Church Bonds

What is a Church Bond?

A church bond is a bond issued by a lreligious institution. The church functions as the borrower of funds, and church property serves as collateral for the loan.

Church Bonds Explained

Church bonds, akin to other securities, fall under the regulation of government security agencies. These agencies play a crucial role in ensuring that church bonds comply with established rules and standards designed to safeguard the interests of investors. When churches decide to issue such bonds, they commit to entering into liability and accidental loss insurance contracts for the church facility throughout the entire duration of the bonded loan.

Additionally, for the issuance of church bonds, the church issuer must furnish the issuing bank with evidence of available income to fulfill debt obligations. Furthermore, it is imperative to determine the value of the property pledged as collateral in the bond offering. This meticulous process ensures transparency and financial viability in church bond financing.

Risks Associated with Church Bonds

1. Lack of Liquidity. Church bonds are primarily illiquid, meaning they don’t trade frequently. This lack of liquidity implies that it might be challenging to sell bonds when needed, and there’s no guarantee of recovering the entire investment.

2. Loss of Church Tax-Exempt Status. There are risk factors that a church could lose its tax-exempt status, potentially affecting church members’ contributions due to the loss of a charitable deduction. This, in turn, could reduce debt service coverage.

3. Departure of a Popular Pastor. The departure of a popular pastor can influence church membership and, consequently, collections. This risk highlights the potential impact of leadership changes on the financial stability of the church.

4. Redemption Risk. Church bonds, known for their high yields, may be subject to redemption on short notice, especially during declining interest rates. The risk lies in the possibility of losing the attractive yield if a church decides to redeem the bonds early.

5. Bankruptcy Risk. Church bankruptcy poses a risk, and even though bonds are secured by a mortgage on the church, the bondholders’ ability to foreclose might be impacted by the bankruptcy proceeding. The proceeds from the sale of church property may not fully cover the outstanding bonds, particularly in cases of new construction or incomplete facilities.

Qualifications

1. Financials. The church must provide detailed financial information, including income and expense reports. This disclosure is essential to verify the availability of income for handling debt service. It is advisable for the church to engage an accountant, often a certified public accountant (CPA), to compile income/expense statements and balance sheets spanning up to three years. This financial scrutiny ensures a comprehensive understanding of the church’s fiscal stability.

2. Unrestricted Income. In the context of bond financing, a church can usually qualify to borrow up to three times its unrestricted income. Unrestricted income refers to funds not earmarked for a specific purpose, such as missions offerings or birthday gifts. This metric provides a basis for determining the church’s borrowing capacity within the bond program.

3. Property Valuation. The church is required to determine the value of the property pledged as collateral for the bonds. Companies facilitating church bonds often mandate that the church obtains an appraisal from either a MAI (Member of the Appraisal Institute) or state-certified appraiser. Accurate property valuation is crucial for assessing the security offered to bondholders.

4. Legal Review. To ensure legal compliance, the church will likely need an attorney to review its Articles of Incorporation, Constitution, by-laws, and other pertinent legal documents. This thorough legal examination ensures that all documents are in proper order and align with regulatory requirements.