Personal Guaranty on Commercial Loan

Commercial Real Estate Investing
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Personal Guaranty on Commercial Loan

Dirghayu Desai
Member since 2018 · 4 posts · 0 votes

Can someone explain how personal guaranty works on a commercial investment? LTV is: 70/30

6 partners and each is ~16% owner

Do all partners have to sign a personal guaranty (PG)?

If we sign a PG and the business can't meet its debt obligations what steps take place? How does the lender enforce the PG? What amount will the lender ask for?

Would the lender come after the partners for the whole amount of the remaining loan..i.e. whatever is left on the $4.2M or are the partners only responsible for the delta between what the lender recovers from sale of hotel and what's left on the loan?

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  • Erich Hauck
    New Smyrna Beach, FL · Member since 2017 · 24 posts · 11 votes
    8y
    Hey Dirghayu, each states foreclosure process varies and how the lender can go after the borrower does as well. By signing a PG with a loan, the partnership is guaranteeing to pay off the debt. If you default on the loan, have a $4M outstanding principal balance, and the property sells afters foreclosure for $2M, then the partnership is liable for the remaining $2M (plus accrued interest, legal costs, and any other fees tacked on). But again how aggressive the lender can come after you is strictly dependent upon your state. Best bet is to contact your local real estate attorney, it’s well worth the couple thousand dollars for him to review the loan docs and explain exactly what your signing.
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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    8y
    Dirghayu Desai as notes speak with a. Attorney. Also ask the attorney if there are limits on the guaranty. I have seen an instance where on individual owed 90% of the company and the person who owned 10% got really hoses as the project went under and the person owned 90% filed personal bankruptcy which caused the other individual to also file. So even though you may own 16% check to see if liability is limited to only 16% or if it is open.
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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    8y

    Yep you want a commercial attorney working on your loan covenants with a lender. Ask for a boiler plate version of the lenders loan covenants upfront.

    If you can't get the loan terms you desire to be comfortable then you might want tot walk away from the deal.

    Lenders want ultimate security. Buyers want least security. It's a dance to where both sides feel comfortable with the downside risk if things go wrong.

    No legal advice given.

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  • Jessica Zolotorofe
    Attorney · NJ · Member since 2016 · 1k+ posts · 794 votes
    8y

    Most of the time the PG is joint and several between all partners owning at least 10%. They can go after all of any of you for the full outstanding principal balance and they don't have to foreclose on the property before going after you individually. That's the general rule, though your loan documents can possibly be negotiated if you have a good attorney. This is for a full recourse loan. If it is a "bad boy" or "limited recourse" loan, then you would only be personally liable in certain circumstances, i.e. bankruptcy, fraud, misappropriation, etc.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    8y

    Yeah I would never agree to that on a loan where they have you all on the hook personally. The lender wants it that way because if 3 partners were worth 2 million each on a 10 year loan and 5 years in 2 of the partners are almost bankrupt but one is now worth 5 million  they go after them.

    Non-recourse it can give the investor more leverage against the lender to re-negotiate the loan with a property down the line if problems arise.

    There also needs to be addressed what happens if one of the investors files bankruptcy but others are not.

    If an investor is only putting in  a percentage of the money and getting a percentage back of the money generated off of the investment then they should not be on the hook for all the debt.

    Remember with lenders they have boiler plate stuff and say nothing is negotiable but it can be sometimes. A buyer needs to determine what are DEAL BREAKERS for a loan and see upfront if the lender will agree to that. It can be expensive sometimes thousands to tens of of thousands of dollars more to negotiate custom loan docs because attorney for bank is having to pay more which they charge the buyer and buyer is paying their attorney more.

    If lender loan docs have just minor nuances a buyer can live with then sometimes better to leave alone.  

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  • Dirghayu Desai
    OP
    Member since 2018 · 4 posts · 0 votes
    8y

    Thanks everyone. This is good information. We are in the preliminary stages of acquiring a hotel in NC and were told by a broker that at 30% down, we would have to sign PG and most non-recourse loans for hotels start at 60/40 LTV. Could that be because its our first project as owners?

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    8y

    I do large multifamily and commercial retail properties so do not know how hotels are underwritten for risk modeling by lenders.

    If it is 60% LTV why not have the seller hold a second 10% note with similar interest rate and amort. as the bank with a 5 or 7 year balloon?

    That way you put 30% down and hopefully the lender goes non-recourse now at their 60% first position note. 

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  • Mark Creason
    Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes
    8y

    @Dirghayu Desai I am working on 2 non-recourse Hotel loans right now. Both are looking at 65% LTV. We are looking at Mezz debt on one of the deals which will take LTV to 80%.

    Mark

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  • Joseph Ali
    Manvel, TX · Member since 2017 · 21 posts · 7 votes
    8y
    Hey guys, any update? How did the deal go?
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  • Brian Geiger
    Rental Property Investor · Phoenix, AZ · Member since 2018 · 141 posts · 165 votes
    7y

    I have a similar question:

    I formed a LLC with another person. We applied and received a hard money loan to do a fix and flip. While doing that, I remember we both had to sign a Commercial Guaranty document. Does that mean we are personally liable for this loan if our business default? Will this be bad for my personal credit?

    Thanks,

    Brian Geiger

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    7y

    Brian have a commercial attorney review and give  a legal opinion on the document you signed. Every word matters so really need a professional to review what you signed, how you are obligated at what times, and under what conditions.

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  • Ken Jernigan
    Wilmington, NC · Member since 2017 · 132 posts · 70 votes
    7y

    @Joel Owens Amen. Read before signing. Also most PGs are "joint and several" meaning if "another person" disappears in the night, you're on the hook for the entire debt.

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