4 Tips on Negotiating Personal Guarantees when Leasing Space for Small Businesses
Leasing space for small businesses can be difficult for tenants that don’t fully understand the commercial real estate process. One aspect of leasing space that small businesses should understand is the personal guarantee. Andy Mayr of NAI Michael provides some insight on how to best negotiate personal guarantees when leasing space for small businesses.
By Andy Mayr, CCIM
Landlords usually require their prospective tenants to provide business financials, such as tax returns, income statements, balance sheets, and personal financials before moving forward on a formal lease agreement. If the landlord is not comfortable with the review of these documents or requires additional security, s/he may also ask the tenant to sign a personal guarantee. In the event of leasing space for small businesses, it is especially important to understand personal guarantees. Personal guarantees have been around in the banking industry for many decades, though they have only been in the real estate leasing world for about the past 40 years.
A personal guarantee puts the tenant’s own assets — such as real estate, savings, or other valuables — on the line should their business not be in a position to pay rent or other lease obligations. If you are new to owning a business or desperate to obtain a lease, you might overlook the legality of the personal guarantee. It is important to know what you are committing to and that you can negotiate the extent of the guarantee. Landlords sometimes expect a tenant to either not accept or limit a guarantee to a specific financial or time constraint. The four most popular resolutions to achieving a mutually acceptable personal guarantee are as follows:
- Reduce the Time Period – Many personal guarantees are signed for the term of the lease, which exposes you to pay all rent up to lease expiration. You should try to negotiate an earlier end date, perhaps a term of 12 months, as long as you are timely with lease payments. An alternative is to have a rolling guarantee, which means your total rent liability would not exceed 12 months throughout the lease term, even if you defaulted and had three years remaining.
- Limit the Dollar Amount – You can also protect yourself by agreeing to a maximum dollar amount for unpaid rent if a default comes into play. In other words, if your 5-year rent payments amount to $300,000, and you reach an agreement guaranteeing $75,000, then your personal assets and collateral are not on the hook for the full $300,000. Rather, in this example, you would not have to repay more than $75,000 to settle a rent debt of a higher amount.
- Guarantee for All Partners – Sometimes, all partners in a business will have to sign the landlord’s personal guarantee. Usually, a personal guarantee has each partner responsible “jointly and severally,” which means the landlord can go after each for the full amount, if need be, to recover the amount owed. Tenants can sometimes negotiate that their percentage portion of the business ownership is the amount that the landlord can recover from each business partner. For example, you and each of your partners have a 25% interest in the business. Therefore, the landlord can only recover up to 25% from each partner. Also, it is always best to avoid having your spouse sign the personal guarantee, if possible. That way you protect the assets that are not owned jointly.
- Do NOT Risk All of Your Assets – Limit certain assets from what can be seized if you default; for instance, your primary residence. Florida and Texas have it written into law that banks cannot seize your homestead. If, however, you live in a state where this is not the case, you want to write that provision into your personal guarantee.
About Andy Mayr, CCIM
Mr. Mayr has been with NAI Michael since 1989, and has completed over 1,000 sales and leases. Click here to learn more about Andy or contact him with questions about your commercial real estate needs.