Church Bonds

[freebird5825]

I am comfortable in my identity as a suspicious bastard.

By all means, please save room for me on that bench.

 

[Nords]

Oh ye, of little faith!

This is literally faith-based repayment, secured by property. Hypothetically their regulatory authority is a lot scarier than the SEC, with more power, and eternal implications.

It's a small market, not very liquid, and with a few defaults. It's possible that the people responsible for contributing the revenue to make the interest payments will... how can I put this politely... not be around to see the bond mature.

Is there a way to rate a bond like that?

 

[Lazarus]

I feel I am already contributing more to organized religion than I want to. Subsidized by the tax free status by everyone.

If the Church cannot raise money through normal channels I would not be willing to risk my money on it.

 

[JDARNELL]

I think you are right. I can see older congregations that are expanding with a strong base having a portion of their bonds forgiven one the elders pass.

JDARNELL

 

[haha]

I think you are right. I can see older congregations that are expanding with a strong base having a portion of their bonds forgiven one the elders pass.

JDARNELL

What does it mean to have a bond "forgiven"?

Ha

 

[brewer12345]

What does it mean to have a bond "forgiven"?

Ha

As I understand it, members of the church who own the bonds not infrequently donate them to the church so they can be torn up.

 

[haha]

I see, thanks. Kind of a costless, informal sinking fund.

Ha

 

[Nords]

For those who've asked to see additional examples, I've posted a total of three different prospectuses for church bond issues at my Scribd account. I'll post more if there's more interest.

Here's the link to "The Military Guide" account:
http://www.scribd.com/TheMilitaryGuide

http://www.scribd.com/doc/111283103/Church-Bond-Issue-Hope-Baptist-Church-Las-Vegas (25 MB)
http://www.scribd.com/doc/111783765/Church-Bond-Brazos-Fellowship-College-Station-TX (18 MB)
http://www.scribd.com/doc/111784828/Church-Bond-Family-Worship-Center-Church-of-Flint-MI (15 MB)

As another legendary poster has said, "Do your own due diligence. You could get hurt investing in this stuff." But I think it's a more palatable alternative to triple-leveraged inverse Venezuelan beever cheeze futures... and peer-to-peer lending.

I'll be writing a blog post on the subject. If you've had any experiences with church bonds, positive or negative, I'd love to hear your story.

 

[brewer12345]

Thanks for te additional examples.

Personally, I don't like any of these issues. Too levered on an LTV basis (especially on a specialized property), and the only one that has a long history has declining membership.

 

[Nords]

Personally, I don't like any of these issues. Too levered on an LTV basis (especially on a specialized property), and the only one that has a long history has declining membership.

I guess this gets back to the same types of questions that came up on the peer-to-peer lending thread:

- Does it scale? (Church bonds: with some effort.)

- How bad are the defaults? (Church bonds: so far, not so bad.)

- Are buyers adequately compensated for the extra risk? I'm not sure how to answer this one. If there was a junk bond that offered the same yields with roughly the same duration and the same (or lower) defaults then I'd go with the junk bond. But if church bonds offer higher yields than junk then I'd be tempted to chase them.

And, of course, if a junk bond fund offered the same yield as a church bond then I'd go with the junk bond fund. That scales.

 

[brewer12345]

I can get comfy with a flaky borrower if I am well secured. I can get comfy with no collateral if I have a strong borrower. My worry here is that we have flaky borrowers and inadequate collateral.

 

[Nords]

My worry here is that we have flaky borrowers and inadequate collateral.

I don't know what issues there are on appraising a church property. Kinda hard to "rebuild to suit" if you foreclose on The Crystal Cathedral, but maybe a nice piece of commercial property if the church is in a prefab warehouse structure.

Most of the up-and-coming churches around here (the ones presumably most likely to seek funding with a church bond) seem to be in upperclass residential neighborhoods or light commercial zones.

I also have an irrational investor bias... let's call it a "faith"... that a simple majority of whatever congregation is alive in 30 years will figure out a way to pay off the debt. Flaky or not, the low default rate seems to show a commitment.

It's hard to get objective data on this sort of asset class. Not many people looking at it, and logistically difficult to do the due diligence. And again it's difficult to assess whether the extra yield adequately compensates the average retail investor for the risk and the extra research.

I bet that at least a dozen posters on this board live close enough to each of those churches to either be a member, or to know a member, or to know their reputation well, or to be able to drive over there in 10 minutes to check that there's really a church operating at that address.

 

[brewer12345]

I don't know what issues there are on appraising a church property. Kinda hard to "rebuild to suit" if you foreclose on The Crystal Cathedral, but maybe a nice piece of commercial property if the church is in a prefab warehouse structure.

Most of the up-and-coming churches around here (the ones presumably most likely to seek funding with a church bond) seem to be in upperclass residential neighborhoods or light commercial zones.

I also have an irrational investor bias... let's call it a "faith"... that a simple majority of whatever congregation is alive in 30 years will figure out a way to pay off the debt. Flaky or not, the low default rate seems to show a commitment.

It's hard to get objective data on this sort of asset class. Not many people looking at it, and logistically difficult to do the due diligence. And again it's difficult to assess whether the extra yield adequately compensates the average retail investor for the risk and the extra research.

I bet that at least a dozen posters on this board live close enough to each of those churches to either be a member, or to know a member, or to know their reputation well, or to be able to drive over there in 10 minutes to check that there's really a church operating at that address.

The congregations my or may not be flaky. I have no real way of knowing. In any case, nobody is contractually obligated to remain a member of the church and keep forking over contributions, so I have to be able to look to the collateral if things do go pear-shaped. We do not get to see the appraisal write-up, so we can only guess as to the methodology used. However, given that the churches are limited by bond indentures to a maximum 75% LTV for the issuance of additional bonds, I bet there is some pressure to have a nice, high value assigned to the property. The problem is that if you have to repo, the church will not be worth a fraction of stated value because the next buyer most likely will not be a church.

 

[JDARNELL]

The problem is that if you have to repo, the church will not be worth a fraction of stated value because the next buyer most likely will not be a church.

Many years ago a church we were attending got a new pastor. The church was the "Jewel" of the conference and this very business like administrative pastor took over. After about a year the new pastor got on a campaign to build a new facility. I remember one of the main reasons was there was not enough parking on Easter and Christmas. I felt like there were many ways around this and building more infrastructure was not a good use of $$. The day of the vote I was asked to observe the counting of the ballots with about 55% agreeing. Of course some people voted with their feet.

The logistics of having two facilities was horrible and I recently heard they sold one of the facilities to another denomination. Definitely a small market. Of course I did go with my wife to a spa that was in a nice converted church. Kind of felt weird though.

JDARNELL

 

[Free To Canoe]

Of course I did go with my wife to a spa that was in a nice converted church. Kind of felt weird though.

JDARNELL

Church Brew Works, Award-Winning Microbrewery and Restaurant

Kind of how I felt when I went in here.

 

[HFWR]

There's a church not too far from here that is so big, I call it the "Baptidome". But from all appearances, they have a very large, well-to-do congregation. Not sure if they issued bonds...

 

[Nords]

The congregations my or may not be flaky. I have no real way of knowing. In any case, nobody is contractually obligated to remain a member of the church and keep forking over contributions, so I have to be able to look to the collateral if things do go pear-shaped. We do not get to see the appraisal write-up, so we can only guess as to the methodology used. However, given that the churches are limited by bond indentures to a maximum 75% LTV for the issuance of additional bonds, I bet there is some pressure to have a nice, high value assigned to the property. The problem is that if you have to repo, the church will not be worth a fraction of stated value because the next buyer most likely will not be a church.

Good points. Thanks.

 

[brewer12345]

Good points. Thanks.

To be fair, one of my occupational hazards is having to regularly look at commercial real estate loans that have gone bad, so my antennae have definitely een sensitized. I may be over reacting.

 

[Nords]

To be fair, one of my occupational hazards is having to regularly look at commercial real estate loans that have gone bad, so my antennae have definitely een sensitized. I may be over reacting.

I'd rather hear all the reasons that something can go bad than a bunch of cheerful reasons that it's so good.

I still remember "Why, for us to lose money on these bonds, the whole darn county would have to go bankrupt, ha ha!"

I can only imagine what it's like for congregations who have to seek mortgage financing through their chain of command instead of the public markets. I bet there's not much faith-based investing going on there...

 

[brewer12345]

Actually, banks do loans to churches on a fairly regular basis. One of the questions that I don't have a good answer to is why the churches are going to the bond market (sort of) instead of the banks. I think I know the answer, and it does not give me any comfort at all.

 

[Nords]

I think I know the answer, and it does not give me any comfort at all.

Exactly. Back to the question of whether we're being adequately compensated for the extra risk, and making sure that we can diversify to avoid concentrating the defaults.

I think there's also a component of socially-responsible investing (or "impact investing") at work that plays on emotions.

 

[Fermion]

To much risk for only 7% in an individual bond.

If I were going to buy an individual bond, it would be something more like Thompson Creek Metals...building a huge gold and copper mine and the bond is paying 14%. (Render unto Caesar the things which are Caesars and all that ).

 

[JDARNELL]

Exactly. Back to the question of whether we're being adequately compensated for the extra risk, and making sure that we can diversify to avoid concentrating the defaults.

I think there's also a component of socially-responsible investing (or "impact investing") at work that plays on emotions.

I think you are right. In my first post on the thread eluded to that I view it as a potential charity event. And there is some giving money to further a cause I am interested in. I also think that while people in the church might want a rate of return they don't want the church to pay a high rate and they have skin in the game based on other reasons. This is why knowing the % of bonds that were sold to the congregation is so important to me. Probably more than LTV because if it goes south they will ride it into the ground.

So many times no matter what side the line we are on we try to bolster our argument and down play the things we don't want to see. We see this a lot with newer investors that invest on emotions not on facts. I still do this in some areas (maybe this one) however I think I understand the risks or at least am willing to except them.

Even with the P2P I do think I could structure a portfolio with enough diversification to get what I want in return. I just can't get past the time commitment initially to pick what I want. I would rather be doing other things for now.

JDARNELL

 

[MBAustin]

Actually, banks do loans to churches on a fairly regular basis. One of the questions that I don't have a good answer to is why the churches are going to the bond market (sort of) instead of the banks. I think I know the answer, and it does not give me any comfort at all.

Our church had financed a new sanctuary building with a traditional bank loan. The terms were not very good, so when we were getting ready to build a new education building, we rolled the old bank mortgage into the bond issue for the new building and reduced the interest rate dramatically over what we would have paid the bank to do the same thing. Plus, we essentially were paying ourselves the interest instead of the bank as 100% of the bonds were purchased by people associated with the church.

I would agree that the proportion of the bonds purchased by the congregation would be a good indicator of the risk level.

 

[Huston55]

Actually, banks do loans to churches on a fairly regular basis. One of the questions that I don't have a good answer to is why the churches are going to the bond market (sort of) instead of the banks. I think I know the answer, and it does not give me any comfort at all.[/QUOTE]

Exactly. Back to the question of whether we're being adequately compensated for the extra risk, and making sure that we can diversify to avoid concentrating the defaults.

I think there's also a component of socially-responsible investing (or "impact investing") at work that plays on emotions.

Our church had financed a new sanctuary building with a traditional bank loan. The terms were not very good, so when we were getting ready to build a new education building, we rolled the old bank mortgage into the bond issue for the new building and reduced the interest rate dramatically over what we would have paid the bank to do the same thing. Plus, we essentially were paying ourselves the interest instead of the bank as 100% of the bonds were purchased by people associated with the church.

I would agree that the proportion of the bonds purchased by the congregation would be a good indicator of the risk level.

I think that's Brewer's and Nords' point; inadequate compensation for the additional risk. Perhaps a better indication of risk than congregation holdings is the % rate the bank was charging.