Using an LLC as a Guarantor on a Commercial Loan

[Kim Hopkins]

Hello!

We are working with a credit union on a loan for a commercial property acquisition. The loan is full recourse. In the past, we've just listed ourselves as individuals (or maybe our trust, I forget) as the guarantor. 

This time, we noticed there is an option to list an LLC as a guarantor. This seems like it might be advantageous as it might add a layer of protection.

If that's the case, what sort of structure for the LLC would be best? Here's the LLCs we already have:

       • About 15 LLCs that each hold one individual property. I'm sure those are out since they each only have ownership in one property.
       • An asset management LLC that has no interest in any properties. That would be ideal for us but I'm guessing the lender wouldn't allow it since it doesn't have interest in any properties
      • A new holding company LLC but it only has an interest in one smaller property we bought last year (our GP interest). 

Are any of these good candidates? If not, is it worth it to set up a new LLC? Does it actually offer more protection? And if so, what ownership should it have?

Yes I know this is a question for my attorney who I've already asked, but he just said "generally the lender will want to see assets in the LLC" so I'm looking for answers here from experienced investors and their best practices. No, I do not consider this legal advice.

Thank you!

Kim

[Greg Downey]

@Sarah Downey might chime in here as she is our entity expert in the shop BUT I would ask your lender what EXACTLY they are referencing regarding the "guarantor". If this is simply on the loan applicaiton, I wouldn't consider that worth more than the paper it is written on. Here are the 3 things that it might mean....

This is a limited recourse loan - IE - recourse would be limited to the property AND anything owned within the LLC

This is a FULL recourse loan - IE - the loan can and will be made to your LLC BUT in the case of a default, the will take the property and if necessary reach into your personal assets.

This is NON-recourse loan (you have already identified that this is not the case) - Lender can only take the property in case of default

My guess is that this is a full recourse loan and you are reading MORE into the loan application than what will actually happen with the loan. IE - the LLC will be the borrower and YOU will be the guarantor. Certainly worth asking as you absolutely wan to know BUT I think that the question would be better aimed at the CU.

[Kim Hopkins]

Quote from @Greg Downey:

@Sarah Downey might chime in here as she is our entity expert in the shop BUT I would ask your lender what EXACTLY they are referencing regarding the "guarantor". If this is simply on the loan applicaiton, I wouldn't consider that worth more than the paper it is written on. Here are the 3 things that it might mean....

This is a limited recourse loan - IE - recourse would be limited to the property AND anything owned within the LLC

This is a FULL recourse loan - IE - the loan can and will be made to your LLC BUT in the case of a default, the will take the property and if necessary reach into your personal assets.

This is NON-recourse loan (you have already identified that this is not the case) - Lender can only take the property in case of default

My guess is that this is a full recourse loan and you are reading MORE into the loan application than what will actually happen with the loan. IE - the LLC will be the borrower and YOU will be the guarantor. Certainly worth asking as you absolutely wan to know BUT I think that the question would be better aimed at the CU.

It's a full recourse loan but apparently an LLC can sometimes be the guarantor. Not the borrowing entity LLC.

[Greg Downey]

I would call that "limited recourse" if in fact the recourse would be limited to ONLY the LLC. If in fact, it would reach beyond the LLC, to your personal assets, they could call it "chicken noodle soup", but it would effectively be full recourse.

[Sarah Downey]

Hi Kim,

You should be able to use one of the LLCs mentioned without having to make a new one. Since this is a purchase, it should not matter if the LLC has assets or not. You will just need your basic LLC paperwork (Articles, Operating Agreement with any amendments/addendums, and an EIN letter).

It seems like you are already going the route of having an LLC for each property, though, which helps keep all the assets separated. I am assuming your attorney recommended this method. If you use the Asset Management LLC with no properties currently in it, that would keep things clean. But if you are using that for any other income/expenses, you may not want to throw a property in the mix.

The new holding company LLC with one other property could be an option, too. Maybe you could start putting 3-5 properties in an LLC together instead of creating a new one each time. That could keep your cost and paperwork down.

When starting out, the method of an individual LLC for each property doesn't seem too daunting, but once your portfolio starts to accelerate, it can turn into a lot of paperwork to manage.

I am sure you are feeling that now with 17 LLCs.

Best of luck with your purchase!

[John McKee]

I never heard of such a thing. The LLC can be the borrow, but chances are you are the personal guarantor. The LLC asset is the property you are buying and yes it should be a separate LLC.

[Ronald Rohde]

You need real assets in the LLC to even be close to substituting a personal guaranty with an LLC.

I don't think anything you mentioned has enough equity.

[Greg Downey]

@Kim Hopkins, whats the word? You have all of us legal and loan guys on the edge of our seats.

[Kim Hopkins]

LOL! @Greg Downey Well, I owe you all a drink, and my lawyer a nice $525 or whatever for the hour we wasted discussing this. According to the lender, they have no idea why it's an option to put an LLC as a guarantor and they've never had it approved. What a rabbit hole!

Our broker even said something about this being worse than personally guaranteeing because you would be essentially cross-collateralizing the properties. 

Back to signing over our house and our first born. J/k. I know they can't take the house. ;) 

[Ronald Rohde]

Quote from @Kim Hopkins:

LOL! @Greg Downey Well, I owe you all a drink, and my lawyer a nice $525 or whatever for the hour we wasted discussing this. According to the lender, they have no idea why it's an option to put an LLC as a guarantor and they've never had it approved. What a rabbit hole!

Our broker even said something about this being worse than personally guaranteeing because you would be essentially cross-collateralizing the properties. 

Back to signing over our house and our first born. J/k. I know they can't take the house. ;) 

 I think you just need more sophisticated vendors. Most of what you post could be answered offline, IMO someone with real access and data to your properties, rent rolls, your net worth, etc.

[Kim Hopkins]

Quote from @Ronald Rohde:

Quote from @Kim Hopkins:

LOL! @Greg Downey Well, I owe you all a drink, and my lawyer a nice $525 or whatever for the hour we wasted discussing this. According to the lender, they have no idea why it's an option to put an LLC as a guarantor and they've never had it approved. What a rabbit hole!

Our broker even said something about this being worse than personally guaranteeing because you would be essentially cross-collateralizing the properties. 

Back to signing over our house and our first born. J/k. I know they can't take the house. ;) 

 I think you just need more sophisticated vendors. Most of what you post could be answered offline, IMO someone with real access and data to your properties, rent rolls, your net worth, etc.

 What kind of vendors are you talking about? I think most of what I post is aimed towards other experienced real estate investors but would be happy to have "vendors" to go to offline if such existed...