It’s getting harder and harder for churches to find property they can use. Not only that, but it’s getting increasingly difficult for churches to finance their buildings via banks. This is why:
1. Banks are reluctant to sell a church property
Banks are very aware of the potential for bad PR if they take possession of and sell a church building that has been funded by people from the community. So whilst a bank may have a first mortgage as security over the money they have loaned the church, in their eyes the first mortgage is practically useless.
2. Banks can’t get director’s guarantees as additional security
Where a bank lends to a private company, it will invariably obtain director’s guarantees as an extra form of security. This is generally not possible to obtain in respect of a church. As a result, when dealing with churches, banks miss out on this form of security as well.
3. Banks are reluctant to lend to “specialised properties” like churches
Because most church buildings are regarded as “specialised buildings” with a limited market if they are to be sold, if banks do lend money to a church, they will generally only lend up to 50% of the value of the property, meaning that funds will need to obtained from other sources.
4. Banks will want the church to have a record of returning profits
For a bank to make the decision to lend money for a church building, the bank will not only want to see a history of surpluses being made sufficient to cover the interest, but will want the surpluses to be sufficient to pay back the loan over time. The bank will generally look to see a record of surpluses of between 1.5 and 2 times the amount of interest to be paid.
This is problematic for most churches, as being not for profits, they don’t exist to make a profit. Instead, most churches will use the income they derive to fund ministry and mission, aiming to break even after doing so, rather than generate the surpluses the bank will look for.
5. Banks will generally regard churches as being an industry in decline
When making lending decisions, the decisions banks make will be influenced by the economic strength and prospects of the industry that the borrowing organisation belongs to.
The IBISWorld Industry Report in relation to Religious Services in Australia makes that comment that “Falling adherent numbers are constraining revenue growth” and “While some small, international religions are in their growth stage, religious organisations on the whole are in decline”. Churches belong to an “industry sector” that is seen to be in decline and consequently not attractive to banks.
What does this all mean?
The bottom line is that churches will increasingly need to find alternative sources of finance for their building projects, reducing their reliance on bank finance. Naturally churches will want to accumulate money in the bank before starting a project. Such funds can come from accumulated surpluses, special offerings or at times the sale of other assets.
Another alternative is to develop a borrowing mechanism where the church can borrow from individuals and even self managed super funds. The church I lead has developed and use a structure that provides the church with a non bank source of finance at a greatly reduced interest rate whilst providing investors with an interest return that is considerably better than they could get in a cash management account, with their investment being secured by a second mortgage and a registered general security agreement.
Email me if you would like more information about the mechanism we have set up. If you decide to set up a non bank finance structure along these lines, there are many issues to consider and you will need to seek your own advice, but we may be able to provide you with an initial blueprint that you can look at and discuss with your professional advisers.