Commercial Loans: Personal Guarantee?

[Trevor Ewen]

I have a friend who is an experienced investor of a different era (started investing in the 50s). He has an interesting quote that he shared with me on the first occasion we met:

"Whatever you do, don't personally guarantee your loans. When someone personally guarantees a loan, we call him a schmuck with a fountain pen."

He is known for strongly-worded advice, but I wanted to know what people think of this, only in regards to commercial financing. Obviously, conventional loans are personal, not an easy way around that one.

I am hoping to (with partners) put together a commercial deal with less than $1m in financing by the end of the year. I can only assume the vast majority of lenders will prefer a personal guarantee. Am I out of my mind if I expect to get something guaranteed against the assets only?

[Joel Owens]

It depends on who you are talking about.

My clients that I work with  transacting as a commercial real estate broker are worth millions to tens of millions of dollars or more.

For them non-recourse is a big component to do a deal.

Think of it this way.

You own 10 properties and after down payment you have 30 million in debt.  After putting 1 million down 5 years in you still have 500k left to recover of the down payment. The property goes south and can't turn around. You decide non-recourse to let it go and make up your loss with the cash flow from the other properties. In 6 months you are made whole again versus having recourse from the properties of 30 million in debt connected to everything you own. 

With non-recourse if there is a problem the lender has to work out the loan or foreclose. So those lenders are highly motivated to get the property performing again. Doesn't matter if the investor is worth 50 million the lender can't touch them unless a carve out for fraud, bankruptcy etc. is violated.  With a personal guarantee the bankers do not care if it goes to losing a bunch each month. If you or your partners have the cash they will make you pay it or come after you.

With non-recourse you can get 75% LTV with 25% down if cap rate is high enough for debt numbers to work. On retail the lowest I have seen is 2 million loan balance minimum and most want 5 million minimum. Multi-family I have seen go down to 1 million.

Since the only recourse is the property the lenders price in higher risk. So  rate on non-recourse for a 10 year fixed term and 30 year amort. might be 5.00 whereas a local bank might do a 5 year term. 25 year amort. for 4.15 fixed.

Banks will usually go non-recourse or partial recourse with 40 to 50% down but will not go to the high LTV's of a CMBS type lender.

Less than 1 million unless you are dropping 40 or 50% down the bank will want full recourse against you and all the partners. That is a very small loan that non-banks do not have appetites for.