by Dennis Park
I read last week that the Great Recession officially ended more than a year ago. This probably came as a surprise to ministry leaders who are still working through recession-related issues like declines in giving and real estate values. The latter, in fact, could have significant impact on your ministry’s ability to renew existing debt.
Over the past decade, many churches took out conventional, commercial loans to acquire or build new facilities. Monthly payments were typically calculated on a 25- or 30-year amortization schedule to keep payments manageable. But those loans had maturity dates set at 5, 7, or 10 years. That means that when the loan matures, it must be paid off, refinanced by another lender, or renewed by the existing lender.
Before the Great Recession, the incumbent lender was usually happy to renew a loan after resetting the terms to prevailing market rates. New appraisals were seldom required. Today however, lenders are looking with more scrutiny at maturing loans.
Two areas that lenders are paying more attention to at maturity are:
Debt Coverage – Lenders want to know that a ministry can make loan payments out of its operating budget without dipping into reserves. If your ministry cannot demonstrate a 1:1.25 debt coverage ratio (or even higher in some cases), the lender might set restrictive covenants, increase the interest rate, or even chose not to renew the loan.
Loan to Value (LTV) – Appraisals are revealing that the LTV ratios on many church loans are higher than when first originated. In some cases, real estate values have declined to the point that churches actually owe more than their properties are worth. If your ministry falls in this category, your lender may require additional collateral. If none is available, or if it is insufficient, you may have to pay down the principal balance to bring the loan in line with the LTV requirements.
At ECCU, we’ve developed an informative tool called the Borrower Health Assessment to help ministries understand the risk exposure they may face when their loans mature. Among other things, this tool helps ministries understand their debt coverage and LTV ratios. This information can be immensely valuable in helping a ministry know how to prepare for a loan renewal.
The risks to ministries with maturing loans are significant. Among those risks—more stringent loan terms, a major reduction in cash reserves, or even default. However, with some forecasting and preparation, a ministry can be better equipped to address these risks.
Has your ministry experienced challenges from a pending loan renewal?
Dennis Park is a ministry development officer, financing specialist, and occasional blogger with ECCU.