Experience and Specialization Are Key
While many religious lenders have come and gone over the years
as the market peaked and bottomed out, Ziegler has been the one
constant player ever since the bank’s first religious project — a
$30,000 bond financing for the construction of Holy Angels Church
and School in West Bend, WI, in 1913.
Since 1980 the firm’s adjusted net default rate on religious
lending projects remains at a sub-1% level, even after accounting for
the tough environment in the post-2008 world. The keys are experi-
ence and specialization. Why? The complexity and uncertainty of
the religious sector, which relies heavily on the changing desires
and economic fortunes of congregants, is difficult to navigate for
lenders who do not deal in that industry every day. Further, the
underwriting process for religious institution loans requires signifi-
cant due diligence, as the industry does not lend itself to static
credit scoring models
To reduce uncertainty and minimize risk, Ziegler obtains funding
through taxable (and sometimes tax-exempt) bond issues, which it
underwrites and sells to both retail and institutional investors — reli-
able investment bases it has carefully cultivated over decades.
Over the years, Ziegler has made a conscious decision to sit out
the market bubbles that seem to happen every decade or so, rather
than overextending or lending to less-than-ideal borrowers simply to
Sector Forecast: Modest Growth
Current Census Bureau reports indicate that annualized construction
in the religious sector will be in the range of $3.5 billion for 2017. This
represents a modest increase over previous years and an indication
that the industry is finally healing. The primary factor holding back
growth in the sector has been a stagnant economy. If consistent GDP
growth of 2% or greater can be achieved, some of those dollars will
flow through to congregation members, allowing many churches to
dust off their shelved blueprints for expansion. The sector may never
again reach the highs of the 2003 construction peak, but we should
start to see a solid recovery in the near-term. ABFJ
SCOT T ROLFS is a managing director at Ziegler, a privately held investment bank specializing in the healthcare, senior living, education and
religion sectors. He oversees the religion and charter school finance practice lines and has more than 30 years of experience securing financing for
non-profits including churches, private K- 12 schools and charter schools.
for certain market participants. As defaults accelerated, lenders had
trouble recouping their principal, given the difficult commercial property market at the time. Previous recovery rates from foreclosure and
property sales did not hold up in the new environment, and church
lenders lost significant amounts of money.
There are several reasons the church lending industry found itself
in such a mess post-2008.
The Mystery of Church Loans
Church loans are not homogenous. They do not lend themselves to
objective metric tests used to evaluate other borrowers. For example:
a particular church might post high scores on lending metrics such
as debt-service coverage ratio, day’s cash on hand and loan-to-value.
Terrific, right? But the church might also be located in a town where
the congregants all depend on a particular employer for their jobs — a
company town — and when that company falls on hard times, so does
the congregation’s cash flow.
One major church lender bridge-financed a congregation approximately $10 million for a new building on the basis of a future $10
million pledge made by a congregant who was a real estate developer.
When the local real estate market crashed, so did the developer’s business. The $10 million pledge was never fulfilled, and the church and
its bank were left holding the bag on a loan the other members of the
church could not afford to service.
Predicting the Financial Growth of a Church Borrower is Tricky
A number of religious lenders that used static scoring models learned
this lesson the hard way. Just because a particular minister has successfully built a congregation from 80 to 800 adherents doesn’t necessarily
guarantee he or she can take that 800-member church up to 2,500
members — or whatever growth metric is required to support the new
loan. The lack of congregation growth, especially post loan funding,
became worse as the 2008 recession took hold. Many churches found
members and potential members unable to donate at previous levels,
and some members had to leave the area (and their church) in search
of new employment.
Too Much Cash Chasing Too Few Good Loans
As with other sectors in the mid-2000s credit bubble, the glut of worldwide cash seeking a return found its way to the U. S. — and the religious
lending arena. Credit unions and bond companies that previously ran
small church loan origination operations suddenly had the ability to
attract hundreds of millions in investment dollars. In some cases, they
used these dollars to increase their annual lending volume by factors
of five to seven times what they had previously done. However, they
didn’t have the experienced staffs to handle such a massive increase
in underwriting activity. At the same time, tested credit metrics sometimes went out the window in favor of trying to buy marketplace advantage through sheer loan volume.
A congregation on the East Coast, for example, borrowed approximately $30 million to build a new facility. Sloppy lender-borrower
coordination and underwriting failed to discover that the actual
construction cost of the project was $50 million. Since the initial $30
million was quickly funded — presumably to meet origination quotas
of the lender — construction began before the error was discovered.
After the initial $30 million was spent, the building was left unfinished
because the congregation was not able to support or attract the additional $20 million in financing needed to complete the project.
If consistent GDP growth of 2% or greater can be achieved,
some of those dollars will flow through to congregation
members, allowing many churches to dust off their shelved
blueprints for expansion. The sector may never again reach
the highs of the 2003 construction peak, but we should start
to see a solid recovery in the near-term.