For most churches and schools, the idea of obtaining financing through a bond issue is a new proposition. But it’s actually quite common and utilized by some of the larger churches nationwide, including Saddleback Community Church, Oasis Church and Hunter Street Baptist Church among others. When a church or school wishes to raise capital, it can retain an investment banking firm like Ziegler to underwrite bonds. Fees are paid to the firm, typically a percentage of the total amount of the bond issue. Then the firm sells the bonds to its clients, who in turn provide the needed capital in much the same way depositors of a bank provide capital for the bank to lend. And that’s it...simple, effective, and a great alternative to a conventional bank loan.
Bond financing options for churches and religious organizations
Ziegler offers two primary types of bond financing:
1. Taxable long-term fixed rate bonds
This is the structure most are familiar with as it relates to traditional church financing. Ziegler can firm underwrite bond issues for needs from $1 million and higher. Learn more about how this structure works and may be a great fit for your ministry.
Your organization never has to worry about refinancing a short-term bank note or rising interest rates. The low interest rate you’ve obtained through the bond issue is fixed for the entire 20 to 25-year term of the loan. For example, refinancing a short-term bank loan during a time of rising or high interest rates can mean higher mortgage payments. Since most nonprofit organizations spend all of the money they receive, the additional costs could mean cutbacks on needed programs and services. Some say that bonds are inflexible. That’s right, the rate you lock-in will never increase!
Reduce Your Risk
Because of the fixed rates provided with a Ziegler loan you eliminate a substantial portion of the risk associated with borrowing on a multi-million dollar project. For instance, if attendance and growth projections are not met, a bank may not be willing to refinance a short-term loan. Additionally, if interest rates have risen your organization is faced with an increased new mortgage payment that it can’t afford. With Ziegler your organization is not exposed to these risks and you know your total cost for financing. You have a fixed-rate, full-term loan, with no balloons.
Is it possible that your organization will need to borrow additional funds for future phases of construction or additional projects? With traditional bank financing you would most likely have to refinance the original loan at the time of the second loan. This may involve additional fees, increased interest rates or prepayment penalties. Ziegler loans allow additional financing to simply be added on to the existing loan balance, without changing any of the terms of the original loan. Interest rates on the new money would reflect current market rates however. The standard loan documents for Ziegler financing contain provisions which allow qualified credits to issue additional bonds at a later date without having to refinance the original loan.
Greater Flexibility and More Control
It is important to read the fine print associated with any loan. Traditional bank loans may have loan covenants that do not fit your organization’s operational needs and can significantly affect future financial strategies and options. The loan covenants your organization must comply with under a Ziegler bond issue are generally more flexible than that of traditional bank financing. Unlike Ziegler, many traditional loan documents restrict the amount of money your organization can borrow or spend on additional capital projects. Some bank loans are set up with a longer term fixed rate, but require that all future building fund pledges be used to pay down the debt, thus really forcing you to have a short-term loan. Ziegler gives you total flexibility with the use of your building fund receipts. Use these monies to either pay down the loan, or for future projects that you decide on. Typically, permission from the lender is required to borrow or spend more than the set amount. This type of restriction can be limiting to a church and put its ability to grow in the hands of a third party. Ziegler leaves this control in the hands of your organization.
No Prepayment Penalties
Unlike Ziegler, many commercial banks do not allow you to refinance your loan unless you pay a prepayment penalty. These penalties are typically based on the potential lost profit to the bank for the remaining years that the loan would have been outstanding. These hidden costs can make it financially impossible to switch lenders or get out of the deal, especially if you are utilizing a SWAP contract to hedge against your loan rate. Ziegler financings do not carry any prepayment penalties or restrictions nor use SWAP’s or other derivative instruments.
What About Fees?
Some may say that bond financing is a “higher cost alternative” to traditional bank financing. Here’s what we say.
Bond financing does require your church to pay up-front loan fees, which are used to compensate the brokers who sell the bonds and the underwriter for the risk involved in purchasing the entire issue before bonds are sold. However, the fees for a bond issue do not have to be paid with cash at closing, and can be financed over the life of the loan. By paying a little more in the way of up-front costs, your church “purchases” more attractive loan terms described above.
The fees paid on a one-time basis for a bond issue provide for excellent stewardship if you add-up the potential future unknown and undisclosed costs on traditional bank financing. Cost factors that a bank will find impossible to quantify for you in their terms sheet include:
- What their rate on loan renewal might be (Ziegler bond issues are full-term, no renewals needed)
- What their fees for a loan renewal might look like (Ziegler underwriting costs incurred just once)
- Will your property appraise for enough down the road to meet unknown future loan-to-value (LTV) guidelines (With a full-term bond issue, no need to “requalify”
- Will your bank still have a commitment and focus to church lending (Ziegler has been financing churches 1913)
- Will your local branch or loan officer still be in place or swept away in the all too common bank merger game? (Ziegler has been an independent company since 1902)
Variable or Fixed Prepayment Penalties
These are hard to quantify and typically require you to pay the bank all of their lost future profit on a loan if you repay any or all of the loan early. If you decide you can’t get along with the bank, you have to pay this fee to refinance with another lender. Loan fees to renew the loan after construction or after the term expires With Ziegler, you can pay one fee for a full-term loan. No need to pay multiple fees to renew short-term loans as they come due.
2. Tax-Exempt Bond Financing
Some ministries will operate K-12 days schools or other community type facilities such a YMCA. These type of facilities are eligible for tax-exempt financing, whereby the bond interest paid by your organization is tax-exempt to the end investor. As a result, it is possible to obtain interest rates lower than traditional taxable bonds and certain forms of bank loans. Ziegler is a national expert in helping your ministry understand whether your specific project or loan refinancing can qualify for tax-exempt financing.
Learn more about tax-exempt bonds here.
Contact us today to learn more about the possibility of bond financing for your organization and for a free debt-capacity analysis!