In Part 1 of this blog we discussed what a personal guarantee can mean in a residential loan. In this section we discuss what they can mean in a commercial loan.  For a borrower of commercial real estate loans signing a personal guarantee is much more complicated and it is highly important to understand what it means and how it works.

Title to most commercial real estate now is help by an LLC.  For purposes of this blog we will assume this to be the case.  Let’s assume that you are purchasing a warehouse for $1,000,000, making a $200,000 cash down payment, and borrowing the remaining $800,000 from your bank secured by a first deed of trust. In addition to having you sign a Promissory Note for $800,000 and giving the bank a deed of trust, the bank is almost always going to require that you sign a “Guarantee Agreement”.  This Guaranty makes you personally liable for the real estate loan that is secured by the commercial property owned by your LLC.

If your real estate loan is $5,000,000 or more you probably can get what is called a “non-recourse” loan which means that you as an individual are not responsible for the real estate loan to the LLC that you manage. Even if this option is offered, most lenders have certain “carve-outs” (for example for fraud) that limit the extent of the non-recourse feature.   However, bank or institutional lenders of commercials loans under several millions of dollars are not as likely to offer a non-recourse option.

If the bank ends up foreclosing on your $800,000, loan it can pursue many options including some that most borrowers are not aware of.  The bank can follow the typical route and foreclose which takes about 5 months.  At the end of the foreclosure process the bank must tender a “bid” to the Public Trustee for whatever amount they feel they can substantiate. Also, don’t forget the amount you will owe the bank can go up exponentially since they are entitled to charge delinquent interest and add in all legal as well as other costs.   If you owed $800,000 when the foreclosure started you may well owe $900,000 or more when the property goes to foreclosure sale.

The bank can bid $700,000 and then assert a $200,000 deficiency judgment against the guarantor (i.e. you).  You do have the ability to go into Court to make the bank prove their $700,000 bid was reasonable compared to the value of the property.  This however can be a difficult and expensive legal process for the borrower to pursue.  If the Court grants the bank’s motion for a deficiency judgment, then the bank can attempt to attach your individual bank accounts, garnish your salary if you are employed, and in general go after any personal property or other real property that you own in your own name.  The bank may not do this, but they have full legal rights to do so.  Guarantors of commercial real estate loans need to carefully understand what they are doing before they agree to sign these documents.

Another option that a bank may follow is to sue the Guarantor under the personal guarantee right away and foreclose later.  There are a number of ways that this option can be played.  It is not common, but it is legally possible.

Disclaimer / This blog is written by Bob Amter drawing on his 41 years of private money lending in Colorado.  Bob is not an attorney and any legal information discussed in this blog is Bob’s own personal understanding of certain lending practices and is not intended as legal advice for any of his readers.  Bob not only advises borrowers who are working with Montegra to use an attorney to represent them – he requires it.

[google_authorship], because of his more than 40 years of experience in funding hard money loans, is considered an authority on hard money or bridge financing.  He frequently speaks at meetings and conferences and writes articles on these subjects.