In almost every community in the U.S., you will find houses of worship — whether they be churches, synagogues, mosques or temples. Given the reach and influence of religious institutions, you might expect that these groups would have relatively easy access to real estate financing when expanding their building or acquiring a new property. For the typical house of worship, however, easy access to a mortgage is usually the exception to the rule.
Religious groups — and the commercial mortgage brokers who work with them — are often surprised to learn that many banks and private lenders don’t want their business. Even with an impeccable application, it’s sometimes nearly impossible for churches, synagogues and other faith-based organizations to find a lender willing to make a deal.
Although they may not be any different from other nonprofit organizations, the barriers standing between them and funding are very real. Why do religious groups struggle to secure loans and how can they find a partner willing to work with them? The main issue is often not the religious institution itself but the potential bad press should the organization run into financial trouble and the lender needs to take action against them.
There’s nothing inherently different about religious groups applying for a loan than any other nonprofit organization. These institutions need mortgages to acquire property or expand facilities, raise working capital and purchase equipment. Religious groups regularly need bridge loans and other types of short-term financing, as well as longer-term mortgages.
The problem boils down to public relations and bad optics. If a religious group can’t repay its loan, it is subject to the same foreclosure terms as any other borrower, profit and not-for-profit alike. This could mean excessive financial penalties or even the repossession of collateral, including the house of worship itself.
Banks and private lenders are particularly concerned about how foreclosing on a religious group would look to the public. Just like with any other mortgage, a lender may well end up in the uncomfortable position of foreclosing on the religious institution’s property and repossessing the collateral. Taking such action creates tension between the lender and the community.
Many commercial lenders saw this unfortunate circumstance become reality in the aftermath of the 2008 financial crisis, when record numbers of religious groups defaulted on their loans. Many institutions took advantage of the boom before 2008 to take out loans for expansions, repairs and other essential needs. Faced with plummeting property values and missed payments, however, a wave of lenders foreclosed on religious properties across the U.S., even if they tried to work out solutions with their borrowers.
Needless to say, this did not improve lenders’ reputations in the eye of the public. Financial institutions were left with a dreaded scarlet letter. This only reinforced their unofficial, unwritten policies to not extend loans to religious institutions in the future.
While negative press is the primary reason that lenders won’t work with a religious institution, the issue of a personal guarantee can stand in the way as well. Banks and private lenders typically require a personal guarantee to fund a church loan, so an individual is identified as personally liable for repaying the loan if the organization can no longer do so.
Although these provisions are normally legal boilerplate, religious organizations are often unwilling or unable to name someone, especially when many of the key people involved are volunteers who did not sign up for such a monumental task. This makes many lenders uneasy and reinforces their concerns about approving a loan.
Debt service also may worry some lenders. Unlike a typical office building or retail center with predictable monthly income, many houses of worship rely on the generosity of their members. The institution’s revenues can be wildly volatile, depending on how the economy is performing, or the ebb and flow of donations around major religious holidays. This does not guarantee a stable income needed to cover payments, which could lead to a higher default rate. Some lenders prefer not to take the risk.
If a church is ready to expand or a mosque needs funding to break ground, it could first try to raise funds from its congregants. A donation-based approach is difficult, however, and does not always result in the necessary funding. The religious institution would then naturally turn to a bank in the hopes of securing a loan to fund its needs. Finding a bank is difficult enough in the first place and the few banks willing to lend to religious groups tend to not advertise it.
For religious groups, it becomes like finding a needle in a haystack. So much time is wasted in applying to banks and private lenders, only to be rejected and forcing the institution to start over again. Sometimes, a group will try multiple times until a lender says “yes,” but as projects get delayed, this only increases the need for funding.
Approving a mortgage for a religious group often comes down to the value of the asset in question, and is not dependent on the type of organization or a personal guarantee.
These circumstances do not change the simple fact that religious institutions need financing just like any other profit-based or nonprofit entity.
The outright, categorical refusal to work with religious groups inhibits their growth and the vital work they do in their communities. In this regard, lenders are doing a service by extending loans to these organizations.
It is possible for commercial mortgage brokers to secure financing for a house of worship. To quickly secure a loan, however, you’ll need to find the right lender and take the right approach. First, find a private lender willing to work with religious groups out the gate. The time wasted on rejections can mean long and painful delays. Explicitly ask if the private lender is open to working with religious groups that have a strong application and valuable assets that have been recently appraised.
Look for a company willing to waive the personal guarantee. As previously mentioned, this can be a major stumbling block for many religious groups, but not all lenders require one. During your initial conversations, ask the potential lender about their personal-guarantee policy.
Also, find a lender with a track record of fast closings. Some lenders will close within days of approval. This ensures that the religious institution can act quickly on a great opportunity.
Waiting weeks or months for an answer — oftentimes only to hear “no” — can make or break a group’s plans. Direct private lenders are often far more flexible in meeting tight deadlines.
Furthermore, a religious institution should work with a commercial lender focused on the deal itself, not the group applying for it. What’s most important in a loan application is the merit of the opportunity alone. Approving a mortgage for a religious group often comes down to the value of the asset in question, and is not dependent on the type of organization or a personal guarantee. If there’s value in the real estate, there’s an opportunity to make a deal.
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At the end of the day, houses of worship are just like any other nonprofit group: They need funding to advance their mission. The risk of negative press should not subtract from the merits of the deal itself. By allowing religious groups with sound applications and healthy opportunities to secure loans, lenders are simply doing the right thing. ●