Cash Flows Investing Activities Cash Inflows Grants For Operating Activities Building a Church: What Can You Afford?

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Building a Church: What Can You Afford?

Whenever the church begins to think about expanding its capacity, there is sure to be a terrible battle between two giants: needs and resources. Titan resources must be the ultimate winner in this competition if the church is to successfully build new facilities. So if a church needs to borrow money to complete a facility it envisions, it’s important to look at the church’s finances and resources (its assets) from a lender’s perspective in the early stages of planning any project.

Lenders face hard numbers and have developed buyout standards to manage the risk in the loans they make. The lending industry is changing, so don’t give up just because you talked to your banker two years ago and it didn’t seem feasible to build at the time. Capital is available to churches for well-designed projects. In fact, recently interest rates have decreased and loan amortization terms have expanded, both of which have created favorable conditions for churches seeking funds to expand capacity and grow ministries. There are lenders who specialize in church financing and understand the unique finances and operations of churches.

While qualification procedures and formulas will vary from one lender to another, here are some guidelines:

Loan-to-asset ratio: Most lenders will lend 70% to 80% of the appraised value of the completed project, including land and existing improvements. The new loan amount usually involves paying off the existing debt. For example, let’s say you’re currently paying $4,000 a month for your land and still owe $200,000. The new building and site development costs are projected (and estimated) at $2,000,000. Your land is valued at $400,000. Therefore, the total assessed value is $2,400,000. The bank is willing to lend 80% of $2,400,000, which is $1,920,000. From this loan the bank will pay off the balance on the land of $200,000, leaving $1,720,000 for construction costs. In our example, the construction budget is $2,000,000, which means the church needs a deposit of $2,000,000 – $1,720,000 = $280,000. The church is no longer paying $4,000 a month for the land, so those funds can now go toward a new mortgage payment. Let’s say the loan amount is $1,920,000 at 6% for 25 years = $12,370 per month – $4,000 = $8,370 per month additional mortgage payment for land and buildings.

Depreciation: Church loans can be amortized over a period of 15 to 30 years. Amortization is the calculated amount of equal monthly installments required to repay the loan over a specified period of time. For example, a $2 million loan, if amortized over 20 years at 6 percent interest, would require 240 equal monthly payments of $14,389. The same loan, amortized over 30 years, would require 360 ​​payments of $11,991. Using a longer amortization period allows the church to borrow more money for the same monthly payment. In this example, if the church can afford to pay $14,389 per month, it has the choice of borrowing $2 million and paying it back in 20 years, or it can choose to borrow $2,400,000 and pay it back in 30 years.

Ratio between loan amount and gross income: Lenders like the ratio to be less than 3 to 1. So if a church wants to borrow $2,000,000, it should have a gross income of about $670,000 per year.

Cash flow should exceed the proposed payment of the new loan by 20%. In other words, the church should have some money left over at the end of each month after paying the new monthly mortgage and all other expenses. Your cash flow would include your current monthly cash surplus and any payments that will no longer exist under the new loan. (For example, this may include payments on current debt that will not exist under the new loan. The church may even expect to see a reduction in utility and maintenance costs in the new building.) In addition, the lender often includes the congregation’s capital campaign pledges that will be collected in the following months.

How much you can afford to build is a function of the loan amount you qualify for and any assets you can add to the loan amount. If a church sells land or buildings, the equity from that sale can be combined with money in savings accounts and expected cash from buildings to determine how much the church can afford to spend on new facilities.

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