Church Building - Financing Options

Somebody once said, “Money isn’t everything, but just try to buy something without it.” We all understand that carrying out ministries requires resources.

Some churches are able to build new facilities with their own cash. This is most often the case when the church has been saving for the project for a period of years, has received a very large gift or is building a small addition to an existing facility. Most projects, however, are financed to some extent.

The church has two major financing options – conventional financing or bond financing, with lots of choices within those two options. Conventional financing is through a financial institution. Bond financing is provided through a bond underwriter. These two forms of financing are very different. (The author is president of a community bank that provides financial services to over 100 ministries and believes that conventional financing is the preferred choice for 95 out of 100 churches. However, I will attempt to summarize the positives and negatives of each.)

Both options allow the church to proceed with construction without having funds on hand to complete the project. Payments will be made on the loan or bonds with anticipated future revenues. Generally, financing of up to 80% of the total value of the completed project is available from both sources.

Bank financing generally offers more flexibility in the terms. Payments of interest only and varied amortization periods are available. Changes or amendments to loan terms are easier with a local institution, whereas the terms of bond financing are very difficult to change after closing.

With bond financing, longer amortization periods are often available. Repayment periods of 25 – 30 years are available. Banks generally limit repayment terms to 15 years. Payments are lower on longer amortization periods. However, serious thought should occur before incurring debt that requires more than 15 years to retire. Bonds also offer fixed interest rates for each bond. Banks can also offer a fixed rate, but generally prefer an adjustable rate loan.

Possible drawbacks of bank financing include shorter repayment periods, a variable interest rate and the possible request that individuals guarantee the loan. (First Bank of Owasso never requires personal guaranties on church loans, but many banks do.) The personal guaranty can adversely impact the guarantor’s ability to borrow funds for their own account.

There are several drawbacks to bond financing. First, although payments are usually required on a monthly basis, the bonds are generally paid semi-annually. The monthly payments sit in a sinking fund that pays either no interest or interest that is less than the rate which is accruing on the bonds. The initial cost of bond financing is usually much higher than conventional financing. You have the same real estate closing costs as bank financing, but you also have the bond underwriter and bond counsel fees.

If you come up a little short at the end of construction and need a few more dollars, you generally can’t get them with bond financing. Additional bonds usually can not be issued without going through the whole process again, and you can’t get the additional dollars from your local bank because the bond agreement prohibits second mortgage financing. Also watch for prepayment penalties or the complete prohibition on prepaying the bonds early. These provisions could cause problems when you are ready to build the next phase of the project.

The biggest drawback to bond financing is that the vast majority of all bonds are sold to members of the church. “Contributors” to the church become “lenders” to the church. Resources which might have been given to the church as part of a capital giving campaign are instead lent to the church. By purchasing bonds, some members feel they have made a sacrifice towards the building project, but have really just made an investment which the church is obligated to repay.

Financing decisions involve many factors and there is no “one size fits all.” Give us a call if we can help you work through these issues.

Let the wise listen and add to their learning, and let the discerning get guidance.

Proverbs 1:5

Dee Sokolosky - President

First Bank of Owasso