| Detail | Explanation |
|---|---|
| Who signs | Sponsors, key principals, or a parent entity |
| Common forms | Full payment, limited or partial, carve-out, completion |
| Lenders review | Guarantor net worth, liquidity, and contingent liabilities |
| Often negotiable | Cap, burn-off after stabilization, and which principals sign |
Why do commercial lenders require a personal guarantee?
The borrower on most commercial loans is a single-purpose entity whose only asset is the property. If the property's value falls below the loan balance, the lender's recovery from the entity stops at the collateral. A guarantee from someone with outside assets closes part of that gap and keeps the sponsor invested in the outcome.
Banks and credit unions often ask for full or partial payment guarantees, especially on smaller loans, owner-occupied property, and transitional assets. Lenders on stabilized permanent loans often make loans non-recourse and ask only for a bad boy carve-out guarantee.
What types of guarantees do lenders use?
- Full payment guarantee: the guarantor is liable for the entire debt, interest, and collection costs
- Limited guarantee: liability is capped at a dollar amount or a share of the loan
- Burn-off guarantee: the cap falls or ends once the property hits agreed tests such as occupancy or coverage
- Carve-out guarantee: liability applies only if listed bad acts or events occur
- Completion guarantee: the guarantor promises to finish construction and fund cost overruns
- Carry or interest guarantee: the guarantor covers interest, taxes, and insurance for a period
Worked example: a limited guarantee with a burn-off
In this hypothetical example, a sponsor borrows $4,000,000 on a value-add property and agrees to guarantee 25% of the loan, which caps personal exposure at $1,000,000 in total. The guarantee terminates once the property holds an agreed coverage level for 2 consecutive quarters. If the loan defaulted before that and the property sold for less than the balance, the lender could pursue the guarantor for the shortfall up to the cap, plus any enforcement costs the document allows.
How do lenders judge a guarantor?
Lenders usually ask for a personal financial statement, schedule of real estate owned, tax returns, and bank or brokerage statements. They focus on net worth, liquid assets, and contingent liabilities from guarantees on other loans. Many loan documents also require the guarantor to maintain minimum net worth and liquidity for the life of the loan and to report annually.
What can a sponsor negotiate?
Borrowers can often narrow a guarantee by capping the dollar amount, adding a burn-off tied to performance, limiting which principals sign, excluding spouses, or trading more equity or a lower loan amount for less recourse. The language in the guarantee controls, and small drafting differences can change liability a lot, so each guarantor should have independent counsel review the document. Capital Partners compares recourse terms across lenders along with proceeds and pricing, and the recourse versus non-recourse guide covers the tradeoffs. Lowering leverage is one way to reduce recourse, and the loan sizing calculator shows what a smaller loan does to coverage. Submit a deal to compare guarantee terms on a property.
Common questions
Can I get a commercial real estate loan without a personal guarantee?
Often yes, on stabilized property with moderate leverage. Life companies, CMBS lenders, and agency programs commonly lend non-recourse with carve-out guarantees. Smaller loans and transitional deals are more likely to need a payment guarantee.
Does a personal guarantee go away when the loan is paid off?
A payment guarantee generally ends when the debt is repaid in full. Some guarantees, such as environmental indemnities, can survive repayment, so read the survival clause.
Can a lender go after my house on a personal guarantee?
A guarantor with a judgment against them may have personal assets exposed, subject to the exemptions and procedures of the governing state law. A guarantor should ask their own attorney how that applies to them.
Is a guarantee required if my LLC has other members?
Lenders decide which principals must sign, often based on ownership share, control, and financial strength. Minority passive investors frequently do not sign, though practices vary.
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