Controversial Lender Includes O.C. Churches in List of Debtors

Last year, members of the new Beautiful Savior Lutheran Mission in Oneco, Fla., thought they had found a home for their small congregation of retirees and “snow-bird” refugees from northern winters. It was a nine-acre parcel with a building that could be improved and used for a church, with enough acreage left over to sell when the value increased, as the 35-member congregation believed that it would in the lucrative, central Florida real estate market.

Anne Driessnack, a member with a Florida real estate license, settled on a price with the owner. Since Driessnack was foregoing any commission, all the congregation needed was a low-interest loan for $275,000 from the Lutheran Church Extension Fund. The fund is affiliated with the St. Louis-based Lutheran Church-Missouri Synod, of which the Florida congregation was a member.

But by the time the fund, working through its own broker, closed the deal, the congregation owed the fund $198,181 for only five of those same acres. With improvements, the loan ballooned to $410,000, and without the remaining four acres, which the church’s district decided to keep for itself, the congregation had no land to resell to help offset these costs.

That transaction, and the financial practices it represents, has sparked an intense controversy within the conservative, 2.7-million member denomination. The dispute has become an issue in today’s presidential election at the denomination’s triennial national convention in Wichita, Kan., where critics of incumbent president Ralph Bohlman have focused on the LCEF controversy in a bid to unseat him.

Reluctant Lenders

The LCEF, as it is known, was founded in 1902 because many commercial banks were reluctant to loan money on undeveloped land, and no banker wanted to foreclose on a church. With assets of $428 million, the LCEF runs on faith, hope and real estate.

In Orange County, as elsewhere around the country, the fund loans money to congregations for land and construction at current rates generally between 7.25 to 9.25%. Investors, all members of the denomination, receive between 6.5 to 8.5% returns. As a religious organization, the LCEF is untaxed, uninsured and largely unregulated. Fund officials say they have never had to repossess a church--although payments have had to be rescheduled--and investors have always been paid, even during the Depression.

At least 15 churches in Orange County have received LCEF loans, as has the denomination’s Christ College in Irvine. The fund is now negotiating for a 15-acre site on Santiago Canyon Road.

To purchase land for mission churches and commercial sales, the fund uses three brokers whose role--and commissions--are at the center of the controversy.

Driessnack has charged in a dissident Lutheran publication that the LCEF has saddled her congregation and others around the country with thousands of dollars of unnecessary debt, enriching itself while leaving the viability of these churches in doubt.

Business Methods Defended

“The process is all in favor of the LCEF,” Driessnack said, rather than the members of the congregation. “The LCEF doesn’t really care if they succeed,” she said.

While acknowledging that their system of acquiring future sites for churches is not perfect and that mistakes may have been made, LCEF leaders strongly defend the way they have done business.

In May, the LCEF leadership wrote to all 6,200 of the denomination’s ministers, charging that Driessnack’s attacks on the fund were politically motivated. The cover letter, from LCEF President Arthur C. Haake and Board Chairman Karl Abel, stated that “we believe the success of the Church Extension program in the synod not only supports the use of regional brokers, but their use has been a great asset to our synod that should be applauded rather than attacked.”

Using sophisticated demographic studies, the LCEF’s regional brokers travel the country, acquiring sites for future churches. Although membership in the aging denomination has been dropping over the past decade, land purchases have been rising sharply over the same period, especially in the Sun Belt where members retire. In the last fiscal year, LCEF officials said, the fund bought nearly $13 million in advance sites, bringing the LCEF’s portfolio to 175 sites.

The brokers charge the LCEF a fee of up to 10% on each tract, usually two to five times the amount of land needed for each church. Customarily, these fees are then added to the purchase price of the land. When the excess portions of the parcels are sold commercially, the regional brokers receive a sales commission, also up to 10%. Both the size of the fee and the payment by buyers, rather than sellers, are unusual, but not unprecedented, according to real estate experts.

The fund has paid an estimated $3 million in commissions over the past 17 years, a price worth paying for the uniformity the system provides in purchasing land and protecting investments, officials said.

‘Discipline’ for Program

“We’ve got to bring some discipline to this program,” said Gerald E. Wendt, the fund’s vice president for mortgage loans. “Over the long term it’s clearly demonstrated its value to the LCEF.”

“I’m not going to say that some mistakes have not been made,” Wendt said.

About half the synod’s 38 U.S. geographical units, known as districts, have entered into “exclusive” arrangements with the fund. Wendt said that “a lot of misunderstanding” over the role of the brokers followed. Today, LCEF brochures clearly state that congregations in districts which have signed such agreements are not required to work through the regional brokers.

In the Florida case, Driessnack was informed that in order for the congregation to get district backing for the LCEF loan, approval of the regional broker for the South, a Texas resident named Thomas Ritter, was required. After inspecting the site, Ritter told Driessnack that he would approve the LCEF loan, but it would have to be for $302,500--$275,000 plus his non-negotiable “broker’s fee” of $27,500, even though he had nothing to do with locating the property or, until that time, negotiating the price.

Despite Driessnack’s warning that the price was fixed and good only for a limited period, Ritter offered the owner a contract for $243,000, only to see the price bumped to $300,000 as the deadline passed. With Ritter’s commission, the price of the land to the congregation went to $330,000, increasing the cost of the loan. At the time of the purchase, the district decided to retain four acres for itself.

When the process was complete, the Oneco congregation was saddled with just under $198,181 in debt for its portion of the land, a figure that included a prorated portion of Ritter’s broker’s commission. Improvements to the land and existing structure added another $211,819 to the loan, for a total of $410,000. With no prospect of offsetting these costs with the sale of the additional acreage, the likelihood that the congregation can repay the debt is sharply reduced.

Ritter and LCEF officials in St. Louis confirmed the details of the transaction and acknowledged that the broker’s involvement in the Oneco purchase may not have been helpful and that the congregation would have been better off if it had simply accepted the owner’s initial offer for the entire parcel.

Bargains Claimed

The regional broker’s participation, “probably did cost us something,” Ritter said. He took the commission, he said, largely because of the work he had done looking at other sites in the area before the purchase, as well as work he has done since in connection with the purchase. Overall, he said, his performance for the LCEF has been excellent.

“I’ve secured a lot of bargains for them over the years,” Ritter said.

In a telephone interview from Mansfield, Tex., Ritter said his small, home-based firm, which includes his wife and son-in-law, has received commissions from the LCEF of more than $1 million over the past 17 years, at a yearly rate which has been increasing over the past four years. LCEF work accounts for “99.9%” of his firm’s business, Ritter said.

Kenneth W. Minto, regional broker for the Midwest and Northeast, said his LCEF commissions were considerably less, but he has been working in the program for a shorter period of time than Ritter, and LCEF accounts for only about half of his firm’s business. LCEF officials in St. Louis estimated total commissions paid for the fiscal year ending June 30 at about $500,000.

Complaints about Ritter’s involvement in the Florida transaction sparked an investigation by the Florida Real Estate Commission, which found that the broker was unlicensed in that state. The commission concluded that further action was unwarranted because Ritter agreed to stop practicing in Florida until he secured a license.

Driessnack, a conservative activist whose complaint started the Florida inquiry, then began writing articles in a dissident Lutheran newspaper, Christian News, protesting the broker system.

Other church groups have criticized the broker system. After one congregation complained that Minto received a $3,000 fee for less than two days of work, the Southern Minnesota district of the synod decided to discontinue its reliance on the fund’s brokers.

The LCEF, which is separate from the denomination’s $750-million pension fund, also accepts Individual Retirement Accounts. Other income from the fund is taxable. In all, the LCEF has $300 million in land, construction and home loans now being repaid, with the remainder of its liquid assets invested in short-term securities.

As a self-governing religious organization, LCEF is not insured or regulated by the federal government or any other regulatory body, including the Securities and Exchange Commission. The fund declares in documents required to sell securities in each state that its investments are not guaranteed by the Lutheran Church-Missouri Synod, despite the fact that they have several board members in common.

Driessnack and her supporters have charged that the church’s incumbent leadership has allowed the LCEF to gain enough leverage to become the tail that wags the denominational dog. The LCEF owns 25% of the denomination’s headquarters, in the St. Louis suburb of Kirkwood, where its 48 employees work, and holds a note for $7.2 million on the remainder, officials said. The fund also makes home loans to some of the church’s district officials and ministers, but not to its own officers, full-time employees or board members.

In its May mailing to all ministers, a letter was included from John P. Schuelke, executive director of the LCEF’s board of directors, stating that the Lutheran Church, Missouri Synod “does not have responsibility for Church Extension matters. The Lutheran Church Extension Fund is a separate corporation with it own board of directors.”

However, according to the denomination’s by-laws, its treasurer, Norman Sell, is also the LCEF’s treasurer, and Bohlman (the denomination’s incumbent president) nominates members to a body which elects the FCEF’s other board members.

“There is no cleavage between the two bodies,” said Driessnack. “They are totally connected.”

She remains adamant in her opposition to the regional broker system.

“I’m sure this is not what the Lord intended when He spoke of The Great Commission,” she said.