"All the things you need to know about Church Bonds"

By Jack Dennison

O: 719-528-5709

Email: JackD@ChurchFS.com

In the world of financial markets there are only two kinds of equity instruments; securities and bonds. Securities represent ownership in a corporation while bonds represent debt from a corporation. Publicly traded companies can sell ownership to investors or they can ask investors to buy the company’s debt. While church’s cannot sell ownership in a not-for-profit (501(c)3) organization it can sell debt to investors in the form of church bonds.

Why might a church choose to sell church bonds rather than using a more conventional lender? There are many theological, financial and practical reasons to prefer church bonds over conventional lending.

There are many benefits of church bonds to consider when assessing the appropriateness of this form of financing over other methods.  There is much more flexibility given in selling church bonds than through conventional lending. Oftentimes if the church is unable to meet the qualifications of conventional church lenders to secure a church loan a church bond finance company can provide funding due to the added flexibly in church bond lending regulations.

Long term fixed rates for 20 – 25 years are available. Short term fixed rates typically will have a 3, 5, or 7 year call meaning that following the designated fixed period the church loan is restructured based upon current interest rates. Restructuring 3 or 4 times over the course of a church loan will cost the Church a substantial amount in refinance and interest expenses. At a time of historic lows the long term fixed rate that bonds provide is a superior means to limit interest expense.

Bond repayment has no prepayment penalty to churches that choose to aggressively pay down debt rather than servicing it over the long term.

Bonds can be sold in a Best Efforts or Fully Brokered effort. Best efforts simply means that as many bonds as possible are sold to church members and friends of the church and the remainder is sold to the investor base of the Investment Bank. A Fully Brokered Issue simply means that no attempt is made to sell bonds to the church membership and all bonds are sold to the Investment Bank’s pool of investors. It is easier to sell bonds to church members than to an outside pool of investors so the brokerage costs are reduced by the percentage of bonds sold inside the church.

Bond issues can be structured in a way to maximize future options due to multiple unique features found in church mortgage bonds.   A graduated payment schedule may be chosen reducing monthly payment during the early years and increasing it annually as the Church grows and increases its ability to service debt.

The Church Bond issue is the preferred method for funding phased growth. New church bonds can be added as additional funding is needed without refinancing the existing debt. Conventional church lenders require the existing loan balance to be combined with the new loan. So, if a Church borrows $3,000,000 for phase 1 growth and three years later adds $2,000,000 for expansion the entire balance of the initial loan must be rolled into the new loan. The new loan will likely be at a higher interest rate than the historic low rates we are funding with today. With a bond issue the interest rate and debt service of the existing issue remains untouched when additional bonds are issued.

An interest only payment for the first year is another of the many benefits of issuing church bonds to finance debt especially during the year of construction.  Churches have greater flexibility in determining rates, terms and conditions of the church bond issue. The Church has the flexibility to determine the fixed interest rate and length of the amortization and other important matters related to the issue.

A church bond issue can be fully or partially brokered as a best efforts agreement. The church bond issue can be sold internally (best efforts) to church and family members or can sell a portion or all the church bonds (partially or fully brokered) on the open market. The interest rate for debt service changes only slightly depending upon which approach is taken but fees increase with the percentage of church bonds presented for open market purchase.

The investment bankers will prepare the church bond issue using a combination of simple and complex interest bonds depending upon the interest level for each by congregational members. Simple interest provides monthly income for bond holders while complex interest accumulates until maturity.

In addition to the financial benefits of a church bond issue many churches choose the issue for theological reasons. A church may prefer a bond issue over traditional term lending solely because it enables church members to financially invest in the Church’s ministry and expansion. Kingdom people are funding Kingdom expansion and then receive the financial return on that Kingdom investment rather than the financial return on investment benefiting a secular institution, for some churches this is the deciding factor in favor of bonds rather than other approaches to lending.

Additionally, pastors who take financial stewardship seriously oftentimes prefer Church Bond Finance because whereas tithes and offerings represent one’s personal stewardship of monthly income investing in a Church Bond Issue provides a stewardship opportunity for long term accumulated wealth. Members will many times redirect their equities portfolio, sell real estate, or redirect their long term investments into Church bond thereby participating in and financing current Church growth and expansion.

Bond Financing requires no personal guarantors whereas commercial banks may require corporate officers to sign loan documents as personal guarantors for the Church loan making them personally liable in the event of default.

Commercial lenders may require the Church to transfer assets, place their primary banking accounts with the bank, and/or require cash accounts to be placed with the lender. Commercial lenders may even require the Church to maintain a certain levels of debt to income, working capital, or additional asset requirements. They occasionally will limit the churches freedom to buy and sell assets, borrow additional money, limit lease options and impose other restrictions. If any of these limitations or restrictions are violated the bank has the option to immediately call the full amount of the loan. Financing expansion through a bond issue avoids any and all of these limitations, restrictions or requirements.

How the Bond Issue Is Prepared

An investment banker will meet with your leadership team to discuss the Church’s needs and will poll the congregation regarding the members’ interest in supporting an issue and through what combination of bonds – long term versus short term maturity, simple interest versus compound interest bonds, and the percentage of the issue to be internally sold or brokered on the open market. This process is completed without obligation or cost to the Church.

Following this evaluation a decision is made by the Church and the investment banker prepares the issue based upon the parameters set by the Church’s needs and interests.