The increased willingness of private lenders to fund church construction is taking commercial brokers to a whole new plane, as those deals, traditionally conceived and executed outside the broker channel, come into the fold.
“In our experience, many private lenders that are willing to lend to non-profits and church groups typically have substantial in-house development financing expertise,” Ken Sethi, broker and manager of Margolis Capital - Commercial Mortgage Professionals in Edmonton, told MortgageBrokerNews.ca. ”As such they can be more flexible in assessing and mitigating risks of an individual project. And by charging higher fees and interest rates than conventional lenders, it allows them to allocate more time to properly structuring a particular transaction. As interim lenders, they focus on the real estate project and quality of sponsorship --often community leaders -- and a clear exit strategy.”
Their interest is helping open what has traditionally been a very small window of opportunity for commercial brokers, with most lenders traditionally leery of taking on deals for purpose-built houses of worship. That’s even despite the profit potential: no less than 10,000 houses of worship have been built in Canada over the last five year s.
“Banks have avoided them because none ever wanted to be confronted with the public relations nightmare of having to foreclose on a house of God,” Don McClure, a mortgage agent with Dominion Lending Commercial and Residential Mortgages Ltd, in Kitchener. “They still do.”
That reluctance has opened the door for the private lenders and mortgage brokers to enter, benefiting a boom in mega congregations across suburban Canada. Those alternative lenders are also facing a dearth of residential and commercial applications at the same time they’re relatively flush with investor cash.
Still, private lenders are still picking and choosing church deals based on their own criteria, including a congregation’s track record with building campaigns, the strength of its business plan, the willingness of individual members to provide personal backing as well as a strong commitment from other project sponsors. Lenders are also attracted by new church construction that has replaced steeples and minarets with the non-descript big-box design of most commercial space. The shift makes it easier for a lender to dispose of the property if the worst, in fact, happens, said McClure.
“Often, these groups will engage professional firms and experienced contractors to ensure that budgeting and cost controls are properly addressed,” said Sethi, who has seen real growth in these types of deals in the Edmonton area, as congregations turn to commercial mortgage broker in the early stages of a project to help identify available financing.
The non-profit borrowers, themselves, may be driving the growth ion deals as individual congregations increasingly find themselves without the financial backing of a parent organization to bankroll church-, mosque-, temple- or synagogue-building. More and more those organizations are also looking to acquire property as investment or to turn around and sell to parishioners.
“One recent transaction arranged by Margolis Capital for a faith-based borrower, involving a 30-unit town house redevelopment, saw the clients acquire a non-performing asset with 30 per cent down and the balance financed via a private lender,” said Sethi. “The client then obtained a RRAP (Rental Residential Assistance Program) grant from a provincial housing agency to do a complete retrofit of the
complex. After the group re-tenanted the project, we assisted the client in placing an attractive CMHC-insured mortgage as an exit strategy for the private lender. The group’s 30 per cent down payment represented only 15 per cent of the total project costs.”
That exit plan, i.e., the ability to eventually move the mortgage to the bank, relies on congregations being able to show consistent tithing level. It's a challenge that can prolong their stau in private lending, say brokers, although most are prepared to move on to the A sphere within two years.