When I listed a former Orkin Pest Control building for sale on the south side of Atlanta, Georgia, I was surprised at the high level of demand from churches. A majority of the calls were from ministers looking to start a church. They were looking for a lease or lease option. None of them had an adequate amount of money to put down to qualify for a loan or to interest the seller in a owner carryback, so the building was ultimately sold to a technology company looking for a call center.
Ministers looking to start a small church probably were most interested due to the high level of churchgoing people in the area, a decent sized building of around 2750 sq.ft., and lots of parking. Parking is probably the key; a lot of people will attend the same service so 30 or more parking spaces seems like a minimum. The ministers wanted a building with a large open floorplan that they could convert into a sanctuary. They knew not to expect the seller to pay for any improvements and knew they would be responsible for building out the space, adding seats, and making sure everything was ADA compliant.
Leasing to churches is a high risk investment opportunity; churches looking to lease generally have no credit and no solid personal guarantees. However, they are willing to lease real estate in outdated shopping centers, retail buildings, and industrial/office complexes that would otherwise be very difficult to lease. Note that they still must have a lot of parking. If you can buy one of these properties at an extremely low price, it is possible to achieve a high cap rate relative to other properties. Vacancy is an issue; the church could never gain traction and disappear overnight. Or it could outgrow the space and start looking for another one. You won’t have the security of a long-term credit tenant.
Some key issues to think about:
- Is this the highest and best use of the property? Don’t give up too early if you would rather lease to a credit tenant or sell the building outright. Leasing to churches should generally not be your Plan A or even your Plan B, but it is more of a creative Plan C or D.
- How much is the church willing to invest in the space? Because the chances of the church being a long-term tenant are low, you should be planning on leasing to the next tenant from Day 1. One of the best improvements the tenant can make is adding permanent built-in pews. You don’t want chairs that are just personal property and can be folded up and moved away. Built-in pews that someone else is paying for (your church tenant), will have a lot of appeal to the next church that wants to go in there after the first one moves on.
- How much money will the church put down? In the worst case scenario, the church will never make a single rent payment after you hand them the keys. That’s why you want to get as much money down as possible in terms of deposit and pre-paid months of rent. Also, assume that any personal guarantees will be impossible to collect on and anything you can collect will end up being a bonus.
- Leasing to churches does not work everywhere. Small churches are more prevalent in the Bible Belt and in particular parts of town. Before you consider being a landlord for churches, drive around the area and talk to leasing agents and property owners to see whether they frequently get calls from ministers looking to lease space.
- Parking is critical. Don’t even consider buying a building to lease to a church unless it has a lot of parking relative to its size.
- Zoning is critical. See if the zoning even allows churches as a use. Not every municipality wants to lose a sales tax-paying retail building to a church that pays no sales tax. Municipalities are more likely to grant a variance if the building is not in a good area or is a nuisance.
- Evicting a church is no fun. If you feel queasy about the prospect of evicting the church for non-payment of rent, then this investment opportunity is not for you.