{"id":1187,"date":"2013-07-16T13:26:00","date_gmt":"2013-07-16T13:26:00","guid":{"rendered":"https:\/\/www.sherin.com\/real-estate\/2013\/07\/16\/to-guaranty-or-not-to-guaranty\/"},"modified":"2017-03-21T18:47:53","modified_gmt":"2017-03-21T18:47:53","slug":"to-guaranty-or-not-to-guaranty","status":"publish","type":"post","link":"https:\/\/www.sherin.com\/real-estate\/2013\/07\/16\/to-guaranty-or-not-to-guaranty\/","title":{"rendered":"To Guaranty or Not to Guaranty?"},"content":{"rendered":"<p>Real estate professionals often ask themselves this question when negotiating terms of a loan. The pros know the script well:<\/p>\n<p>The customer, Slim Pickens, says to the banker, Sticky Fingers, with an edge:\u00a0 \u201cSticky, if you did your underwriting properly, you would know that you don\u2019t need my guaranty.\u00a0 The tenants are sound, and there is more than ample equity in the property.\u00a0 Why do we always need to play this game? Besides it makes my personal financial statement less desirable to my other lenders.\u201d<\/p>\n<p>Sticky Fingers replies defensively:\u00a0 \u201cSlim, we did the underwriting just right; that\u2019s not the issue.\u00a0 You know our bank\u2019s policy on personal guarantees, and this is a seven year loan. Anything can happen to those tenants during that period.\u00a0 We need to make sure you stay incentivized when things go bad.\u00a0 The guaranty will do that. \u00a0Just think of it as an umbrella in the sunshine.\u201d<\/p>\n<p><!--more--><\/p>\n<p>And so it goes.\u00a0 Each side espouses the merits and demerits of the personal guaranty.<\/p>\n<p>What can the customer or banker do when the guaranty becomes a perceived red line?\u00a0 Is there some middle ground?\u00a0 There is if both sides are willing to compromise.\u00a0 Here are some approaches to consider:<\/p>\n<ol>\n<li>If there is more than enough equity in the property, at least a 50% or 60% loan to value, the bank probably does not need a full payment guaranty.\u00a0 One solution for the bank may be a so-called springing guaranty, one that \u201csprings\u201d into life when an appraisal of the property reveals a loan to value that exceeds 65%, 70%, 75%, etc\u2026.. , a percentage to be negotiated.\u00a0 Or, a limited guaranty could be required at closing for a percentage of the principal of the loan.<\/li>\n<li>If the equity is enough to satisfy the bank for a loan but not enough to waive a guaranty, close the loan with a guaranty and agree to test debt service coverage or the loan to value ratio on each anniversary date. \u00a0If the either of those financial covenants reach a pre-negotiated threshold, the guaranty is terminated.<\/li>\n<li>Another possibility is what\u2019s commonly referred to as a secondary guaranty.\u00a0 Most payment guarantees are primary.\u00a0 The lender need not wait to foreclose its mortgage before enforcing its rights under the guaranty. \u00a0It can do so as soon as the loan is called after default.\u00a0 A secondary guaranty requires the lender to exhaust its remedies against the real estate first before chasing a guarantor.\u00a0 Only if a deficiency results from a foreclosure, can the lender enforce the guaranty.\u00a0 Lenders do not favor secondary guarantees because by the time the foreclosure is completed (sometimes after a brawl in a bankruptcy court), the guarantor\u2019s net worth may be depleted.<\/li>\n<li>Customer can also provide additional collateral.\u00a0 The bank will prefer liquid collateral such as cash deposits or marketable securities.\u00a0 The customer will prefer illiquid collateral such as a mortgage on his other properties.\u00a0 If a mortgage is offered, the bank will want it to be in first position.\u00a0 But the customer may not have unencumbered property so a second and even a third mortgage may be all he can offer. \u00a0\u00a0The bank may be persuaded if the customer can demonstrate enough equity behind a first mortgage.<\/li>\n<\/ol>\n<p>With a good and long lasting relationship between customer and banker, the question to guaranty or not to guaranty need not be perplexing.\u00a0 Reasonable people will generally find reasonable solutions to their differences.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Real estate professionals often ask themselves this question when negotiating terms of a loan. The pros know the script well: The customer, Slim Pickens, says to the banker, Sticky Fingers, with an edge:\u00a0 \u201cSticky, if you did your underwriting properly, you would know that you don\u2019t need my guaranty.\u00a0 The tenants are sound, and there [&hellip;]<\/p>\n","protected":false},"author":9,"featured_media":1755,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":"","_links_to":"","_links_to_target":""},"categories":[],"tags":[],"class_list":["post-1187","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.8 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>To Guaranty or Not to Guaranty? - Real Estate<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.sherin.com\/real-estate\/2013\/07\/16\/to-guaranty-or-not-to-guaranty\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"To Guaranty or Not to Guaranty? - Real Estate\" \/>\n<meta property=\"og:description\" content=\"Real estate professionals often ask themselves this question when negotiating terms of a loan. The pros know the script well: The customer, Slim Pickens, says to the banker, Sticky Fingers, with an edge:\u00a0 \u201cSticky, if you did your underwriting properly, you would know that you don\u2019t need my guaranty.\u00a0 The tenants are sound, and there [&hellip;]\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.sherin.com\/real-estate\/2013\/07\/16\/to-guaranty-or-not-to-guaranty\/\" \/>\n<meta property=\"og:site_name\" content=\"Real Estate\" \/>\n<meta property=\"article:published_time\" content=\"2013-07-16T13:26:00+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2017-03-21T18:47:53+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.sherin.com\/real-estate\/wp-content\/uploads\/sites\/2\/2013\/07\/10524414_s.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"450\" \/>\n\t<meta property=\"og:image:height\" content=\"300\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Sherin and Lodgen\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Sherin and Lodgen\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"3 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\\\/\\\/www.sherin.com\\\/real-estate\\\/2013\\\/07\\\/16\\\/to-guaranty-or-not-to-guaranty\\\/#article\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/www.sherin.com\\\/real-estate\\\/2013\\\/07\\\/16\\\/to-guaranty-or-not-to-guaranty\\\/\"},\"author\":{\"name\":\"Sherin and Lodgen\",\"@id\":\"https:\\\/\\\/www.sherin.com\\\/real-estate\\\/#\\\/schema\\\/person\\\/96bd34e7823afde2e3e7e561023c5a44\"},\"headline\":\"To Guaranty or Not to Guaranty?\",\"datePublished\":\"2013-07-16T13:26:00+00:00\",\"dateModified\":\"2017-03-21T18:47:53+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\\\/\\\/www.sherin.com\\\/real-estate\\\/2013\\\/07\\\/16\\\/to-guaranty-or-not-to-guaranty\\\/\"},\"wordCount\":575,\"commentCount\":0,\"image\":{\"@id\":\"https:\\\/\\\/www.sherin.com\\\/real-estate\\\/2013\\\/07\\\/16\\\/to-guaranty-or-not-to-guaranty\\\/#primaryimage\"},\"thumbnailUrl\":\"https:\\\/\\\/www.sherin.com\\\/real-estate\\\/wp-content\\\/uploads\\\/sites\\\/2\\\/2013\\\/07\\\/10524414_s.jpg\",\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\\\/\\\/www.sherin.com\\\/real-estate\\\/2013\\\/07\\\/16\\\/to-guaranty-or-not-to-guaranty\\\/\",\"url\":\"https:\\\/\\\/www.sherin.com\\\/real-estate\\\/2013\\\/07\\\/16\\\/to-guaranty-or-not-to-guaranty\\\/\",\"name\":\"To Guaranty or Not to Guaranty? 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