Tenant rejects personal guarantee for option, but accepts for initial lease term.

Commercial Real Estate Investing
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Tenant rejects personal guarantee for option, but accepts for initial lease term.

Nikolas Engel
Investor · Pacific Northwest · Member since 2018 · 71 posts · 19 votes

Folks,

I am negotiating an owner-operated restaurant lease and tenant agrees to a personal guarantee for the initial lease term of five years but rejects a guarantee for the two options (five year each). We had not talked about it during the LOI negotiations, the issue popped up during the draft lease review process. Obviously it is in my best interest as LL to have a guarantee in place for the entire lease period, including options.

How would you deal with a situation like this? 

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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
2y
Quote from @Nikolas Engel:

Folks,

I am negotiating an owner-operated restaurant lease and tenant agrees to a personal guarantee for the initial lease term of five years but rejects a guarantee for the two options (five year each). We had not talked about it during the LOI negotiations, the issue popped up during the draft lease review process. Obviously it is in my best interest as LL to have a guarantee in place for the entire lease period, including options.

How would you deal with a situation like this? 

It’s a negotiable point.  You can accept the no personal guarantee but counter with a slightly elevated lease amount, then offer he choice; lower amount with guarantee, higher without 
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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    2y

    That doesn't strike me as too crazy. She or he is themselves an entrepreneur, perhaps their exit plan is to get the business up and running, and then sell it somewhere in that 5-10 year window. 

    Of course, it's your property and you have every right to say "no." 

    1Reply
  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    2y

    Its pretty common. If they have been in the location for 5 years paying rent and never defaulting, then I would not require additional PG.

    1Reply
  • Nikolas Engel
    OP
    Investor · Pacific Northwest · Member since 2018 · 71 posts · 19 votes
    2y

    Thank you @Chris Mason and @Ronald Rohde

    I see your valid points.
    I was thinking from the other way, if tenant is not comfortable with PG then he/she might not trust the strength of their business... But maybe I am overthinking here.

    0Reply
  • John M.
    Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 803 votes
    2y

    They need to personally guarantee the entire lease as long as they are still the owner.  If the restaurant changes hands then the new owners would assume the lease with their own personal guarantee.  

    1Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    2y
    Quote from @Nikolas Engel:

    Folks,

    I am negotiating an owner-operated restaurant lease and tenant agrees to a personal guarantee for the initial lease term of five years but rejects a guarantee for the two options (five year each). We had not talked about it during the LOI negotiations, the issue popped up during the draft lease review process. Obviously it is in my best interest as LL to have a guarantee in place for the entire lease period, including options.

    How would you deal with a situation like this? 

    It’s a negotiable point.  You can accept the no personal guarantee but counter with a slightly elevated lease amount, then offer he choice; lower amount with guarantee, higher without 
    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    2Reply
  • Nikolas Engel
    OP
    Investor · Pacific Northwest · Member since 2018 · 71 posts · 19 votes
    2y

    Thank you @John M. and @Don Konipol

    I appreciate your input! We are still negotiating and tenant might accept original terms. 

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    2y

    Is this tenant first location concept? Is it franchised or mom and pop.

    Your lease is meaningless if they go dark quickly. You will then be out attorneys fees, TI, and leasing commissions. You also do not have to accept whatever language they have for assigning. You could still keep them guaranteeing the lease even if they sell the business.

    You do not want them selling to joe blow that runs it in the ground and goes dark. You want them on the hook with double guarantee until new owner demonstrates strength as an owner operator tenant. This is especially true when whoever they are selling the business to is weaker or the same strength of guarantee.

    If it's someone much stronger then obviously do not need both. Check if their liquidity and net worth is a cash position or mostly retiree funds you can't touch. If they go dark do not plan on getting paid fully for the lease if smaller tenant. Usually best to settle or they file BK and landlord gets very little to nothing.

    Have in lease they have do disclose sales quarterly. There are 100 plus other things that go into it. Good luck   

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  • Nikolas Engel
    OP
    Investor · Pacific Northwest · Member since 2018 · 71 posts · 19 votes
    2y

    Thank you @Joel Owens

    Great advise. How common is it in commercial leases that tenant discloses sales? My assumption is that all tenants have an interest in keeping their cards close.

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    2y

    If national investment credit tenant even if sales not disclosed in lease often in their corporate website stock disclosures you can find data average store sales overall and then sometimes per store.

    If no credit you need sales disclosures as tenant strength is weaker. Without sales I can't measure how they are performing with rent to sales ratio.

    I won't rent to no credit tenants that will not disclose sales. You will have to ask for it anyways if they have trouble and ask for reduction in rent etc. If they disclose quarterly you get tailwind in advance there is trouble and try to get them back on track or know way in advance they won't make it so can start early to line up another tenant. 

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    1Reply
  • Nikolas Engel
    OP
    Investor · Pacific Northwest · Member since 2018 · 71 posts · 19 votes
    2y

    Thanks @Joel Owens, great support from you!

    0Reply
  • Evan Polaski
    Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
    2y

    @Nikolas Engel, I used to work for a large retail owner/operator.  Monthly sales disclosures were in their form lease.  While this was allowed to be negotiated out, it was more common to have sales reports required on a monthly basis.  Granted, this was over a decade ago, but nationals, regionals, and mom and pops were all reporting sales.  

    As Joel notes, it is a great way to monitor tenant health and be prepared for failing tenants ahead of them stopping to pay.

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