Manna from Caesar (& Other Forms of Faith-Based Lending)
7.31.20
How does a 58-year old “gun-guy” with a clear Evangelical spin attract an avid following of Millennials on Instagram? He rants about debt. A lot. Dave Ramsey made his fortune through a single-issue campaign against the perils of borrowing. Best known for his New York Times bestseller, The Total Money Makeover, Ramsey is now a beloved (and feared) Christian radio talk show host with over 14 million weekly listeners.
Ramsey’s appeal is two-fold: it’s enthralling to watch his public denouncements of debt-ridden sinners, and it’s relieving when they are still offered salvation. Afterwards, many former debtors are invited onto his show to unburden themselves with a debt-free scream.
But Ramsey’s anti-debt lifestyle isn’t just reserved for individuals. When asked by a woman if her church should take out a loan, Ramsey had a resolute answer: never make a decision through the lens of business rather than the lens of scripture. He recounts how a church board member once yelled at him, “I’m a banker, I know money!” Ramsey looked at the pastor and said, “And he’s the pastor, and he knows the Bible!” Unfortunately, the Bible is very critical of debt. Every time loans are mentioned in the Bible, the borrower is pitied as a fool or a slave who should have known better than to owe someone anything beyond a “debt of love.”
So, when the Small Business Administration approved houses of worship for the Paycheck Protection Program, it was not well-received on The Dave Ramsey Show. “This is not my first ride on the cabbage truck,” said Ramsey. “I didn’t just wake up this morning and decide to be obstinate or hard to get along with on these stupid PPP loans from the SBA. And yet, I think I may be the only one that is telling you not to take the ‘free money’ or ‘grant’ because it is neither.”
In fact, Ramsey was far from the only one who complained about including churches in the loan program. The decision ignited a wave of hysteria pronouncing the breakdown of separation between church and state. Those that came to the defense of churches (The WSJ, for one), arguing that even though churches don’t pay taxes, their employees certainly do, found an unsympathetic audience. And internally, some skeptics sided with Ramsey: “Is it really manna from heaven?” asked Chuck Bentley, CEO of Crown Financial Ministries. “It’s manna from Caesar, that’s for sure. What’s it going to look like in terms of the optics in the long term, that this is where the church went for a rescue?”
You Can’t Run a Church on Hail Mary’s
In total, the SBA distributed over $7.3 billion in loans to religious organizations. Certain denominations felt less conflicted about taking the PPP loans. The Catholic Church swept the field, pulling in at least $1.4 billion dollars for a total of 3,500 loans.
It helps that Catholics have a robust financial infrastructure, including their own bank. As Archbishop Paul Marcinkus, former president of the Vatican Bank, famously quipped, “You can’t run the Church on Hail Mary’s.” Churches that had no financial guidance or inadequate payroll documentation were significantly disadvantaged.
Most churches are heavily dependent on in-person tithing: less than half of churches were prepared to accept electronic donations. As a result, many experts predict the greatest wave of church foreclosures seen since the Great Recession. But where else can churches turn to?
What Makes a Church Credit Worthy?
If churches didn’t receive a PPP loan, they can also look to private lenders, denominational banks, Christian credit unions, and other faith-based partners for financial assistance. Below, we walk through some of the most common requirements for passing faith-based credit checks.
1. Church Size & Giving Units
Lenders typically require that churches have a minimum number of members and giving units. If a church is too small, mild upheavals such as a few wealthy families leaving town could significantly impact a church’s weekly income. A congregation’s makeup also matters. If 90% of your congregation is comprised of silver foxes, who’s to say how many parishioners will be left standing in ten years?
In the eyes of lenders, a standard minimum church size ranges from 100–300 families, 300–500 is better, and 500+ is excellent. At a minimum, 100–250 of these families must be considered giving units; that is, they contribute weekly. Ideally, 90% of families are giving units. Giving campaign history is also considered, with communities that meet 95% of their pledge amounts taking priority.
2. When the Pastor’s Away, the Congregation Will Stray
If the general public thinks Elon Musk is a god, how do you think most congregations view their leaders? In a sociological study of 12 megachurches, congregations often perceived their senior pastor as a person of extraordinary qualities and otherworldly grace. One member described their senior pastor as a “walking reincarnation of Christ.” Another felt that their pastor had a “special anointing over him which created this special anointing over the church. So I just had to be a part of it.”
Given their massive fan clubs, it’s no surprise that lenders seek some security regarding a pastor’s tenure. Generally, lenders prefer a tenure of 5–10+ years, unless the church is part of a denomination that transitions its pastors every 3–5 years (Catholics are constantly circulated). Newer pastors haven’t developed a strong following yet, and the congregation is at flight risk.
On the other end of the spectrum, older pastors that may have seen extraordinary success throughout their career are at risk of retirement or even an untimely death. Some lenders will go so far as to demand Key Person life insurance in the event that a senior pastor passes away before the loan matures.
Clear succession planning also quells anxieties. This might entail junior pastors, an administrative staff, or a board of directors who help run the church. But if 90% of the decision-making is in the hands of one charismatic leader, most lenders will assume that when the pastor is away, the congregation will stray.
3. Collateral
Churches are not a particularly liquid asset class. While many congregations have vast real estate holdings, they’re generally harder to re-purpose or sell than a standard office building. Who dreams of having their living room next to a tabernacle? As a result, many lenders include churches in the same category as gas stations and bowling alleys: they’re considered “special purpose properties.”
Church properties are also subject to different zoning laws. However, not all zoning restrictions are credit negative. Since they’re exempt from paying property-taxes, many municipalities set limits for the amount of churches allowed in one area. This ensures that for-profit, property-tax paying businesses will continue to represent the majority interest in that area.
Still, despite the limitations of church properties, their appraised value is a key determinant in how much credit a church will receive. Most lenders will not extend more than 50–75% of the total collateral value, or “Loan-to-Value” ratio. For example, a church building appraised at $1,000,000 would be unlikely to receive more than a $750,000 loan. This leaves a sufficient cushion for the lender in case they need to foreclose and sell the property at a discount.
4. Denomination
With the exception of Catholics and Mormons, many Christians are increasingly seeking non-denominational churches. The number of U.S. adults that identified with a specific Protestant denomination dropped from 50% in 2000 to just 30% in 2016. As a result, non-denominational churches often perform better than more rigid congregations, and they often have their own parent financing available.
At the same time, lenders fret that non-denominational churches are a magnet for so-called “Cafeteria Catholics” and their kin, people who will join a church just because they think a pastor is fun. Having an internal governing board or succession planning committee is particularly relevant for these “personality-driven” congregations.
Lessons from Friendship-West Baptist Church
“These people know what makes you tick. What they will do is they will quote Scriptures and before you know it, you’re doing church at the table instead of business at the table.” –Veta Holt, Chief Operating Officer, Friendship-West Baptist Church
Even when a church meets many of a lender’s conditions, things can still go wrong. This was the case for Friendship-West Baptist Church, a thriving, social-justice megachurch that boasts its own franchise line. Known as the “Taj Mahal in Oak Cliff,” Friendship-West is one of the largest employers in South Dallas and is home to 45+ ministries including a credit union and printing company.
Friendship-West is led by Senior Pastor Dr. Frederick Douglass Haynes, III, a third-generation preacher who takes his namesake seriously. He describes his preaching style as a “Gospel gumbo” of civil rights leaders and prophetic pastors whose work has influenced him. “You become what you behold,” said Haynes. “And I have beheld the best.” Under his 37-year tenure, Friendship-West’s congregation has grown from 80 members to 13,500 members.
This bourgeoning social justice community required a significant injection of capital to build a new 174,000 square foot facility. In 2005, Friendship-West was approved for a $19 million-dollar loan from Bank of America (a conservative 63% LTV on their collateral). However, Friendship-West’s general contractor trash-talked the bank and produced another offer — this time for $30 million in bond financing — from a now defunct bond company. This was a closer fit for the Taj Mahal vision. Friendship-West accepted the second offer of 100% debt financing (with increasing interest rates every six months) three years before the Great Recession hit. At their highest point, interest rates would reach 8.5%. Worse still, $5 million of the loan was structured as a balloon note with a short five-year maturity to pay for their new AV system.
When church leaders inquired what would happen in five years, they were verbally reassured that the loan balance would be renewed at maturity. “He told us, ‘It’s going to mature in five years but when it does, we’re going to roll it into the main bond mortgage,’” said Holt. “The first mortgage was set for 25 years; $25 million for 25 years.”
This did not happen. After the Great Recession, the collateral value of the church property fell from $30 million to $20 million. Friendship-West did not have the cash to reduce its principal to achieve an acceptable LTV. Friendship-West could not pay off the balloon note or make full loan payments at the highest interest rate, but it succeeded in working out a payment plan and eventually consolidated both sets of payments into one note. In 2018, Friendship-West was finally able to refinance its debt after the Taj Mahal was re-appraised for $35 million.
Reflecting on the experience, Dr. Haynes urges younger pastors not to make his same mistakes. “I was so busy doing the spiritual work and the community work, that I left the business of the ministry to other people. I thought they would recognize that this is God’s work and ‘Who would dare do God wrong?’ I was wrong.” He adds, “Do not ignore the language of business. I did, and we had to pay for it in ways I have repented for and God has forgiven me — but we paid the price.”
About Colbeck: Colbeck is a strategic lender that partners with companies during periods of transition, providing creative capital solutions to meet their evolving needs. You can reach the team at inquiries@colbeck.com.
