Personal Guarantee (PG) negotiations
London · Member since 2019 · 722 posts · 386 votes
Personal Guarantee (PG) negotiations
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votesfrom my experience.. if your borrowing from a commercial bank PGS are required for the entire length of the loan.
everything is negotiable of course depending on the strength of the borrower but most commercial banks in the US its in their bylaws they simply do not do loans with out them.. same with most HML ers.
when you get to very large agency debt type loans then PGS are not used.. since very few would have the means personally to pay off huge loans anyway.. they are moot..
One thing we did with our credit lines pre 08 we had multiple 5 million dollar lines with 6 banks.. these were one year revolvers.. IE matured every year.. we stipulated and the banks agreed if they did call the loan we would have 36 months to retire it.. and when 08 hit we needed that.. the borrowers who did not have those clauses were the ones that got hammered .. my partner owns a bank it was his clause.. SMart dude but now I know LOL
26 Replies
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
from my experience.. if your borrowing from a commercial bank PGS are required for the entire length of the loan.
everything is negotiable of course depending on the strength of the borrower but most commercial banks in the US its in their bylaws they simply do not do loans with out them.. same with most HML ers.
when you get to very large agency debt type loans then PGS are not used.. since very few would have the means personally to pay off huge loans anyway.. they are moot..
One thing we did with our credit lines pre 08 we had multiple 5 million dollar lines with 6 banks.. these were one year revolvers.. IE matured every year.. we stipulated and the banks agreed if they did call the loan we would have 36 months to retire it.. and when 08 hit we needed that.. the borrowers who did not have those clauses were the ones that got hammered .. my partner owns a bank it was his clause.. SMart dude but now I know LOL
- 7yCameron TopePro MemberProperty Manager · Katy, TX · Member since 2015 · 1k+ posts · 1k+ votes
@John Corey Great discussion topic!
I think @Jay Hinrichs just summed it up! I've never been able to get financing without a personal guarantee - whether that's commercial financing, private money or hard money.
Pre-2008 groups of investors would buy apartment complexes in LLCs without PGs to do value adds, then refinance to take their cash out and walk away from the property without any ramifications.
I think it's going to be awhile before we see the era of no PGs...
- Silicon Valley · Member since 2018 · 20 posts · 13 votes7y
@John Corey
I have been able to avoid PG in loans by guaranteeing the assets of my business (non real estate). I ended up passing on it because of the amount of disclosure requirements in my line of business. (More paperwork, lot of headaches)
- London · Member since 2019 · 722 posts · 386 votes7y
Originally posted by @Scott Mac:
If we see two or three medium sized lenders break away from the herd on this somehow, and they start getting a ton of traction, maybe we'll see a shift back to no guarantees.
In the past, when lenders start moving towards fewer covenants, it is a sign that lenders are chasing business and we are heading towards a correction. That money is become too easy to secure so asset prices will get over heated.
- Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes7y
Yes, although from the lenders perspective (Lenders are not always the source of the money), offering a product like this would result in a flood of demand, and passing the risk down the chain to the money source comes from greed to make a huge killing quickly for the lenders, and the money raisers too.
That's why I thought medium sized lenders, might break the mold. A quick killing (get rich quick). I assume all it would take is a board decision and access to lendable funds with this loophole (another product in the chain). Strips were marketed with success before the bubble (it seems if the funding product were there, there would be some takers).
Not everyone has a long-ish view of profits, and some are willing to take more risk, (knowingly or not). And that seems to go for all parts of the chain.
- Encinitas, CA · Member since 2011 · 192 posts · 252 votes7y
Remember that a personal guarantee only comes into play when there is a different entity as the borrower such as your LLC. One does not "personally guarantee" one's own debt obligation. That is why many commercial lenders typically want the borrower to be an entity.
In California, there is no anti-deficiency protection for guarantors. A lender can foreclose non-judicially and then seek recourse on the personal guarantee. There is anti-deficiency protection if you are individually the borrower. This is one instance where using an entity for asset protection actually backfires if it is the lender who is coming after you.
- London · Member since 2019 · 722 posts · 386 votes7y
Originally posted by @Rob K.:
Remember that a personal guarantee only comes into play when there is a different entity as the borrower such as your LLC. One does not "personally guarantee" one's own debt obligation. That is why many commercial lenders typically want the borrower to be an entity.
In California, there is no anti-deficiency protection for guarantors. A lender can foreclose non-judicially and then seek recourse on the personal guarantee. There is anti-deficiency protection if you are individually the borrower. This is one instance where using an entity for asset protection actually backfires if it is the lender who is coming after you.
Interesting that there can not be a PG when the borrower is a person. Is that because the borrower is effectively the PG for the loan anyway?
What if I am the borrower and someone else offers a PG? Does that fit the model that the entity borrowing is different than the party offering the PG so the PG would work?
I am not suggesting that someone else guarantees another person's loan. Just trying to understand the line about different entity.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Scott Mac:
If we see two or three medium sized lenders break away from the herd on this somehow, and they start getting a ton of traction, maybe we'll see a shift back to no guarantees.
Don't hold your breath.. Commercial banks simply wont do this.. if your not willing to PG they are not willing to loan.. they feel your not standing behind your project or your name etc..
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @John Corey:
Originally posted by @Scott Mac:
If we see two or three medium sized lenders break away from the herd on this somehow, and they start getting a ton of traction, maybe we'll see a shift back to no guarantees.
In the past, when lenders start moving towards fewer covenants, it is a sign that lenders are chasing business and we are heading towards a correction. That money is become too easy to secure so asset prices will get over heated.
Never happen … not from commercial business banks.. for business credit.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Rob K.:
Remember that a personal guarantee only comes into play when there is a different entity as the borrower such as your LLC. One does not "personally guarantee" one's own debt obligation. That is why many commercial lenders typically want the borrower to be an entity.
In California, there is no anti-deficiency protection for guarantors. A lender can foreclose non-judicially and then seek recourse on the personal guarantee. There is anti-deficiency protection if you are individually the borrower. This is one instance where using an entity for asset protection actually backfires if it is the lender who is coming after you.
Rob not exactly correct.. in non deficiency states LIke CA WA OR NV AZ its ONLY on your personal residence and ONLY for purchase money IE the loan you used to purchase the property.. this is why you had so many strategic defaults in those states in the bad days.
and during the bad days as well. govmit stepped in and in the states were they could get judgements on owner occs they suspended it plus suspended the 1099 c that came with them.
its back to normal now.. you have an owner occ in Texas and you default the lender can and will go for a judgement many time.s
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @John Corey:
Originally posted by @Rob K.:
Remember that a personal guarantee only comes into play when there is a different entity as the borrower such as your LLC. One does not "personally guarantee" one's own debt obligation. That is why many commercial lenders typically want the borrower to be an entity.
In California, there is no anti-deficiency protection for guarantors. A lender can foreclose non-judicially and then seek recourse on the personal guarantee. There is anti-deficiency protection if you are individually the borrower. This is one instance where using an entity for asset protection actually backfires if it is the lender who is coming after you.
Interesting that there can not be a PG when the borrower is a person. Is that because the borrower is effectively the PG for the loan anyway?
What if I am the borrower and someone else offers a PG? Does that fit the model that the entity borrowing is different than the party offering the PG so the PG would work?
I am not suggesting that someone else guarantees another person's loan. Just trying to understand the line about different entity.
John this is NOT true its only true on owner occ loans and ONLY for the loan that was used to purchase the property.. if you refi have a heloc or a second those can get judgements..
- London · Member since 2019 · 722 posts · 386 votes7y
Originally posted by @Jay Hinrichs:
Originally posted by @John Corey:
Originally posted by @Rob K.:
Remember that a personal guarantee only comes into play when there is a different entity as the borrower such as your LLC. One does not "personally guarantee" one's own debt obligation. That is why many commercial lenders typically want the borrower to be an entity.
In California, there is no anti-deficiency protection for guarantors. A lender can foreclose non-judicially and then seek recourse on the personal guarantee. There is anti-deficiency protection if you are individually the borrower. This is one instance where using an entity for asset protection actually backfires if it is the lender who is coming after you.
Interesting that there can not be a PG when the borrower is a person. Is that because the borrower is effectively the PG for the loan anyway?
What if I am the borrower and someone else offers a PG? Does that fit the model that the entity borrowing is different than the party offering the PG so the PG would work?
I am not suggesting that someone else guarantees another person's loan. Just trying to understand the line about different entity.
John this is NOT true its only true on owner occ loans and ONLY for the loan that was used to purchase the property.. if you refi have a heloc or a second those can get judgements..
Thanks for clarifying Jay
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @John Corey:
Originally posted by @Jay Hinrichs:
Originally posted by @John Corey:
Originally posted by @Rob K.:
Remember that a personal guarantee only comes into play when there is a different entity as the borrower such as your LLC. One does not "personally guarantee" one's own debt obligation. That is why many commercial lenders typically want the borrower to be an entity.
In California, there is no anti-deficiency protection for guarantors. A lender can foreclose non-judicially and then seek recourse on the personal guarantee. There is anti-deficiency protection if you are individually the borrower. This is one instance where using an entity for asset protection actually backfires if it is the lender who is coming after you.
Interesting that there can not be a PG when the borrower is a person. Is that because the borrower is effectively the PG for the loan anyway?
What if I am the borrower and someone else offers a PG? Does that fit the model that the entity borrowing is different than the party offering the PG so the PG would work?
I am not suggesting that someone else guarantees another person's loan. Just trying to understand the line about different entity.
John this is NOT true its only true on owner occ loans and ONLY for the loan that was used to purchase the property.. if you refi have a heloc or a second those can get judgements..
Thanks for clarifying Jay
the loan that is used to purchase the property is commonly known as a Purchase money loan .. reality though sueing on gurantees are pretty rare if it gets that far with the borrower they are usually TU
- Encinitas, CA · Member since 2011 · 192 posts · 252 votes7y
Originally posted by @Jay Hinrichs:
Originally posted by @Rob K.:
Rob not exactly correct.. in non deficiency states LIke CA WA OR NV AZ its ONLY on your personal residence and ONLY for purchase money IE the loan you used to purchase the property.. this is why you had so many strategic defaults in those states in the bad days.Jay, you are referring to the anti-deficiency protection under CA code of civ pro Sec. 580(b), which protects 1-4 owner occupied situations and "vendor" (seller carryback) situations. In addition, borrower are protected from deficiency under Section 580(d) when a lender utilizes the relatively "quick" remedy of non-judicial foreclosure and finishes it, regardless of whether it is owner occupied or not.
I still can't figure out how to get the mention feature to work.
- Encinitas, CA · Member since 2011 · 192 posts · 252 votes7yCalifornia Code, Code of Civil Procedure - CCP § 580d
(a) Except as provided in subdivision (b), no deficiency shall be owed or collected, and no deficiency judgment shall be rendered for a deficiency on a note secured by a deed of trust or mortgage on real property or an estate for years therein executed in any case in which the real property or estate for years therein has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust.
(b) The fact that no deficiency shall be owed or collected under the circumstances set forth in subdivision (a) does not affect the liability that a guarantor, pledgor, or other surety might otherwise have with respect to the deficiency, or that might otherwise be satisfied in whole or in part from other collateral pledged to secure the obligation that is the subject of the deficiency.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Rob K.:
California Code, Code of Civil Procedure - CCP § 580d(a) Except as provided in subdivision (b), no deficiency shall be owed or collected, and no deficiency judgment shall be rendered for a deficiency on a note secured by a deed of trust or mortgage on real property or an estate for years therein executed in any case in which the real property or estate for years therein has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust.
(b) The fact that no deficiency shall be owed or collected under the circumstances set forth in subdivision (a) does not affect the liability that a guarantor, pledgor, or other surety might otherwise have with respect to the deficiency, or that might otherwise be satisfied in whole or in part from other collateral pledged to secure the obligation that is the subject of the deficiency.
Correct so if a commercial lender is expecting a deficiency on a non owner occ they go judicial not trustee.. were as owner occ no deficiency possible on purchase money.. the PG allows a regular trustee sale and then a suit on the PG.. ergo why every commercial loan I have gotten has a PG..
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Rob K.:
Originally posted by @Jay Hinrichs:
Originally posted by @Rob K.:
Rob not exactly correct.. in non deficiency states LIke CA WA OR NV AZ its ONLY on your personal residence and ONLY for purchase money IE the loan you used to purchase the property.. this is why you had so many strategic defaults in those states in the bad days.Jay, you are referring to the anti-deficiency protection under CA code of civ pro Sec. 580(b), which protects 1-4 owner occupied situations and "vendor" (seller carryback) situations. In addition, borrower are protected from deficiency under Section 580(d) when a lender utilizes the relatively "quick" remedy of non-judicial foreclosure and finishes it, regardless of whether it is owner occupied or not.
I still can't figure out how to get the mention feature to work.
I am the worlds worst on how to run computers and such I just learned how to cut and paste a few years ago.. but I know a few things on BP if you want to respond and quote up on the right there is a tab you hit it and it will say quote or report ( that's for bad actors who have done something naughty and you want to turn them into the mods) but if you hit quote then you will automatically tag the other person.
and or I think its @? these two symbol will give a list of every one on the thread.. and then I think if you want to ping someone your connected to I think you Just do @ that symbol and start typing their name.. I could have that backwards.. but I use the quote most of the time since it works well for me..
its actually the 3 little green dots.. so you can quote report bad behavior and EDIT.. I Edit a bunch if I am flying through a post and I know my spelling is all mucked up I will proof it and edit it.. I still make boo boos but I am not writing an English paper as long as I get my point across I can live with it.. but I have been accused of being a terrible speller and punctuator.
- Encinitas, CA · Member since 2011 · 192 posts · 252 votes7y
Hey it worked! Thanks!
While in theory, a lender can go judicial instead of the trustee route to preserve a deficiency against a borrower who does not otherwise have a deficiency defense it does not happen very often. First, it involves a fairly expensive two step lawsuit that will take a few years to resolve and gives the borrower a right to a fair value hearing. perhaps more importantly, the borrower gains an equity of redemption for a year or more after judicial sale that as a practical matter creates a title problem for the lender after sale. There is no equity of redemption in non-judicial foreclosure sales. Where I have seen a lender most often go judicial is when they need to appoint a receiver to enforce their assignment of rents on a property. These rarely actually go to judicial sale and at some point the lender will switch to non-judicial resulting in a waiver to seek a deficiency against the borrower.
My knowledge of anti-deficiency issues is based in California and I worked in this area quite a bit after the great recession. These issues can get very complicated depending on the nature of the transaction. Sometimes when you apply for a commercial loan as a borrower on an individual basis and the lender insists that you form an entity so that they can get a personal guarantee, the validity of the guarantee can be attacked on the basis it is not a"true" guarantee. Sometimes the defense works.
- Developer · Member since 2018 · 3 posts · 0 votes7y
@Jay Hinrichs
You have that backwards. On your personal residence, in CA at least, they can NOT go after both your personal residence and your other assets, they have to choose one or the other. They absolutely CAN go after both for a commercial loan.
- Breckenridge, MI · Member since 2016 · 34 posts · 19 votes7y
We sign PGs on all of our loans but we limit the PG to each individual's membership %. For example, four members each own 25% of the LLC, then they each only PG 25% of the loan.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Dylan Bird:
@Jay Hinrichs
You have that backwards. On your personal residence, in CA at least, they can NOT go after both your personal residence and your other assets, they have to choose one or the other. They absolutely CAN go after both for a commercial loan.
I agree with this.. personal residence with purchase money mortgage there is no deficiency judgement.. commercial loans can go judicial with judgements etc.. as was stated above it can be rare but I have bought sherrif sale properties that were the basis of lenders getting judgements and selling off debtor assets.. plus as a HML in my day we did this.. in dual action states like MS and or TX we would foreclose on the asset then sue on the note..
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes7y
Originally posted by @John Corey:
I did a quick search and did not see anything recent that matches this. If someone knows of a good thread, drop a link here.
Otherwise, lets discuss what people do to negotiate PGs. What is considered normal or acceptable vs more unique negotiations.
A PGs limited to a specific period of time (less than the life of the loan)?
Can a PG be for a limited amount (X% of the principal loan amount or for Y payments)?
What is expected by lenders in terms of monitoring existing or future PGs which would have a claim on the same (personal) assets?
Thanks in advance. Let's clarify the topic of PGs so I can send people to the thread when they need to know.
I've got millions of residential, commercial and owner financed notes out there. I have a personal guarantee on all of them. Every single dollar.
- Syndicator and Fund Manager · Victor, NY · Member since 2012 · 760 posts · 345 votes7y
@Jay Hinrichs
Before I started focusing on syndicating investments, I was a commercial mortgage banker. Think of it as a combination of broker and direct lender. I’ve worked on close to a billion dollars worth of loan requests and there absolutely are loans without personal guarantees available.
I still broker loans on a select basis.
As Jay mentioned the agency's, along with life insurance companies, the CMBS market as well as banks offer non recourse (no personal guarantee) loans. Typically these start at $1-2m and up.
You can even get non recourse loans for a portfolio of single family rentals. I’d venture to guess that the majority ($) of loans on commercial properties are non recourse.
You just need to know where to look and how to ask.
- Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes7y
And of course, don't forget that loans made to a self-directed IRA or 401k retirement plan cannot require a personal guarantee. Private lenders are able to do what they wish, but there are also a handful of banks that will make these loans.
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