By Michelle Dupler

When the leaders of Columbia Community Church in Richland started planning an expansion, they knew they’d likely have to finance a portion of the $3.2 million construction project.

What they didn’t anticipate were the challenges they’d face in obtaining a construction loan at terms within their comfort zone.

“At the time, we had a church bank account and ran our finances through Bank of America, but found out they don’t have a lending arm for churches,” said Pastor Mark Barker.

As it turns out, that’s fairly common. Many banks don’t lend to churches or other religious institutions for a host of reasons. And those that do are conservative in their lending standards, which can present challenges when a religious institution seeks financing for a construction project or any other purpose.

“I think I understand why most banks are hesitant to lend to churches,” Barker said. “A bank would feel horrible having to foreclose on a church.”

After researching a few options and comparing terms, Barker and Columbia Community Church inked a deal with Bank of the West, one of the banks with a lending arm that specializes in religious institutions, and one of the few with a presence in the Tri-Cities that works with churches on construction financing.

Barker said the bank had some stipulations — like moving the church’s banking to Bank of the West and having purchase cards for church staff issued through the bank. But the trade-off is that the bank notified the church when the Federal Reserve appeared to be about to raise interest rates and offered to lock the loan in at a lower rate.

“For the most part, it seems like it’s been a good relationship,” Barker said.

Now the remodeled church looks to be complete in time for Christmas services, he said.

Dan Mikes, vice president and head of the national Religious Institution Banking division at Bank of the West, said the bank has a three-decade history of working with churches, synagogues, mosques and other religious institutions on construction financing and term loans.

It’s a service line the bank inherited when it acquired Central Bank in 1990, but one that proved to be a solid performer. Bank of the West opted to continue lending to religious institutions and to expand that portion of its business when Mikes joined the bank in 1997.

Mikes said in more than 25 years, Bank of the West has made more than $4 billion in loans to religious institutions and had only two foreclosures. During the recession that started in 2008, the Religious Institutions Banking division saw only a handful of delinquent payments.

“The Religious Institutions Banking division within our large bank has the best history of the entire bank in terms of credit performance,” Mikes said. “It is an extremely safe business for us.”

Mikes said Bank of the West has been highly successful as a lender to religious institutions for a few reasons.

“One thing that separates us from our competitors is we look at the leadership and bylaws and like to see that there is decentralized governance,” he said. “We like to see spiritual leaders accountable to a board of governors.”

Bank of the West also is conservative in the amount of money it will lend to a church so that the church doesn’t become overextended, Mikes said. The bank offers a service to religious institutions to help spiritual leaders target capital campaign amounts and project size based on their financial information and debt capacity.

The net result is a transaction that is most likely to succeed, he said

“These spiritual leaders may do something like this once or twice in their spiritual career. They may welcome this kind of guidance and input,” Mikes said.

Barker told the Journal of Business he expected Columbia Community Church to pay the loan off within five years at the most.

Mark Helland, a CPA based in Tulsa, Okla., who advises religious institutions across the nation, said in his experience a common reason why banks shy away from lending to churches is that churches, especially smaller ones, often tend to be volunteer-run and don’t typically have professionals on staff trained in accounting practices. They may not know how to write a financial statement or how to document assets, such as vehicles or buildings, in a way that shows the bank that the church is a good credit risk.

“So when they go to the bank, it looks like they don’t have any assets,” Helland said. “Banks operate in a world of collateral.”

Helland advised any religious institution considering a construction project or capital campaign to consult a CPA to make sure financial documents are in order before applying for a loan.

“Get help to get financial statements that speak the language of the banker, that are in the right format,” Helland said. “If you’re trying to get a loan with a bank, you absolutely should have an outside CPA unless your internal staff is really sophisticated.”

Another tip Helland offered is to start building a cash reserve once the religious institution thinks it might have a capital project on the horizon, even if it’s years away.

“Churches tend to operate with very little cash reserve,” he said. “If a church doesn’t keep much in the way of reserves, it hurts them when they try to get a loan.”

A final tip Helland offered is to make sure that any money raised through a capital campaign goes into a distinct and separate account from other church funds because that money has to be restricted for the campaign purposes.

“Keep that segregated so you can show where it was received and where it is, who gave what. A separate account makes a lot of sense,” Helland said.

Mikes said Bank of the West will carefully scrutinize a religious institution’s financial documents when considering a loan, especially if the church does any kind of charity or missionary work overseas in countries linked to possible terrorist activity. Increasing federal regulations in recent years require banks to monitor transactions flowing to and from the church if it is active in other countries.

“It’s more labor intensive from a customer due diligence standpoint,” he said.

Mikes said that’s one reason why many banks may be reluctant to work with religious institutions — the additional scrutiny is work they just don’t want to do.

But because Bank of the West had already been working with religious institutions for decades, it already had the infrastructure to continue doing so as regulations tightened, he said.

“We had such a longstanding and deep experience,” Mikes said.