A personal guarantee pledges the private assets of an individual borrower to secure a commercial mortgage. This unsecured written promise is not tied to a specific asset, such as a house, so any part of the borrower's assets can be used to repay the debt. If the investor defaults on the loan, a personal guarantee allows the lender to seek compensation for damages by going after the owner’s home, cash, and any other assets. Even if the entity that owns the property declares bankruptcy, the lender can still demand that the guarantor repay the value of the loan. Only a personal bankruptcy, in addition to business bankruptcy, would discharge this debt.

Personal guarantees are a common requirement when a business does not have enough credit to adequately secure the loan according to the lender's preferences or to address perceived risks in the commercial mortgage lender’s underwriting. Many lenders prefer personal guarantees because they believe that commercial property owners will be more cautious and less likely to default if their own finances are strongly tied to the successful payment of the loans.

The risks associated with providing a personal guarantee on a commercial mortgage include the potential for the lender to seek compensation for damages by going after the owner’s home, cash, and any other assets. Even if the entity that owns the property declares bankruptcy, the lender can still demand that the guarantor repay the value of the loan. Only a personal bankruptcy, in addition to business bankruptcy, would discharge this debt.

Additionally, if the property’s value decreases, the borrower could find themselves underwater on their loan – owing more than the property is worth. Before taking out a loan with a personal guarantee, be sure to speak with a qualified commercial real estate broker to discuss all of the risks and benefits associated with this type of financing.

The primary benefit of providing a personal guarantee on a commercial mortgage is that it allows the lender to seek compensation for damages by going after the owner’s home, cash, and any other assets if the investor defaults on the loan. This can provide the lender with a greater degree of security and assurance that the loan will be repaid. Additionally, many lenders prefer personal guarantees because they believe that commercial property owners will be more cautious and less likely to default if their own finances are strongly tied to the successful payment of the loans.

For more information, please see Understanding Personal Guarantees on Commercial Mortgages and What are the Benefits of Non-Recourse Loans?.

The primary alternative to providing a personal guarantee on a commercial mortgage is to obtain a non-recourse loan. Non-recourse loans are secured by the property itself, and the lender cannot pursue the borrower's personal assets if the loan is not repaid. However, most non-recourse loans require a carve-out guarantee, which gives the lender the authority to go after the borrower's personal assets if the loan is not repaid.

Sources:

• Understanding Personal Guarantees on Commercial Mortgages
• Carve-Out Guarantees in Commercial Real Estate Finance

Providing a personal guarantee on a commercial mortgage means that the individual borrower pledges their private assets to secure the loan. If the investor defaults on the loan, the lender can seek compensation for damages by going after the owner’s home, cash, and any other assets. Even if the entity that owns the property declares bankruptcy, the lender can still demand that the guarantor repay the value of the loan. Only a personal bankruptcy, in addition to business bankruptcy, would discharge this debt.

Carve-out guarantees are standard on almost all types of non-recourse commercial loans; if they are violated, they essential make the non-recourse loan into a full recourse financial instrument. Depending on the wording of the carve-out guaranty, the lender has the ability to either seek damages or the entire loan amount if there are any violations of the note or commercial mortgage loan agreement.

The best practices for providing a personal guarantee on a commercial mortgage are to ensure that all owners of the business who have at least 20% equity in the company guarantee the loan, and to include the names and information for each of these owners in the application paperwork. If the borrower and their spouse have at least 20% equity in the company, the spouse will also need to guarantee the loan. If the borrower is a sole proprietor, they will not need to provide a separate personal guarantee for the loan.

Sources:

• Understanding Personal Guarantees on Commercial Mortgages
• Using the SBA 7(a) Loan to Refinance Debt