Financing Your Spiritual Home
Tips on Working Successfully with Local Bankers
Unitarian Universalist congregations across the continent are facing
the need to expand their existing facilities or build entirely new ones.
Most congregations achieve their building dreams by raising funds through
a capital campaign and then seeking financing for the balance from a lender.
Congregations may pursue financing options offered through the Unitarian
Universalist Association. The UUA offers loans, loan guarantees, and grants
to qualifying congregations.
For additional information about these three programs, please contact:
Wayne B. Clark, Ph. D.
Director of Congregational Fundraising Services
(207) 829-4550
wclark@uua.org
In addition to pursuing the possibility of UUA financing, congregations
are strongly encouraged to explore local financing options. The following
outline offers the steps necessary to obtain local mortgage financing
for your project. Two Unitarian Universalists, who are commercial mortgage
banking professionals, have compiled these steps. The techniques have
been used successfully in obtaining financing for their own fellowship
and for other congregations as well.
Working with a Bank
Identifying Lending Sources
You are best served by talking with local institutions or local branches
of larger banks who see the potential loan to your congregation as an
opportunity to expand their business or personal banking relationships,
earn a profit, and get credit for being a good citizen.
Good banking leads include any business or personal relationships that
members of the congregation have with senior officers of local lending
institutions. Talk to members with their own businesses who might introduce
you to their banker. This will not ensure that you get the loan, but
it will give you a receptive audience for your initial presentation.
Approach the bank that your congregation is now using for its regular
savings and checking accounts and be prepared to move the accounts to
the bank that actually makes the loan. A lender cannot require you to
move your accounts, but your offer to do so can aid in negotiating a
favorable rate.
Contact other churches in your area that have financed building projects
and ask for the information about their lender. Also, look for banking
institutions that appear to be active in community affairs and community
lending through contributions they may be making to local non-profit
organizations. Talk to more than one lender about your project.
Typical Loan Terms
Most institutions will lend no more than 70-75% of the project cost
and UUA guidelines suggest you borrow less. You will be eligible for
a commercial loan, not a residential loan, and the terms are very different.
Most commercial loans are written with a five to ten year term and a
20 to 25 year principal amortization schedule. This means that the loan
must either be rewritten or paid off at the end of the term.
Be aware that there is a refinancing risk. The bank is not committed
to renewing the loan in five to ten years. You can, however, request
an adjustable loan where the rate is reset to the current market for
another five to ten year period, thus avoiding having to pay the full
balance balloon amount.
Interest rates for a construction loan will usually float and may range
from .5% to l.5% over the prime rate. During this time you would pay
interest only on the outstanding loan amount. Once the construction
is completed, the loan would be converted to a permanent mortgage with
a rate generally between 2% to 3% over a Treasury note of the same five
to ten year length.
Closing costs will include points (typically up to 1% of the loan amount),
legal fees, professional engineering reports including environmental
reviews, and a professional property appraisal. You can anticipate that
the base level of total expenses, not including points, will be from
$5,000 to $8,000. These expenses will not vary with the size of the
loan. If you are negotiating with more than one bank, get an agreement
that the appraisal is put out to bid and is shared. You cannot arrange
for the appraisal yourselves, as the bank will only accept the report
of an independent appraiser from their approved list, addressed to the
bank.
Lending institutions will require the guarantee of the congregation.
As mentioned above, a loan guarantee program is also available from
the UUA. Please contact the Office of Congregational Fundraising Services
for more information. This guarantee is often the "clincher" that allows
the congregation to get good market rate financing from their local
lenders. But the guarantee should not be offered, unless requested by
the bank, and only if it makes the difference in getting the loan or
reducing the interest rate. Do not agree to provide guarantees from
individual members of your congregation.
A bank underwrites (analyzes risk) based upon three approaches to value.
The most important factor is cash flow. The bank will want to know if
your congregation consistently raises enough money to pay the mortgage
being requested. The bank will need to be convinced that you are not
relying upon future increases in membership or pledges. The second factor
relates to the equity in the transition. Does your existing land and
building (less current debt), plus capital raised, indicate that the
loan represents a low percentage of total value? The third factor relates
to the versatility of the building design. Can your building be used
for rental purposes (weddings, day care) and/or be adaptable to an alternative
use (school)? These three factors determine the risk the lender is taking
and if all three are reasonable, your loan should be easy to obtain
without a UUA loan guarantee.
If a higher level of risk is involved, the UUA loan guarantee can make
the difference. We suggest that your congregation review the bank application
with the Office of Congregational Fundraising Services to gauge the
level of risk, the completeness of your application, and to check the
current interest rates available through the UUA loan program.
Once you secure a loan, establish a routine of reviewing your loan
rates annually. You will want to compare them to the current interest
rates being offered by area banks to see if refinancing might save you
money. Generally speaking, if the new rate is lower by 1% or more, and
at least five years remain on the loan, then refinancing should be considered.
The Bank Presentation
Getting Ready
When financing is needed, many congregations begin by going to a bank,
asking for money, and then developing whatever additional information
is needed. This is not a good idea.
Long before you make the initial contact with a bank, it is essential
that your congregation clarifies its vision, mission, goals and needs.
You will want to create a five-year strategic plan in which you project
your operating income and expenses, as well as your capital income and
expenses. This strategic plan will enable you to prepare a realistic
five-year cash flow projection to determine how much debt service your
congregation can afford to carry. You can then calculate the amount
you can borrow. Use this number when calculating the size of your project
to ensure that you do not burden yourselves with too much debt.
You may need to improve the success of your annual canvass. You might
need to create a stronger pledge base. You might establish a goal of
achieving an average pledge of at least $1,000 to 1,200 per pledge unit,
with a median pledge of $800. This will enhance both your borrowing
capability and the funds available for program support.
How large is your congregation's endowment? Your endowment will need
to be at least large enough so that it equals your annual operating
budget. Although you will not want your endowment to be primarily responsible
for funding your building project, a bank will be interested in the
size of your endowment.
Please contact the Office of Congregational Fundraising Services for
guidance on developing a comprehensive strategic plan, implementing
a successful annual canvass, and increasing the size of your endowment.
The Initial Presentation
The bank wants to know if the project is viable, well planned and worth
pursuing. It will be important, as part of this presentation, to project
conservatively the growth anticipated over the next three to five years
in members, revenues and pledge income. Summarize in one or two pages
the following data:
- Required loan amount (include, if necessary, interest on the loan
during the construction phase.)
- A brief project description including construction start date,
total square footage of new space, property address and location and
sketches or renderings
- Description of the congregation, including its membership size
and history
- Description of the Unitarian Universalist Association.
- Financial history including income and expenses for the previous
three years, current indebtedness and assets and estimated property
and land value
- A three to five year projection of income and expenses upon completion
of the project.
Do not offer the UUA loan guarantee as part of your initial presentation.
It can be used as leverage when you negotiate your interest rate, and
may lead to a reduction in the offered rate by 1/2 to 1%.
The Final Bank Presentation
The bank wants to be assured that the congregation is stable and financially
strong. They will be concerned with your ability to repay the loan,
so they will look for a solid pledge base as well as capital gifts (at
least three times your annual pledge total) which will assist in lowering
the actual amount of money needed. The UUA's own loan guidelines should
be very acceptable to them. We will not approve a loan (or a loan guarantee)
in which your annual debt service is more than 25% of your annual operating
income. You need to stress your proven ability to raise both
capital and operating funds and demonstrate a clear sharing of
the new risks represented by this loan among individual members of the
congregation.
You need to assure the bank that there is enough collateral (the ability
to recover their debt through the sale of the assets if default occurs)
on any loan from the congregation. However, most sophisticated bankers
know the negative public relations impact of a foreclosure action and
will usually re-negotiate the loan on mutually agreeable terms.
If you will be using a UUA loan guarantee, they will want assurance
that the national organization is stable and financially able to back
up the loan if the congregation defaults. They will also want information
on the loan guarantee program to be sure that it adequately protects
their interests. Attach a copy of your completed UUA application to
demonstrate the UUA's review of your situation. The bank is also looking
for a viable project that is well along in its planning stages and with
professionals associated with the project who have credentials or a
known reputation with the lender. In the final analysis, the lender
wants to know if the project is well thought out and a "real deal" that
they should spend some time analyzing.
Do not sign any construction bids until you have been qualified by
a bank. In fact, as part of its overall strategy to reduce its risks,
the bank may insist on professional construction management or the bank
may hire an engineer. Most banks will want a bonded construction contract.
They will not finance construction overruns through additional debt
so include a 10% contingency amount to your projected project total.
The presentation should include the following exhibits and information:
Exhibit 1: The Congregation:
- The history of the congregation (members, buildings, ministers)
- Membership statistics (the number of current members/pledge units,
age and income breakdown, average length of membership)
- Income and expenses for each of the past three years and current
cash reserves including pledge collection rates
- The percent of revenues from pledges, building use, annual fund
raising, special events, etc.
- Three year history of pledges and pledge income (including the
percentage of pledges which were left unpaid each year)
- Capital Campaign results including pledges and pledge payments
to date
- Next year's projected budget and pledge expectations,
- Your institutional net worth including buildings and land with
a formal appraised value, if available. (Do not, however, pay for
a property appraisal as part of your initial submission to the lender.
Lenders will only accept such appraisals from appraisers on their
approved list, and generally do not require them until the loan
review process is well underway.)
- Tangible assets (i.e., furniture, office equipment, vehicles,
etc.)
Exhibit 2: The Unitarian Universalist Association:
- A description of the denomination which gives the philosophy,
history, number of congregations in the United States and number
of members. Include names of famous Unitarians: Emerson, Jefferson,
etc.
- An audited financial report on the denomination
- Copies of the loan guarantee forms (but do not include in your
initial submission, unless requested to and only if needed to address
a higher loan to value situation)
- A description of the loan guarantee plan
Exhibit 3: The Proposed Project
- Details of the project: for a new building or expansion, include
the square footage, the number and type of rooms, the type of construction
and architect's drawings and models, if they are available
- Information on the architect, engineer, general contractor or
legal counsel, if they have been selected. (Do not use members to
fill these positions unless they are fully qualified, and competitive
in the marketplace both in their professional credentials and their
pricing.)
- Copies of construction bids that have been received and a preliminary
construction schedule
Exhibit 4: The Project's Benefits to the Congregation
- The specific amount that the project will add to the congregation's
assets
- A reason why the project is required by the congregation
- Some assurance that the benefits, particularly if they relate
to growth in membership, are valid and based on historic trends.
Conclusion
Well, sure it's a complicated and time-consuming process. But
money is available from banks to help your congregation fulfill its dreams.
If the dreams are reasonable and the congregation is willing, you can
be successful!
CASE EXAMPLE
The First Unitarian Universalist Society of Jonesville has
an extremely crowded religious education program. The congregation has
been slowly growing for years and the leadership is concerned that the
lack of meeting space for both adults and children is limiting their programming.
They convene a strategic planning committee that spends nearly a year
to develop a comprehensive strategic plan, which is voted upon and approved
by the congregation. One element of the plan is to improve their facilities
so that they could offer more adult religious education opportunities.
Another element of their plan is to enhance and expand their youth group.
Finally, in reviewing the demographic patterns of Jonesville, they learned
that their county projects strong growth in the number of school age children
over the next ten years.
A Facilities Planning Committee was created to generate plans for a
new addition. The Finance Committee developed a five-year projection
of income and expenses. Based on past trends of growth and pledge increases,
the Finance Committee developed an estimate of the amount of funds the
congregation could devote to debt service, without hurting programs.
The Facilities Planning Committee used this information in projecting
the amount of money the congregation should borrow for its new building.
Once the building plans were developed, the congregation voted to hold
a capital campaign. Working with a UUA Fundraising Consultant, they
raised nearly $2,000 per member to be paid over three years. The congregation
applied for a loan guarantee and was approved.
Church leaders then approached the bank where they had always done
business for a construction loan and for permanent financing. They also
asked a member of the congregation who was a business owner in the community
to introduce them to her banker.
At each initial meeting they brought a two-page summary describing
their congregation, the UUA, their project, their capital campaign,
their financial history, the loan guarantee and their cash flow projections.
Several weeks later they made a final presentation to one of the banks.
They brought expanded versions of the information presented at the initial
meeting, their complete loan guarantee application, building plans and
budget estimates.
Once their loan was approved, they put the project out to bid and planned
their groundbreaking.
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