Church Bond Intro

DETROIT STOCK EXCHANGE® INCORPORATED

FINANCING and INVESTING

ARE CHURCH BONDS FOR YOU?

Financing church building and renovation projects with church bonds is not commonly used in the Detroit area because banks and other financial institutions have been aggressive in pursuing church finance business. However, recent turmoil in the credit markets and dislocations in the real estate market have resulted in credit being difficult to obtain.

This "credit crunch" along with the state of the local economy have resulted in some of our church institutions delaying building projects and even finding it difficult to pay church debt. While not the panacea to meet all church finance situations, knowing about this avenue of financing may be worthwhile.

What is church bond financing? Essentially, the church borrows from its members, other individuals and institutions by issuing bonds instead of borrowing from a bank or other financial institution. The issuer(church) is required to pay the bondholders interest during the term of the bonds and to repay the principal amount of the bonds at the maturity of the bond indenture(bond contract). Church bond financing is usually given serious consideration as a financing alternative when bank financing is perceived to be more expensive.

In some states church bond issues are required to be registered with the state securities commission. A securities broker-dealer facilitates the issue and professional services of an attorney and accountant are necessary to successfully execute the issue.

BENEFITS TO THE ISSUER

1) The bond issue provides the funds for the financing project, e.g., construction, renovation, debt refinancing.

2) The bond indenture(contract) is typically in force for the entire term of the bond issue. Unless stipulated, there is no requirement to renegotiate the terms of the contract, including the interest rate, during the term of the bond issue.

3) Typically, there are less loan covenants with bond financing than with bank financing. Also, bond indentures usually do not levy pre-payment penalties as with bank loans.

4) A church bond issue is usually divided into series. Each bond series may differ as to lengths of maturity and/or rates of interest, and whether interest is paid semi-annually or compounded. Thus, interest payments and payments of principal can be structured to fit the projected revenue inflows of the church.

BENEFITS TO THE BOND INVESTOR

1) As bondholders church member investors earn the interest instead of an impersonal financial institution. The investor can use the interest income to accumulate funds for retirement, education and other personal financial goals.

2) Managing and participating in a church bond project introduces members to the bond issuing process and demonstrates the value of commitment to financial responsibility.

RISK FACTORS CONFRONTING THE ISSUER

1) The issuer is dependent upon contributions of the membership to meet expenses for church operation and for payment of principal and interest. If contributions and fund raising activities are insufficient to meet the interest and principal payments as they come due, church assets may be subject to foreclosure, as with any other defaulted mortgage contract.

2) There is no guarantee that all of the bonds will be sold. As sales of the bonds progresses, funds are placed in a separate escrow account and the funds are not released for church use until all of the bonds are sold.

3) It may be difficult to get a fixed price contract from the construction company thus the bond issue may not be sufficient to finance completion of the project.

RISK FACTORS FACING THE INVESTOR

1) There is no quoted market for the bonds. Neither the issuer(church) nor the broker/dealer is obligated to repurchase the bonds at the request of the investor therefore the bonds should be purchased as an investment to be held until maturity.

2) Church bonds are not tax exempt securities. The interest earned on the bonds must be reported on both federal and state tax returns. Bondholders of compound interest bonds will be paying taxes on income earned, but not yet received.

3) Some bond series' may be subordinate to other bond series'. This means that in the event of foreclosure one series may have a prior claim on the church's assets than another.

4) The risk factors facing the church will inevitably effect investment risk.

Despite the foregoing, the benefits of church bond financing, to the church and to the investor, are reasons enough to explore its possibilities.

To learn more, please contact Detroit Stock Exchange® Incorporated:

Phone: (313)587-4750 Email: learn at detroitstockexchange dot com.