Private lending to an LLC

[Nicholas Mann]

Hello all,

I am considering doing a private money loan tied to a mortgage to a friend of mine. The mortgage of the property will or should protect my investment just like a bank mortgage (or so I hope). I received the mortgage paperwork and had my lawyer review it. My lawyer said that the note should also have the personal persons name on it as a guarantor as the note only has the LLC on it. My question to any hard money or private money lenders is it ok to do a loan just for the business or should it have the business owners personal name attached to it. Thanks for any replies

[Jeff S.]

Nothing will change a relationship faster than when money is involved, @Nicholas Mann. Take heed doing business with friends or family.

“I received the mortgage paperwork and had my lawyer review it.”

This is a red flag in and of itself. Never accept loan documents from a borrower. In whose interest do you think they will be written? Do you think it’s a coincidence that there is no personal guarantee? What about the other terms in the note and mortgage. Is anything missing which would protect you?

It’s much cleaner, easier, cheaper, and safer to begin with a fresh set of documents prepared by your attorney in your interest as the lender, than try to back out what’s missing. This is your money to protect, Nicholas.

“… is it ok to do a loan just for the business …”

No, it’s not ok to loan just to the business. You want a personal guarantee. Equity alone is not enough protection. Ask this of anyone who was lending in 2007. You have no idea what the property will be worth months from now. A personal guarantee allows you to go after additional assets if necessary and it becomes a further responsibility (i.e. motivator) for your borrower.

Lending to a retirement plan, which can't require a PG, is an exception. As a one-off lender, this wouldn't make any sense for you to even consider. A greater interest rate in return for no recourse works if you have many loans among many borrowers, to spread the risk. Even tripling your interest rate, to an LLC that defaults, will still wipe you out if you don't have many loans. Zero times anything is still zero.

New York might be different, but personal guarantees have their own terms and are typically separate documents than the note and mortgage or deed of trust. In CA for example, you don’t want the personal guarantee to even be considered a loan document even though everything is normally signed at the same time. Deferring to your attorney, who I assume (hope?) has some lending experience, I suppose New York does it differently.

Good luck, Nicholas.