In my post entitled Personal Guarantee Required? 6 Tips You Should Follow, I set forth that there are significant implications to consider, when providing a guarantee.

Similar concerns and strategies are raised in a recent article by Scott Anderson of Lawson Lundell LLP, entitled Buckle Up: How Guarantors of Real Estate Loans Can Limit Their Exposure. He sets forth several suggestions, including that the guarantee be limited in amount if possible. Similarly, where there are more than one guarantor, that the guarantee be joint, and not joint and several. In other words, that individual guarantors provide a proportionate guarantee, and no one guarantor be liable for the entire indebtedness.

Commitment Terms are Negotiable
The important point to remember is that you should proceed with your lender discussions with the mindset that all items in your commitment letter are negotiable. You’ll have a much greater chance of modifying terms within your commitment letter. As Scott Anderson points out in his article,
“No matter how small the amount of bargaining leverage a borrower may have on a specific loan negotiation, there will be far less once the commitment letter is signed by the parties”.

Personal Guarantee Required? 6 Tips to Remember

1. Limit your personal guarantee obligations to a lesser amount. Typically a lender will seek to have you personally guarantee the entire amount of the indebtedness. Frankly, the “at risk” portion of the loan is the top piece. Seek to limit your exposure to an amount less than the entire amount of indebtedness. Even an empty building will have some value to the lender!
2. Limit your personal guarantee to a percentage of the amount of indebtedness, so that it falls away (reduces) as the debt is paid down.
3. Negotiate a release of your personal guarantee once the loan to value (LTV) reduces to a specific point, or a specific amount of the loan has been repaid.
4. Negotiate a release of your personal guarantee in the event that the property is sold and the current financing is assumed by a new purchaser. This is a fairly common oversight of property vendors. They assume that since they no longer own the property, they’ve wiped their hands of it. Not so, if the purchaser has assumed the debt you originally guaranteed.
5. Discuss the need for the personal guarantee with your lender. Consider borrowing a lesser amount, (lower LTV) or perhaps consider paying a higher rate, or taking a shorter term, if this alleviates specific lender concerns.
6. If the guarantee is required so as to mitigate risk associated with a particular property issue (e.g. impending lease maturity), consider an alternate way to provide your lender with comfort. Perhaps a Letter of Credit (L/C) which the lender could cash (and reduce their indebtedness) in the event that the tenant fails to renew their Lease. Keep in mind this L/C, if cashed, becomes an ongoing credit obligation.

Final Thought
Personal guarantees are a recognized real estate lender requirement. Unless your covenant is undoubted, and you have several significant sized loans with the specific lender, your personal guarantee will likely be required. Speak with your lender and understand why this is being requested, and negotiate a more favorable guarantee provision. Sleep better at night!

Contact me for your best mortgage options 705.669.7798 or trina@ndlc.ca

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