Updated about 8 years ago on . Most recent reply
Overcoming Personal Guarantees
My business partner and I have collected a few residential rental properties (2-4 units) in the Indianapolis area and we are now looking to move up into commercial multifamily properties. Our strategy is to acquire these properties via a 1-year interest only acquisition/bridge loan and then flip it into long term fixed rate FHA financing. The acquisition loan is necessary to provide the time required to perform all of the third party reports necessary for the FHA financing we are targeting.
We both work in the multifamily family development world (one in finance and one in legal) and are familiar with the loan products we are pursuing. The major hurdle we have is that these products typically require personal guarantees, regardless of the corporate structure that is set up. As a rule of thumb, the guarantees require a net worth equal to the amount of the loan and 10% liquidity.
A property that we are eyeing right now would require a loan amount of about $4.5 million, and we are not close to having a combined net worth of $4.5 million or liquid assets of $450,000. My underwriting is showing that is a strong property and would be a great investment, but the guarantees requirements are becoming a real impediment to our plans on growing our business. (Obtaining equity investors is not a problem at this time)
Does anyone have any advice on how to overcome a hurdle such as this? This is a chicken and egg scenario…. This kind of deal would help us get the net worth to do more deals like this, but we can’t do the deal because the lack of net worth. Any advice would be appreciated. Thank you!
Most Popular Reply
Dusty,
In my experience a personal guaranty is pretty standard. There are lenders I know of that will forgo the NET worth requirement that you mentioned, but liquidity is always required. You can get very creative showing liquidity with IRA, Life Insurance, and even available 'credit' on the business end as well for many banks.
I'm happy to talk about it more if you wish.
--Dan