"What Should You Look For In A Construction Loan?"

By Jack Dennison

O: 719-528-5709

Email:JackD@ChurchFS.com

While church construction loans are the most common church loan it is also the most challenging. Working with a lender that has not previously funded a church construction loan can be a nightmare for the church.  At Church Financial Services,  we smooth out the process by fully understanding the unique features of each construction project and then identifying a church lender from our broad network of church financial institutions best suited for each project. Our church lending network wants to finance church construction loans and each has plenty of experience in successfully closing church construction loans. This saves the church money, time and emotion.

Additionally, Church Financial Services  can present church lenders that will fix your permanent interest rate at the time construction begins. Many banks try to win church construction loans by offering a low variable rate for the construction loan. They do not fix the permanent financing which begins following construction until that time. In a raising interest rate environment interest rates could be 1% - 2% higher in 12 months when construction is done than today. Waiting to fix the permanent interest rate is very good for banks but very bad for churches. Church Financial Services will present lenders that fix your interest rate one time at the beginning of construction saving the church enormous savings in interest costs.

There are a number of very important considerations and preparations when considering a church construction project and the church construction loan needed to finance it.

How much can you borrow? Truth is, most church leaders wait and look at borrowing strength as a last resort rather than as the first step. Before you begin with conceptual drawings you should first determine your borrowing limits and what can you do to expand those limits during the preparing to build period.

Are you going to conduct a Capital Funds Campaign? Seldom have we seen a church enter a church construction project or purchase that has not begun a Capital Funds Campaign. This is an important matter to church lenders as well since this effort gives evidence of congregation's support through their personal financial investment and provides much of the needed cash toward a successful church construction project. The experience of Church Financial Services is that churches should begin their Capital Funds Campaign earlier rather than later in order to establish observable trends in the collection pattern of the church and to give enough time to gain the benefit of member capital contributions. Additionally, lenders have learned that those churches utilizing the consulting services of an outside Stewardship Company with a proven track record will produce better results than when the Capital Campaign is designed by internal church leaders. If the approach is matched well to the personality and theology of your congregation the church can expect to receive 1.5 to 3 times its annual income in 3 year pledges. It will be invaluable to your ministry to continue with Capital Stewardship Campaigns until the majority of the church building debt is retired. Your congregation must realize that today’s project is tomorrows debt. This is worth doing, and worth doing well!

What about a design/build approach? Experience has taught us the value of an integrated and turnkey approach to the design/build process. Too often church leaders try to manage the process by themselves hiring architects, construction managers, civil engineers, site development and so on only to find that these disconnected parts run into all kinds of problems. One group won't sign off on the work completed by another, one group is forced to wait while another completes its work, designs have been created (and paid for) for a facility that the church can't qualify for funding … the potential problems and conflict are too many to list … and all of this costs the Church valuable financial resources and time. But when all of the different departments are pooled together at the planning/decision making table, the result is a faster, smoother, more efficient process with better overall coordination. Many resource-wasting conflicts are virtually eliminated, and your Church ends up with a professional-quality completed project it can feel good about.

Choosing a General Contractor. Choose well!! This is the person and company that will oversee the building of your church. Lenders will want to review the financial statement of the company to insure there is adequate financial strength and safeguards to complete the project. If there is any question about financial strength the lender may require the church to purchase a performance bond that goes into effect if the General Contractor defaults. Performance or Payment Bonds typically cost the church 1%-2% of the total construction amount. This is a sizeable penalty for choosing a General Contractor that is not up to snuff!

What kind of Contract should you seek from the General Contractor? Most lenders prefer and many require a Guaranteed Maximum Price contract between the church and General Contractor. This simply means the contractor has bid out the job to each subcontractor based upon construction drawings prepared by the architect and is able to guarantee a maximum price. If the General Contractor is unable to hold prices during construction he must pay the increase out of his profit rather than expecting the church to take on the added costs. This is an important safeguard for the lender and the church. There are some circumstances under which lenders will permit a Construction Management contract with a General Contractor. Construction Management simply means that the Contractor acts more as an advisor and the Church takes on the role of securing bids from Subcontractors and takes on the supervisory role of the General Contractor. This is unadvisable for all but the most experienced churches. Lastly, in some circumstances lenders will permit some work to be subcontracted to church volunteers but generally this too is not advisable. Church Financial Services   can help you determine your most cost effect approach to each of the matters during our initial consultation.

How do we get an appraisal on something that is not yet built? The church lender will identify and hire a church appraiser that is experienced in church construction projects. The appraiser will set a value on the land and an “As-Complete” appraisal on the value of the church construction once it is completed based upon a review of the construction drawings and costs. Rarely is this a dollar to dollar value. In other words, if the land is valued at $500,000 and the construction costs are $2 million it is unlikely that the appraised value will be $2.5 million. This is important for churches seeking a church construction loan to keep in mind and is one of the reasons that working with Church Financial Services   can be so helpful to churches seeking a mortgage loan for a church construction project. We know and understand these things and will help you prepare a “Sources & Uses” profile to insure you have the needed finances available to complete the project.

What is “Sources & Uses?” Sources refer to the various sources of funds dedicated to the church project while Uses refers to the various costs for the church project. As you might expect Sources needs to equal Uses or there is a shortfall. Most lenders require that ALL costs needed to complete the project MUST be available at the start of the project.  This means that a projected sale of a current facility and anticipated income from Capital Funds cannot be counted in the Sources because it is money that has not yet be received and has no guarantee that it will be received during the construction project. This comes as a surprise to many churches expecting that the uncollected Capital Funds will be counted to reduce the overall loan amount. Rarely does this occur. So, once again Church Financial Services is able to help churches anticipate these issues and find a way through the obstacles that would otherwise prevent successful completion of the project. We find a way and help show you the way to successful completion.