plan to reach that amount. The reserve requirement should be reviewed periodically to make sure it is adequate for the ever-changing needs of the church.