Introduction
Over the last several years the Financial Advisory Board (FAB) and pastors have been discussing what’s next for the church mortgage after the current seven-year note reaches maturity. The current mortgage on our land and building is coming up for refinancing in January of 2026. We will have an outstanding balance of around $1.5 Million to refinance. We want to explore the idea of having members of the church form an investor group and loan part, or all, of the outstanding amount to the church in the form of a private mortgage.
The FAB will be hosting an information meeting to discuss this proposal on Tuesday, November 12 at 7:00pm.
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What is a private mortgage?
The privatization of a mortgage occurs when a lien is held against a property (a mortgage) by an individual or organization who is not a financial institution. For all other purposes the mortgage is treated the same as a mortgage held by a financial institution.
Why would CFC pursue a Private Mortgage?
- As long as CFC holds a mortgage, it will be paying interest to someone. If the mortgage holders are members of the church these resources stay within the church community, to the betterment of both the organization and the members.
- This effort will attempt to minimize, or perhaps eliminate, the amount owed to an external banking institution, reducing or eliminating outside debt obligations.
- In the event that the property were to be sold prior to the private mortgage being completely paid off, the investors would be paid back as a part of the proceeds of the sale, just like any debt holder. The investment is secured by the value of the land and building like most mortgages.
- If loan terms need to be extended or renegotiated during the loan period, the investors will be more flexible than a bank in creating mutually beneficial terms.
Why consider this now?
- The current mortgage will need to be refinanced as of January, 2026. If there is a desire to restructure the loan to include all or a portion to be privately financed, this would be an ideal time to do so. The outstanding balance is $1.5 Million.
- Our current mortgage rate is 3.25%. When we will need to refinance in January, 2026, the market rates will be potentially much higher than that.
- One of our goals is to free up the cash flow by paying off the mortgage as soon as possible. This is one way to pursue that goal.
How would the process work?
- A specific purpose LLC would be created to hold the mortgage and administer the receipts and the payments.
- The members of the LLC would consist of those who contributed funds to the mortgage. Each members ownership percentage would be the proportion to the amount they loaned CFC relative to the to the entire amount of the loan.
- Each month the church would pay the mortgage payment due to the LLC (just like a regular mortgage).
- Each quarter, the LLC will distribute principal and interest to the members of the LLC, based on the published amortization schedule.
- Each year, each member will receive a 1098 form with the interest they were paid for the year for tax reporting purposes.
Individual Example
If we raise $1 Million as an investor group and one individual provides $50,000 of the funding (5% of the loan), their quarterly payments would look like the following (assuming a 5% rate on the loan):
- Initial Investment: $ 50,000
- Quarterly Payments: $ 1,591.05 (4 payments each year, for 10 years)
- Total Principal + Interest*: $ 63,642
*Paid over the 10 year period
Potential Financial Impact
|
A Few Possible Scenarios |
Monthly Payments Years 1-5 |
Monthly Payments Years 5-10 |
Total Interest Paid |
Difference over the 10 year period |
|
10 yr 1.5M to Bank, No Private Financing |
$16,653 |
$16,653 |
$498,369 |
- |
|
10 yr 1M to Bank, 500K Private Financing |
$16,405 |
$16,405 |
$468,609 |
$29,760 |
|
10 yr 750K to Bank, 750K Private Financing |
$16,282 |
$16,282 |
$453,775 |
$44,594 |
|
10 yr 1.5 M Private Financing |
$15,910 |
$15,910 |
$409,179 |
$89,190 |
|
5 yr 500k to Bank, 10 yr 1M Private Financing |
$20,273 |
$10,607 |
$352,770 |
$246,639 |
Q&A
Q: What is the interest rate going to be on the mortgage?
A: It will be 1% less than the best financing option available from banks with which we have a relationship at the time of refinancing (1/26).
Q: What will be the term of the loan?
A: A ten year note most closely matches our current mortgage monthly payment. We could pursue a shorter term based on CFC’s ability to support larger monthly payments.
Q: Will I be able to put this in an IRA?
A: Yes, we have identified a number of IRA custodians who offer Self Directed IRAs (“SDIRA”) which can hold these types of loans. It will involve opening a new IRA account with one of these custodians in order to facilitate the funding and quarterly payments. These accounts have an annual fee of roughly $600 per year. The interest would not be taxed as regular income but only upon withdrawal. The SDIRA would need to funded from an existing IRA.
Q: What if I need to withdraw my funds prior to the 10 year repayment schedule?
A: Generally, you should think of this as a ten year commitment. It might be possible to facilitate a replacement investor if you can find a replacement or someone approaches the LLC with an interest to invest. This option would be available only at the end of a calendar year. CFC could also elect to buy back a portion of the mortgage, if they desired to do so.
Q: What happen if CFC sells the building within the next 10 years?
A: The loan will be either the 1st or 2nd mortgage on the building. If the building is sold the principal of the loan would be paid off to each investor as a part of the sale transaction and the LLC would be dissolved.
Q: Does having this private mortgage change anything regarding church governance?
A: No, just as the bank has no role in church governance or oversite, being an investor in this mortgage does not in anyway impact the church governance or leadership structure. It is just a financial instrument creating a lien against the land and building, nothing more.
Q: What is the minimum investment amount?
A: It would not be administratively or financially feasible to have portions of the note in amounts less than $25,000.
Q: How will the quarterly payments be processed?
A: All payments will be processed either via an electronic payment method (Zelle, Venmo, ACH, etc.) or bill pay from the LLC’s bank account on the first week following each quarter.
Next Steps
- Attend the interest meeting on November 12th.
- Consider your desired level of involvement, if any.
- Communicate your level of interest and potential level of investment by December 1st, 2024 by submitting the interest form below.
- Based on the responses, there will be an update in December as to whether or not we will pursue private mortgage financing.