Managing risk in preparation for a church's loan approval takes savvy and careful planning.
Tim Lawrence · February 27, 2018
Here is some solid advice that is worth sharing for any church planning a building project. The construction process has and always will have its challenges.
First, economic realities have affected the collection plate, which has lowered operating income and significantly affected capital campaigns designed to raise money for upcoming projects.
Second, finding quality builders in a financial position to handle your project may be more difficult as the recession has hit the construction industry particularly hard.
And third, financial institutions are more reluctant to offer construction loans;even to church borrowers, who have been traditionally considered less risky than other commercial organizations. And those who do offer these loans are more selective on the organizations and projects they are willing to consider.
Churches wanting to build now need to put themselves in an optimal position for consideration of a construction loan.
They must understand from the lenders point of view the things that add risk to the construction loan, and what lenders will typically look for to mitigate that risk. Because construction loans contain both a financial risk component (risk of payment default), and construction risk component (project completion risk), the church’s ability to manage risk becomes paramount.
If the church can show they understand these risks and have taken steps to mitigate them, a lender will be more likely to approve their loan request.
Here are five risk areas, let’s call them Danger Zones that churches should consider shoring up prior to their loan request.
Danger Zone #1: Project Delivery. Avoid Dealing Directly with Subcontractors
Project Delivery refers to the method or system of organizing the design and construction of the facility to be built. The American Institute of Architects (AIA) notes that contractual responsibility and the legal/contractual relationship between parties is the key concept for differentiating between project delivery methods. [Several of the] most common project delivery methods, [historically] are Design-Bid-Build, Design-Build, and Construction Manager at Risk.