When You’re Expanding, Capitalization Is Key
(Originally published as an article within ECCU’s former e-publication, Ministry Banking Today.)
The story started out so well. A church in the southwest was ready to expand. After a too-quick, overly-general conversation with a local lender, they began to envision a facility that would require financing multiple millions of dollars.
Soon they had invested hundreds of thousands of dollars in architectural, engineering, and design fees, plus some city approvals, to create plans for their ideal facility. Excitement was running high…until they applied for financing, and the church only qualified for half the amount needed for the project.
"I've heard stories like this dozens of times," says Gary Kehr, vice president of ECCU's Colorado Springs office and a 25-year veteran of commercial lending.
Capitalization is the deal breaker in this story, and according to Kehr, it's a huge issue for ministries looking to expand. Many ministry leaders simply don't understand commercial lending. "They've only had experience with residential mortgages," he says, "which often require only a 5 to 10 percent down payment. Commercial loans, however, require more up-front 'capital,' usually 25 to 30 percent of the project cost." One reason for this variance is that a larger down payment communicates the ministry's level of commitment to the project. Another is that these kinds of "special-use" facilities can be more difficult to sell.
Both capitalization requirements and how you choose to meet those requirements vary. "Every situation is unique," Kehr says. "Sometimes a church owns their land free and clear. That's their equity, or capital. Sometimes it's cash from the sale of an existing facility or from a capital campaign. Often it's a combination of sources."
The key to avoiding a bad ending to your expansion story is preparation. You'll need quality financial statements for the past three years. The size of your loan will dictate the information these statements should include. And be sure capital is available when you need it. This might mean selling property, paying down existing debt, or launching a capital campaign.
The starting point, Kehr says, is to talk with your lender. The earlier you have that conversation, the better able the lender will be to help you understand the process and your options. This doesn't have to be a long conversation, "And if we can help ministries save kingdom dollars," he says, "that makes it all worthwhile."
To learn more about preparing for your expansion project, see the ECCU white paper Financial Statements Matter.