Church Appraisal Considerations: Church/Religious Facility Closure Loan Risk Considerations

(This archived article was published in 2012.  More recent data is found in the articles section of our web site). In a religious facility appraisal, a primary appraiser concern is assessing the likelihood for its continued viability. While many religious congregations may not be financially healthy or credit worthy, only about 1.1% are believed to close per year according to David Olson the Director of the American Church Research Project, in his excellent analysis of church demographics The American Church in Crisis. Although every facility is unique, there are some risk factors that may be more predictive of potential problems that would encourage religious facility appraiser caution in the appraisal of a church or religious facility Religious facility failures are more likely to be an urban area rather than in rural or suburban locations. This is often because urban areas can frequently experience more rapid demographic changes as well as housing many older or less efficient buildings. Older buildings such as in older neighborhoods of Chicago can be more expensive to maintain and may not have the ancillary facilities the more modern facilities offer. A substantial shift in local population characteristics may erode the support for an older facility that served a different target group. Facilities on the brink of closure may experience rapid congregational population drops that are substantially above those that remain open. Newer religious facilities, particularly those not affiliated with a main line denomination, are at a much higher risk level for closure than more established religious facilities. Interestingly, the healthier denominations with the most new startups also have the highest individual religious facility failures. This is a function of the higher risks associated with new religious facilities, however, and not of the denomination itself. It is very important when appraising religious facility or churches in the Chicago market that the religious facility appraiser look at the census levels and church receipts over many years to get a sense of the stability of the religious facility and their ability to meet debt service over time. There are a myriad of factors that can contribute to the success or failure of a congregation. Some of these factors can be more subtle but could affect loan-to-value ratios or interest rate considerations.