The Ripple Effect: An Interview With Dennis Moses

Toss a stone in the middle of a body of calm water, and you can watch the ripples spread outward from the point of impact, changing the water’s dynamic. It’s cause and effect. The calm of the water is interrupted by the impact of the rock. It’s a ripple effect that will ultimately change the surface of the entire body of water. That analogy came to mind as I interviewed my friend and long-time banker, Dennis Moses of Church Capital Resources, for this Coach. Minutes into the interview, it became apparent that the banking industry suffers from the effect of failed banks rippling into the world of church finance and loans. Here is my interview with Dennis, who will help explain the current world of finance to our pastors and advise us on moving forward.

Mark:  Dennis, thanks for your time. In our conversations leading up to this interview, you expressed concern about the liquidity crunch banks are experiencing. Can you give us an overview of the liquidity crunch?

Dennis:  You have liquidity as a bank to make loans. Last year, there were a couple of high-profile bank foreclosures that scared investors, which also impacted a lot of foundations. People were taking money out of banks and institutions. Banks had such tight liquidity that they started looking for only the premiere prime loans. In other words, loans with far less risk. Churches were always considered a high risk. What has happened for churches is money is now harder to get. It wasn’t plentiful, and things tightened up. Lenders started increasing their minimum loan sizes while limiting maximum loans. For instance, if they were making loans at $1 million, they raised it to $3 million. If their limit was $3 million, then it would be $5 million. No matter how good the credit, they wanted the maximum loans. As a result, banks are drilling down more into a church’s finances, and they are asking more questions than I have ever seen in my career.

Mark:  So, the bottom line is that churches looking for financing are facing a more uphill battle than in the past.Can you clarify further some of the difficulties this liquidity crunch is causing?

Dennis:  One of the biggest areas impacted was in how banks are now using Debt Service Coverage Ratio Guidelines. Let me explain. For many years, up until Covid, the ratio was 1 to 1. That meant the lender wanted to see that you could make the mortgage payment. So, for every dollar loaned, a church needed to show a dollar coming in to cover the loan. Now, because of the liquidity crunch, it is 1.25 to 1.

Let me illustrate. For instance, $3 million at 7 ½%, on a 25-year amortization, would be around $22,170 monthly. The lender wants to make sure you can make that payment and have what we call “free catch,” meaning you take the $22,170 a month times 125%, which equals $27,700 a month. $6,600 a month is what they want you to have on hand to meet all other expenses. Annually, this would mean $266,028 in annual debt service. A lender wants to make sure you have at least that. But they will want to push it. $332,000 is what we would like to see.

Mark:  We used to tell churches that banks would loan them, on average, 2 to 3 times their annual operating expenses. Has that changed?

Dennis:  Lenders used to use 2 1/2 to 3 times your income. They still use that to some extent, but a church can expect a higher debt service coverage ratio. This is why church leaders need to ask what capacity they have before they start talking about building. What is the church’s capacity to borrow money? Sometimes, they don’t know what they need. I just look at numbers. They must understand their needs and what they can afford. Adding to a church’s problems is the fact that most pastors and church leaders don’t know the project’s cost.

Mark:  Explain why they can’t know the cost of their project and how this impacts potential loan ability.

Dennis:  Constructionloan limitations are impacting churches due to the liquidity crunch. Before Covid, loans were common to churches that wanted to go out and buy land and build a building. We call these Brown Dirt Loans, and they are becoming more difficult for churches to acquire as fewer and fewer lenders are willing to make that kind of loan today. Lenders are more open to loans for purchasing existing buildings, renovating, etc. So, a church needs to ensure that whatever lending institution I used in the past is still open to the church now and in the future.

Mark:  With prices fluctuating with inflation, how can any church know for certainty what the cost of their project will be?

Dennis:  This is a huge issue, Mark. Builders are now asking churches to sign a cost-plus contract, which makes the final number on the project cost difficult, if not impossible, to guarantee. It’s like writing blank checks, hoping they are not taken advantage of. More and more lenders want a Guarantee Fixed Price or what is called a GMax contract. The price must be fixed; it can’t go up. We are finding that contractors are putting into contracts contingencies, sometimes 10%, in case prices go up. So, the church tries to find someone who will not require contingencies. You must get that in writing! I talked to a lender today who told me that the last 40 loans they have made have all drawn down on their contingency, money set aside in that contract in case of cost overruns.

Mark:  What are some other issues churches should be aware of?

Dennis:  Lenders are very interested in a church’s succession plan if the pastor leaves for whatever reason. Lenders want to make sure the church has a succession plan. They want to know how the Board of the church is organized. They want to know if you have a simple majority of people who are non-family, non-staff members. If your board is comprised of people, not from the church or out of state, they will not talk with you. You need to have a written succession plan. Who is on the Board, and what did they do for a living? They will also ask if the pastor can be fired. They are asking to ensure your ability to pay that loan back.

Mark:  Dennis, I know no one can predict the future, but what trends do you see in the next 12 to 24 months?

Dennis:  I ask lenders this question. I have over 20 lending institutions that we do business with. We do know that the Fed is talking about dropping a quarter of a percent in September and perhaps another drop in October. The concern is that this could drive up inflation. The economy is going to play a huge role. However, my concern is the supply chain and the price of materials. We are currently seeing buildings at around $275 a square foot. $300 to $350 a square foot is not uncommon. Given the rising cost of materials, it could easily get up to $400 a square foot.

Mark:  Given all that is happening in the financial world, what would you say to church leaders?

Dennis:  We talk about two issues in borrowing money. The first is your capacity to borrow, which we talked about earlier. In my experience, church leaders often feel they can borrow more than a lender is comfortable loaning. Knowing your capacity to borrow keeps you from over-extending your project with a builder or architect.

The second issue is being able to fill the gap between what a lender will loan you and what the cost of the project will be. Take whatever cash you have on hand, plus capital campaign revenue and that must equal the project cost. The church must fill that gap. If they can’t, they must value engineer the project. Nearly every project I am dealing with now must be done in phases as a result.

Mark:  Dennis, thanks so much for this information. If a pastor or church leader would like more information, how can they get in touch with you?

Dennis:  Mark, I would love to help. The best way might be to simply email me at moses@churchcapitalresources.com. They can also find out more at our website at: https://churchcapitalresources.com/.