Collection Plate, Meet Wall Street

GRAND RAPIDS — A West Michigan investment team has taken steps to revolutionize religious and charitable finance, creating a $300 million marriage between Wall Street and the Bible Belt.

Local investment banking firm Hartwick Capital, legal counsel Warner Norcross & Judd, and communications firm Lambert Edwards and Associates all played a role in the $28 billion church finance industry’s first ever loan syndication, a landmark event in an industry characterized by inefficient trading and huge, unrealized opportunity.

Common perception suggests religious organizations would be a treasured market for lenders. Truth be told, bankers fear God’s wrath more than most.

“No financial institution is going to want to foreclose on a church,” said Remos Lenio, principal of Hartwick Capital. “It will be on the front page of the paper, the Antichrist throwing these people out on the street so they can’t worship.”

That was the case in 2003, when Bank One was forced to foreclose on East Grand Rapids’ Bibleway Outreach Ministries for default on a $558,000 mortgage. One headline read, “EGR’s only black congregation seeks to survive foreclosure.”

A unique paradigm exists: historically-viable organizations with massive assets and passionate stakeholders, in need of capital for construction or other growth expenditures, but unable to access the debt vehicles available to other institutions of comparable size and scale.

“What we’ve got are people who need money, but don’t have access to the traditional sources of money, because the average financial officer in a church is not a corporate-trained executive,” Lenio said. “We’ve got unsophisticated borrowers … and lenders who don’t really understand the market, which leads to some serious market inefficiencies.”

In an efficient market, he said, capital is priced according to risk. In the church market, borrowers are usually priced as a credit risk plus a market risk, regardless of finances. In fairness to bankers, nonprofit organizations offer limited ability to secure repayment. Sustainability factors are checkered with uncertainty. The American Catholic Church, for instance, went from one of the nation’s wealthiest institutions to near bankruptcy in just over a year.

As such, many congregations forego traditional finance entirely. Warner Norcross attorney Tim Horner has built a six-person practice headquartered in Grand Rapids devoted to this parallel market. A corporate securities lawyer by trade, he serves as counsel for charitable investment funds, denominational extension funds, church retirement funds, and to churches, underwriters or trustees involved in a church bond offering.

Through this alternative banking system, congregations have a variety of capital sources at their disposal.

“The cost of construction, the size of churches and the cost of new buildings and facilities has grown such that most churches are not able to pay for those facilities simply out of donations,” Horner said. “It is very common for churches to borrow funds.”

Horner generally becomes involved when organizations grow past simple debt service into full-fledged securities offerings. Congregations sometimes offer bonds to their members, or to the general market. More often, a church will look to its denominational parent for capital.

Most denominations have lending arms, commonly known as extension funds. Horner counts over a dozen as clients, including the Lutheran Association for Church Extension, the Grand Rapids-based United Methodist Foundation and the Reformed Church of America Building and Extension Fund, as well as other non-denominational funds.

“We’re basically a securities company. We do loans for churches,” said Brian Roger, executive director of Saginaw-based LACE, a 15-year Horner client. “Every denomination has one — Lutherans, Baptists, Methodists.”

Horner becomes involved as the funds look to raise capital by selling securities. At both levels, he manages state and federal compliance issues, as well as qualifications for special exemptions and deductions.

Lenio was first exposed to Horner’s work through Jeff Lambert of Lambert Edwards. Lambert’s firm represented a number of Horner’s clients, and the investor relations expert felt there might be opportunity in the manner these funds raised capital.

“There are all these tools that have been used by sophisticated lenders for years — packaging credit card receivables, securitizing bad debt, things like that; Wall Street securitizes everything,” Lenio said. “We wanted to bring those tools to this market.”

In 2004, the team made banking history, completing the first loan syndication of any size in the church lending market. The $125 million credit facility — provided through a banking syndicate including KeyCorp, Wells Fargo Foothill, Bank Midwest and Harris Trust and Savings Bank — was Wall Street’s first exposure to the estimated $20 billion to $40 billion church finance market.

That non-denominational fund is not named here because of a quiet period associated with the group’s follow-up: a $175 million securitization expected to close later this month.

“We think this is an opportunity for us,” Lenio said. “There are a lot of churches in this country. We’re talking $20 billion in church construction a year. If you bring the average interest rate down a point, that’s $200 million that could be put back in the coffers of these nonprofits and churches.”

To gauge the size of the market the local group turned on its head, Horner’s practice alone advised over a billion dollars worth of securities offerings last year. Offerings ranged from $500,000 to $500 million, with some funds boasting over $1 billion in assets.