A Personal Guarantee refers to a commitment made by an individual (often a business owner, principal, or major stakeholder) to be personally liable for the repayment of debt or the performance of contractual obligations, typically in the context of a loan or lease.
When an entity, such as a corporation or limited liability company, seeks financing for a real estate project or enters into a lease agreement, the lender or lessor might be concerned about the entity’s ability to meet its obligations. This is especially true for newer entities without a proven track record. In such cases, the lender or lessor might request a personal guarantee from the principal stakeholders of the entity.
By providing a personal guarantee, the individual guarantor promises to cover the debt or obligations if the entity defaults or fails to meet its responsibilities. This means that the lender or lessor can pursue the personal assets of the guarantor to satisfy the debt or obligation.
It’s a way for the lender or lessor to mitigate their risk, as they have an additional party (the guarantor) to hold accountable. However, for the guarantor, it means increased exposure to risk, as their personal assets could be at stake in the event of a default.
In the real estate investment industry, personal guarantees are commonly associated with:
- Mortgage Loans: Especially when a new or less-established entity is buying a property.
- Lease Agreements: Commercial landlords might require a personal guarantee when leasing space to new or less-established businesses to ensure they get paid even if the business fails.
- Development or Construction Loans: Given the risks associated with large projects, lenders may require personal guarantees from the developers or principals of the investing entity.
It’s always advisable for individuals considering providing a personal guarantee to consult with legal and financial professionals to understand the potential risks and liabilities involved.