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Church loans are probably the most difficult form of commercial financing to successfully close. Churches are an integral part of local communities, so it is necessary to improve church financing solutions. In most situations church loan financing will require a specialized type of commercial real estate loan that is not understood by most church loan advisors and borrowers. Churches are not typical commercial enterprises but they do have substantial business financing requirements. This article will offer an overview of four key church loan financing difficulties and a listing of six practical church financing strategies. Four Major Church Financing Difficulties Before looking at different strategies for church financing, it is important to discuss typical church loan barriers. A typical church loan will be difficult to arrange due to four primary factors: (1) Church Financing Difficulty Number One: Church properties are unique. Lenders are therefore concerned that if commercial loan payments are not made in a timely manner and the lender is required to assume ownership of the property, it will be very difficult to find a new owner because of the unique property features. (2) Church Loan Obstacle Number Two: Commercial lenders usually require individual guarantors for church financing, and this is inappropriate for a church loan. The financial and legal structure of churches is at odds with a traditional lender/guarantor agreement. Many commercial lenders are not comfortable with the potential lack of individual guarantors because of the difficulty of reselling the church property if negative financial circumstances occur in the future. As a result, it is common to find that church loans have been obtained only after one or more church members have provided a personal guarantee for a church loan. The requirement for personal guarantors acts as a severe obstacle because church members might be unwilling to act in this capacity and because there simply might not be individuals who have sufficient net worth to provide a personal guarantee for a large church loan. (3) Church Loan Obstacle Number Three: When a church loan is approved, there are often onerous terms such as not enough financing, short-term loans, low loan-to-value (LTV) of 50% to 60% and high interest rates. These unacceptable terms are similar to the church financing being disapproved, and if the terms are accepted, the church might experience financial problems due to the commercial mortgage loan conditions. (4) Church Loan Obstacle Number Four: Land acquisition, construction and renovation funding are usually more difficult to obtain than church refinancing and purchases. Because of this, repairs are often postponed and new churches can take years to build. Six Pragmatic Church Loan Strategies There are practical business financing approaches for the church financing problems just noted. Here is a summary of church loan financing terms that can be obtained from a few non-traditional commercial lenders: (1) Church Financing Solution Number One: Non-Recourse Loans (instead of guarantors). As noted above, the willingness to forego traditional guarantors does require a non-traditional lender. This particular church loan solution means that lender decisions will not be based on personal guarantors in any way. (2) Church Financing Solution Number Two: Long-term loans (up to 30 years). A church loan will be much more successful when it is long-term instead of short-term (payments will be reduced dramatically). (3) Church Loan Strategy Number Three: Lower interest rates. Churches have frequently been taken advantage of and have paid higher interest rates than necessary. With payments limited to prime plus 1% or less, church financing payments will be noticeably reduced. Together with a longer-term church loan, the overall payment decrease will improve church cash flow. (4) Church Loan Strategy Number Four: Minimum church financing set at $500,000. This encourages churches to finish most business financing in one stage. (5) Church Loan Strategy Number Five: A Higher LTV (up to 85% is routinely doable). This results in a more reasonable amount of 15% or slightly more (rather than 40% to 50% possibilities with many church loan financing alternatives) for the church to provide. (6) Church Financing Solution Number Six: Church loans can now include new construction, renovation, land acquisition, purchase and refinancing. Because of more flexible church loans, it is no longer necessary for these vital church financing needs to be postponed indefinitely. Altogether the six church loan financing strategies provided above should produce significant benefits for many churches by allowing refinancing with improved financial terms and by facilitating the new construction needs of churches much more quickly. The six church loan strategies should provide financial terms that will complement the long-term financial condition of pragmatic churches which follow the church loan financing strategies described. Copyright 2005-2007 AEX Commercial Financing Group, LLC. All Rights Reserved.
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