The Cash Flow On Total Assets Ratio Is Calculated By Building a Church: What Can You Afford?

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Building a Church: What Can You Afford?

Whenever a church begins to think about expanding its facilities, a terrible battle between two giants is sure to follow: needs and resources. Titan resources must be the ultimate winner in this competition if the church is to successfully build new facilities. Therefore, if the church must borrow money to complete the building it has envisioned, it is important in the early stages of planning any project to look at the church’s finances and assets (its resources), from the lender’s perspective.

Lenders deal with hard numbers and have developed risk-taking standards to manage the risk of the loans they make. The lending industry is going through changes, so don’t despair just because you talked to your banker two years ago and it didn’t seem feasible to build at the time. Churches have capital available for well-designed projects. In fact, recently interest rates have fallen and loan repayment terms have expanded, both of which have created favorable conditions for churches looking for funds to expand their facilities and grow their ministries. There are lenders who specialize in church financing and who understand the unique finances and operations of churches.

While qualification procedures and formulas will vary from lender to lender, here are some guidelines:

Loan to property value ratio: Most lenders will lend 70% to 80% of the appraised value of the completed project, including land and existing improvements. The new loan amount usually includes paying off the existing debt. For example, let’s say you’re currently paying $4,000 a month for your land and still owe $200,000. The cost of developing the new building and site is projected (and estimated) at $2,000,000. Your land is valued at $400,000. Therefore, the total estimated value is $2,400,000. The bank is willing to lend 80% of $2,400,000, which is $1,920,000. From this loan the bank will pay off the remaining balance on the land of $200,000, leaving $1,720,000 for construction costs. In our example, the construction budget is $2,000,000 which means the church needs a down payment of $2,000,000 – $1,720,000 = $280,000. The church is no longer paying $4,000 a month for the land, so those funds can now be put towards paying off the new mortgage. Let’s say the loan amount is $1,920,000 at 6% for 25 years = $12,370 per month – $4,000 = $8,370 per month in additional mortgage payments for the land and buildings.

Amortization: Church loans can be amortized over a period of 15 to 30 years. Amortization is the calculated amount of equal monthly installments that are required to repay the loan in a certain period of time. For example, a $2 million loan, if repaid over 20 years at 6% interest, would require 240 equal monthly payments of $14,389. The same loan amortized over 30 years would require 360 ​​payments of $11,991. Using a longer amortization period allows the church to borrow more money for the same monthly payment. In this example, if the church can afford to pay $14,389 a month, it has the choice to borrow $2 million and pay it back in 20 years, or the church can choose to borrow $2,400,000 and pay it back over 30 years.

Ratio of loan amount to gross income: Lenders like the ratio to be less than 3 to 1. Therefore, if a church wants to borrow $2,000,000, it should have a gross income of about $670,000 per year.

Cash flow should exceed the proposed repayment of the new loan by 20%. In other words, the church should have some money left over at the end of each month after paying the new monthly mortgage debt and all other expenses. Your cash flow includes your current monthly excess cash, plus any payments that will no longer exist once the new loan is in place. (For example, this may include payments of current debt that will not exist after the new loan is given. The church may even expect a reduction in the cost of utilities and maintenance in the new building.) Furthermore, the lender will often include the congregation’s pledges obtained in capital campaign that will be collected over the coming months.

How much you can afford to build is a function of the loan amount you qualify for, plus any funds you can add to the loan amount. If the church is selling land or buildings, the equity from that sale can be combined with money in savings accounts and expected mortgage money to determine how much the church can afford to spend on new facilities.

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