When is a Personal Guaranty Not Needed in a Commercial Lease?

I recently had a conversation with a client regarding obtaining a personal guaranty for a lease that was executed by an individual “doing business as.”  I am under the impression that a guaranty of lease is only necessary when a lease is executed where the tenant is a corporation or LLC.

Being a CCIM Designee I have the availability of asking the opinion of thousands of fellow CCIM brokers across the nation.  I posed the question, “Is a guaranty of lease needed to secure personal liability when the lease is executed by an individual?” to approximately 8,000 brokers – and the replies came pouring in. 

You can arrive at your on decision, but in my opinion a personal guaranty is not needed when the lease is executed by an individual.  However, it is important to get the tenant’s spouse either on the lease as a co-tenant or as a guarantor (at least in California).

One more thing, I am not an attorney, nor do I claim to be one.  When it comes to specific lease terminology I would suggest you seek the counsel of an attorney.

-Burt

Here is a list of some of the responses:

• I always try and get a personal guaranty as well as the signature on the lease. My standard leases are set up that way.

• No, when the person signs individually, my understanding is that they are personally guaranteeing the lease.  I do a lot of tenant and landlord rep and that is how both sides as well as their attorneys have handled it.  In my area, landlord’s get personal guarantees on businesses that are not necessarily sole proprietors unless they have a long history of existence as well as strong balance sheets.

• No, the individual by signing is guaranteeing the lease.

• We always require a personal guarantee on the lease signed by the husband and wife for every member of the tenant group. Exception is a national corporate lease guaranteed by the national corporation.

• According to my trusted CA real estate attorney the answer is "no".

• I just went through this with our attorney and he indicated the sole proprietor is the guarantee.  Getting a guarantee is a duplicate effort.

• A personal guaranty is not necessary, but it is expedient.  A personal guaranty takes very little to perfect a judgment.  Collecting under a lease is a long process subject to various state law, and mitigation of damages.

• A Personal Guarantee is only good from a viable third party.  An individual signing a lease in a personal capacity (not in a corporate officer or LLC managing member capacity) cannot Guarantee their own lease, that's why you have them sign personally to begin with.  If the issue is more technical than that suggest your client contact his attorney for specifics to the proposed lease transaction.

• Yes.

• No, it is redundant in the case of a sole proprietor because there is no separate legal entity other than the individual himself.  However, if it makes your client more comfortable, your sole proprietor tenants can simply execute leases on behalf of themselves without the d.b.a. reference.  It shouldn't matter to the tenant, and it should give your less-than-knowledgeable landlord the peace of mind he needs.

• A personal signature is pretty much the same thing as a personal guarantee. I’m sure the owner will want to review the individual’s financial statement and credit report.  During these tough times, perhaps the owner will have more options to choose from if he doesn’t require a personal guaranty. A lot of potential tenants will simply pass if they need to put their personal assets at risk.  Check out other options to secure the lease.

• In my experience, if the lessee (Tenant) is an individual, no additional personal guarantee required, but it doesn’t hurt to have one.  That being said, California is a community property state; therefore, you need to get the spouse to sign as well, if the lessee is married.  In that case, the lease would be under the name of both spouses with both executing the lease. I’m sure you already have a credit report, but if you don’t, then include the home address, phone and SSN’s in the signature block.

• No.

• I require a personal guarantee because I deal in a multi state territory. Not being a lawyer I don't want to risk loosing personal liability over technicalities that vary state to state. Also this provides insulation from evolving case law & new legislation that might slip by me.  No, it is redundant and unnecessary.  It is like saying if you die, I am going to shoot you too.  It would be like getting a personal guaranty on your home mortgage, that is in your individual name.

• The exception to it being redundant is if the sole proprietor is married, and then a personal guaranty would have value to the landlord, IF his/her spouse signed it (and was not already on the lease itself).

• If you indicate the person’s name and identify as an individual, then it is not necessary to get a personal guaranty because he is acknowledging that he is signing as an individual.   If he is a married man it is a good idea to have his wife acknowledge the lease; although again, not necessary.   Example John Smith, an individual, dba ACB Company, a sole proprietor.  Also make sure the signature page is the same.

• In my experience the individual signature is the same as a guaranty.  I have had property owners (mostly small property owners) who require a bank letter of credit.

• You do not need a personal guaranty if the individual is signing.  Only for corporate leases, LLC, etc.

• In that case, the personal guaranty would be redundant.  As long as the tenant is identified as [individuals name], individually and doing business as [name of dba], that should suffice.

• My experience includes GA, Fl, NM, and TX. If lease is as individual regardless of dba status it's as good as a signed guaranty.

• It’s been my understanding that a personal guaranty is not necessary when and individual is signing the lease as a sole proprietor.  However, there are some in the legal community that may disagree with this.  Generally speaking, when an individual signs a contract as an individual they are bound by the terms of that contract and offer their personal assets as a guaranty for payment.  Keep in mind that I have also been instructed that personal pension plans (i.e. 401K’s, etc.) are exempt from being used as collateral.  I would suggest that you seek further legal advice on this topic.

• If the natural person named on the lease is the same as that on the guarantee, the guarantee will not add anything more to the the individual's obligations or liabilities than is already set out in the lease. If this person is married and the state is a community property state (as California is), the spouse should sign the lease as well.

• I’m curious what an attorney would say and how the laws in the state of California affect this, but typically a personal guarantee is a third party (a natural person or community property estate in the case of a personal guarantee) and not the entity signing the lease (whether the lessee is a natural or unnatural person in the case of a corporation) who guarantees performance of the lease terms in addition to the liability incurred by the entity (natural person or otherwise) entering the lease.

• I am not an attorney but in my opinion if the tenant signs the lease as an individual vs owner of “ABC, LLC” you should have a personal guarantee.

• You are correct - a lease signed by an individual is a personal guaranty. The only reason for any additional document would be if there were some specific terms of the guaranty that the owner wanted spelled out.

• I am a CCIM and California real estate attorney (28 years). Generally, the guaranty in such a situation is redundant (often called a sham guaranty); however, sometimes the guaranties contain certain waivers of rights which would otherwise be available to the underlying obligor (here the tenant). If representing the tenant, I would certainly argue that the requirement for the tenant to execute a guarantee of an already existing lease obligation is not appropriate.  So it boils down to what’s in the guaranty. Generally, however, I do not recommend it. If, at some point, the tenant wanted to assign the lease, and your client did not want to release the original tenant but permit the assignment , then for clarity a guaranty should be executed as a part of the landlord’s consent to the assignment (typically, however, unless the lease otherwise provides, the original tenant is not released unless by express written release.  Please be advised, the foregoing is being provided to you as a courtesy only, and no attorney/client relationship has been established. Your client should seek counsel from an attorney, and rely on that advice given in the context of an attorney-client relationship, as any direct advice you give to him would constitute the practice of law, which you would want to avoid unless you are a licensed attorney.

• I'm not an attorney, but in all my years of leasing, if the tenant is an individual, then a personal guaranty is redundant. The "dba" doesn't affect the fact that the tenant is the individual. I have seen wording that specifically describes the tenant as an individual, e.g. "John H. Doe, and individual, doing business as ABC Roofing".  The other issue, of course, is if the individual is married, then you really need the spouse either named as the tenant or as a guarantor. Otherwise, assets held jointly like their house, are not accessible for the landlord.

• In my opinion, if the lease is in the name of the tenant (i.e., John Q. Public) and signed by the tenant, no guaranty is needed. "Doing business as" does not lessen the tenant’s personal liability.

• Based on my understanding, an individual signing a lease is already on the hook 100%.  But we make sure that if he's married, we have both spouses execute the lease.  That way, if they divorce two years into the lease, you're not limited to assets retained by the signer.  You still have access to assets transferred to the ex-spouse as well.  Also wanted to offer up a suggestion, based on our experience here:  You could probably get your owner to accept varying levels of personal guarantees.  We have seen guarantees that fluctuate between full and limited guarantees.  We have negotiated guarantees that decrease over time.  Also, some of our guarantees have been set to equal certain dollar amounts, such as the amount of Tenant Improvements.

• If they sign personally on the lease (not d/b/a) there is no need for a personal guaranty (that is what my attorney has always advised).

• No, but pending the State we have the spouse as a guarantor and then if their joint financials are weak we ask for another party to also be a guarantor.

• The attorneys I’ve worked with over the years on leases have consistently indicated that adding a personal guarantee when the defined tenant is an individual is redundant.  That party is already obligated per the lease with or without an additional express guarantee.  Thus the guarantee is to add an additional party essentially as a co-signor, not the primary party, but to guarantee if the primary party does not fulfill its obligations.

• If the lease is to an individual, a guaranty by that individual is redundant.

• Nope.  When the individual signs for himself he is personally liable.  The dba means nothing... doesn't shield him.

Why Toxic Assets Are So Hard to Clean Up

Securitization was maddeningly complex. Mandated transparency is the only solution.

By KENNETH E. SCOTT and JOHN B. TAYLOR

Despite trillions of dollars of new government programs, one of the original causes of the financial crisis -- the toxic assets on bank balance sheets -- still persists and remains a serious impediment to economic recovery. Why are these toxic assets so difficult to deal with? We believe their sheer complexity is the core problem and that only increased transparency will unleash the market mechanisms needed to clean them up.

The bulk of toxic assets are based on residential mortgage-backed securities (RMBS), in which thousands of mortgages were gathered into mortgage pools. The returns on these pools were then sliced into a hierarchy of "tranches" that were sold to investors as separate classes of securities. The most senior tranches, rated AAA, received the lowest returns, and then they went down the line to lower ratings and finally to the unrated "equity" tranches at the bottom.

But the process didn't stop there. Some of the tranches from one mortgage pool were combined with tranches from other mortgage pools, resulting in Collateralized Mortgage Obligations (CMO). Other tranches were combined with tranches from completely different types of pools, based on commercial mortgages, auto loans, student loans, credit card receivables, small business loans, and even corporate loans that had been combined into Collateralized Loan Obligations (CLO). The result was a highly heterogeneous mixture of debt securities called Collateralized Debt Obligations (CDO). The tranches of the CDOs could then be combined with other CDOs, resulting in CDO2.

Each time these tranches were mixed together with other tranches in a new pool, the securities became more complex. Assume a hypothetical CDO2 held 100 CLOs, each holding 250 corporate loans -- then we would need information on 25,000 underlying loans to determine the value of the security. But assume the CDO2 held 100 CDOs each holding 100 RMBS comprising a mere 2,000 mortgages -- the number now rises to 20 million!

Complexity is not the only problem. Many of the underlying mortgages were highly risky, involving little or no down payments and initial rates so low they could never amortize the loan. About 80% of the $2.5 trillion subprime mortgages made since 2000 went into securitization pools. When the housing bubble burst and house prices started declining, borrowers began to default, the lower tranches were hit with losses, and higher tranches became more risky and declined in value.

To better understand the magnitude of the problem and to find solutions, we examined the details of several CDOs using data obtained from SecondMarket, a firm specializing in illiquid assets. One example is a $1 billion CDO2 created by a large bank in 2005. It had 173 investments in tranches issued by other pools: 130 CDOs, and also 43 CLOs each composed of hundreds of corporate loans. It issued $975 million of four AAA tranches, and three subordinate tranches of $55 million. The AAA tranches were bought by banks and the subordinate tranches mostly by hedge funds.

Two of the 173 investments held by this CDO2 were in tranches from another billion-dollar CDO -- created by another bank earlier in 2005 -- which was composed mainly of 155 MBS tranches and 40 CDOs. Two of these 155 MBS tranches were from a $1 billion RMBS pool created in 2004 by a large investment bank, composed of almost 7,000 mortgage loans (90% subprime). That RMBS issued $865 million of AAA notes, about half of which were purchased by Fannie Mae and Freddie Mac and the rest by a variety of banks, insurance companies, pension funds and money managers. About 1,800 of the 7,000 mortgages still remain in the pool, with a current delinquency rate of about 20%.

With so much complexity, and uncertainty about future performance, it is not surprising that the securities are difficult to price and that trading dried up. Without market prices, valuation on the books of banks is suspect and counterparties are reluctant to deal with each other.

The policy response to this problem has been circuitous. The Federal Reserve originally saw the problem as a lack of liquidity in the banking system, and beginning in late 2007 flooded the market with liquidity through new lending facilities. It had very limited success, as banks were still disinclined to buy or trade such securities or take them as collateral. Credit spreads remained higher than normal. In September 2008 credit spreads skyrocketed and credit markets froze. By then it was clear that the problem was not liquidity, but rather the insolvency risks of counterparties with large holdings of toxic assets on their books.

The federal government then decided to buy the toxic assets. The Troubled Asset Relief Program (TARP) was enacted in October 2008 with $700 billion in funding. But that was not how the TARP funds were used. The Treasury concluded that the valuation problem seemed insurmountable, so it attacked the risk issue by bolstering bank capital, buying preferred stock.

But those toxic assets are still there. The latest disposal scheme is the Public-Private Investment Program (PPIP). The concept is that private asset managers would create investment funds of half private and half Treasury (TARP) capital, which would bid on packages of toxic assets that banks offered for sale. The responsibility for valuation is thus shifted to the private sector. But the pricing difficulty remains and this program too may amount to little.

The fundamental problem has remained untouched: insufficient information to permit estimated prices that both buyers and sellers find credible. Why is the information so hard to obtain? While the original MBS pools were often Securities and Exchange Commission (SEC) registered public offerings with considerable detail, CDOs were sold in private placements with confidentiality agreements. Moreover, the nature of the securitization process has made it extremely difficult to determine and follow losses and increasing risk from one tranche and pool to another, and to reach the information about the original borrowers that is needed to estimate future cash flows and price.

This account makes it clear why transparency is so important. To deal with the problem, issuers of asset-backed securities should provide extensive detail in a uniform format about the composition of the original pools and their subsequent structure and performance, whether they were sold as SEC-registered offerings or private placements. By creating a centralized database with this information, the pricing process for the toxic assets becomes possible. Making such a database a reality will restart private securitization markets and will do more for the recovery of the economy than yet another redesign of administrative agency structures. If issuers are not forthcoming, then they should be required to file the information publicly with the SEC.

Mr. Scott is a professor of securities and corporate law at Stanford University and a research fellow at the Hoover Institution. Mr. Taylor, an economics professor at Stanford and senior fellow at the Hoover Institution, is the author of "Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis" (Hoover Press, 2009).

-The Wall Street Journal

New Loan Disclosure Rules May Potentially Affect Close of Escrow

Starting July 30, 2009, if the APR on an initial Good Faith Estimate is no longer accurate (within a 0.125% range) at close of escrow, a lender must generally provide a residential borrower with a new disclosure and a three-day right to rescind before consummating the loan.  REALTORS® are forewarned that, because of this new three-day waiting period, a lender's failure to timely provide corrected disclosures has the potential of delaying funding of the loan and close of escrow.

This new requirement is part of the Mortgage Disclosure Improvement Act (MDIA) implementing new loan procedures to protect borrowers and foster greater transparency in mortgage lending.  For loan applications submitted on or after July 30, 2009, the new MDIA changes to the Truth In Lending Act are generally as follows:

• Applicability: The new MDIA rules pertain to federally-related mortgage loans covered under RESPA and secured by a consumer's dwelling.  The rules apply to both purchase and refinance loans.
• Early Disclosures: A lender must provide a borrower with an initial Good Faith Estimate within three business days of receiving the borrower's written loan application as specified.  For this provision, a "business day" is generally defined as a day on which the lender's offices are open for business.
• Upfront Fees Restriction: Neither a lender nor any other person may impose an upfront fee on the borrower (except for credit report) until the borrower has received the early disclosures in person or, if mailed, three business days after the early disclosures are mailed.  For this rule, a "business day" is defined as all calendar days except Sundays and legal public holidays as specified.
• Seven-Day Waiting Period: A lender must wait seven business days after providing the early disclosures before consummating the loan.  For purposes of this waiting period, a "business day" is defined as all calendar days except Sundays and federal legal holidays as specified.  A borrower may waive the waiting period in writing in case of personal financial emergency, such as an imminent foreclosure sale.
• Re-disclosure Requirement: If the final Annual Percentage Rate (APR) at loan consummation varies more than 0.125% (or 1/8 of one percent) from the initial APR on the early disclosures of a regular transaction, the lender must provide the borrower with a corrected disclosure at least three business days before the loan is consummated.  For purposes of this waiting period, a "business day" is defined as all calendar days except Sundays and federal legal holidays as specified.
• Three-Day Waiting Period: For corrected disclosures, a lender cannot consummate a loan until three business days after the the borrower receives the corrected disclosure in person.  If the corrected disclosure is mailed, the borrower is deemed to have received it three business days after it is placed in the mail.  A borrower may waive this waiting period in writing in case of a bona fide personal financial emergency, such as an imminent foreclosure sale.

The new MDIA rules and regulations are set forth at 74 Federal Register 23,289 (May 19, 2009) (to be codified at 12 CFR 226).

GLEN COVE SHOPPING CENTER SELLS FOR $12.9 MILLION

VALLEJO, CALIF. — Newport Beach, Calif.-based Yacoel Properties has purchased Glen Cove Shopping Center, a retail property located in the Glen Cove section of Vallejo along Interstate 780. The 66,000-square-foot property sold for $12.9 million, which equated to a 7.71 percent cap rate. A 50,360-square-foot Safeway supermarket anchors the center. The seller is a joint venture between Kimco Realty Corp. and Prudential Real Estate Investors.

-Western Real Estate Business

SUNSTONE HOTEL INVESTORS SELLS MARRIOTT NAPA FOR $36 MILLION

NAPA, CALIF. — Sunstone Hotel Investors Inc. has completed the disposition of the 274-room Marriott hotel in Napa. The property sold for $36 million. Sunstone estimates that the hotel would require approximately $6 million in near-term renovations to comply with Marriott brand standards. The gross proceeds of $36 million, plus the $6 million of renovations that Sunstone will not have to spend, equates to a 10.5x 2009 EBITDA multiple. The buyer was not disclosed.

-Western Real Estate Business, July 2009