Need advice on Personal guarantee requirement for Commercial loan

[Rafiq Merchant]

Hi all,

I am an RE investor in the Houston area, with two SFR properties and they are both rented out returning decent cash flow per month. Last year I became part of an investment group whose primary goal is to acquire commercial properties with higher CAP rates and good potential for appreciation. It's a community group of 28 individuals, all highly professional with many years of real estate experience. Everyone contributes a set amount every month into the corporation which would go towards down payments. Recently we have found a great prospective property out in Waco, valued at around 3.4 million. Problem is that this would require a down payment of about 1 million, and the group does not have that much cash at this time (because we just closed on another small property). Because we don't want to lose out on this deal the recommendation is for everyone (who can) to put up 75K so that the down payment can be put together, and the one's who cannot should put up the guarantee towards the loan. The 75K would be returned back over time, no interest paid. This way everyone will play a role in the acquisition. Banks don't want to go through paperwork for 28 individuals as part of loan process, this is another reason why they want to limit the # of folks putting up the guarantee. Now here is my delima - I dont have the 75k to put up at this time. So that means I would need to become part of the "loan guarantee" team. However I have no clue how this works. The first purchase was very small and an all-cash deal. I have read up a bit about this, and some of the information out there is pretty scary. This seems to be a personal guarantee towards the loan, which means my personal finances would be at stake. Secondly, I am not sure how this impacts my credit/credit score and my ability to continue my residential property acquisition.

To me it seems appropriate for all 28 members to be on the loan and be part of the guarantee process, that way the risk is equally distributed and that is what was told to me when I signed on.

I am really looking forward to some advice on this. I do have the option to NOT be part of this second project, but at the same time don't want to miss out on a good investment.

Please advise.

[Joel Owens]

Sometimes you can negotiate the debt with the lender based on partial instead of full recourse.

Some lender like all of the parties to give a guarantee for extra security. You could have 3 partners worth 1 million each but 5 years into the 10 year loan 2 of them made bad choices with businesses or other investments and are now insolvent meanwhile the remaining one is now worth 2 million.

With the lender having all on the hook they now put pressure for the guarantee fully on the partner with the highest net worth.

This is why partial recourse can become so important. Also you could try and negotiate a (burn off) where once the LTV is paid down to a certain point the personal guarantee goes away.

Even in a non-recourse loan to start the lender typically will make it recourse upon the single remote LLC for example set up for the one property. The LLC can simply be made insolvent down the road so the property is generally the only recourse for the lender in that situation.

Lenders ask for the kitchen sink for themselves. A borrower has to push back and be comfortable or not do the loan. Sometimes you switch lenders and still close the deal and other times you do not do the deal at all.

I would rather walk away from a deal then regret it down the road.