Numbers a lender looks at when considering a church loan – Loan to value ratio

When considering whether to make a loan to a church, a lender will likely look at the loan to value ratio.  Introduced this discussion here.

In one sentence, LTV is the ratio of the balance of the loan in relation to the appraised value of the real estate that will be securing the loan.

Purpose of this ratio is to evaluate how secured the lender is in the event the loan has to be foreclosed. If the lender takes back the property, will they be able to sell it and recover their loan balance in full after paying commission and closing costs along with past due interest. 

Typically, the expected ratio is 70% or less. Go over that ratio and the lender probably won’t make the loan.

Complicating this is that some lenders are insisting that appraisers come back with a cautious or conservative appraisal number.  I’ve heard some unpleasant stories on this issue.  What this does is force a higher equity factor which essentially means you would have to have a 60% or perhaps 50% LTV if the appraisal number was closer to market.

Let’s walk through a ratio calculation. Let’s say you are on the board of directors for Example Community Church. 

In a separate post I have created some example financial statements for this series of posts.  The numbers in these posts will come from those dummy financials.  You can find the example financials here.

All of these examples are constructed assuming the church is trying to refinance an existing loan.

Let’s say the appraised value came in at $6,200,000.  Notice this is the appraised value, not the net book value on the financial statements.  So you will need to get an appraiser (actually I think banks are selecting the appraisers today but I’m not sure how that works), pay a bunch of money, then look at the report to see the appraised value.  The calculation goes like this:

  • 4,000,000 – loan (in this example, this is the amount being refinanced, which can be found in the financial statements)
  • 6,200,000 – appraised value (from the just-completed appraisal)
  • Divide loan by appraised value
  • 64.5% – loan to value ratio

Congratulations!  You are below the cutoff of 70%.  Your church met that ratio.  You can now look at the other ratios to see if you still qualify.

Now, let’s change the situation a bit to see where this gets messy.

Let’s say you completed your building in about 2002 or 2004 at a cost of about $5.4 or $5.6 million. Let’s say that since then the market value of property in your area has dropped by, say, 20%.  That means your church building is now worth about $4,500,000.  So let’s do that calculation again:

  • 4,000,000 – loan
  • 4,500,000 – appraised value (from the changed assumption)
  • Divide loan by appraised value
  • 88.9% – loan to value ratio

Sorry!  You are a long ways above the 70% cut off, which means the bank will not be comfortably secured if they make the loan.  They probably will not make the loan or refinance it.  Even worse, it is a very real possibility that your current lender might not renew the loan when it matures.

That is the very difficult situation that a lot of churches are in today.

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