Buying Commercial Real Estate? Understanding Personal Guarantees And Your Loan

As a business owner, one of the biggest transactions you will ever embark on is buying your own commercial real estate. Since commercial real estate purchases are so complex, and because they are typically such high-value purchases, many banks look not only to the business for a financial guarantee, but they also look to the individual owners or executives as well. This is referred to as a personal guarantee, and here's what you need to know if your lender is asking for one.

What Is The Purpose Of A Personal Guarantee?

When it comes to commercial real estate loans, your lender is taking a significant risk. Commercial property values are often high, which means that the lender is facing a substantial loss if the loan is not repaid. 

A personal guarantee is a way to ensure that the bank has multiple avenues of resolution to seek repayment of your loan funds. Sometimes, when your business is unable to make the payments and is struggling financially, even the collateral that you've put up for the loan could prove to be insufficient to recoup the cost of the property. 

In those cases, the lender wants to ensure that they can get repayment for anything they are still owed on that loan. The personal guarantee lets them seek that repayment from anyone named in the guarantee.

What Are Your Personal Guarantee Options?

Personal guarantees come in many forms. If you are a sole proprietor, you may obtain a sole unlimited guarantee, in which you are the sole person responsible for paying the loan back should the bank deem it necessary. Just remember that, should you choose this option, your spouse will be legally obligated as well if your finances are jointly managed.

Joint unlimited guarantees are often used when there are multiple executives or responsible parties. The named parties, as a collective, are responsible for repaying the balance of the loan, and it is up to them how that responsibility is distributed among them.

You can also have a joint guarantee that allows the bank to seek restitution not only from all of you as a collective, but also from each one of you as individuals. This may introduce other considerations, particularly if one of you is deemed to be judgment-proof. A judgment-proof finding would eliminate that person from any financial responsibility.

There are also limited guarantees that only allow the bank to seek a limited amount from you as an individual, leaving the bank to take a loss on any remaining balance.