Real estate often proves to be an excellent investment.
Whilst typically many would go down the route of purchasing a residential property (for example, those who buy off-plan property or invest in buy-to-let), this does not necessarily mean that this is the only option available. Even relatively inexperienced investors are now finding it easy to become involved with commercial projects that can even, from time to time, produce more significant returns than the residential alternatives.
Companies that list and lease commercial real estate make it clear just how much demand there is for these sorts of properties. Investors who wish to contribute to increased supply have plenty of options before them.
Investing in commercial properties has become more popular in recent years. Along with it, industrial properties are also seeing considerable investments increase. For instance, an industrial property Greenpoint based is an excellent choice for those looking to invest in a raising commercial area.
Naturally enough, buying and making money with commercial property differs in some significant ways from doing so with residential real estate. Many investors, for instance, first come across personal guarantee terms in their loan documents when they start working with commercial properties. There are three particularly important things to realize about such clauses, a look at each of which follows.
There are Several Common Personal Guarantee Structures
A personal guarantee clause in a loan contract obliges at least one party to satisfy the debt under specified circumstances. There are a number of common structures that are employed to make sure each such arrangement suits the project to be financed. These are all also found in other types of contracts, with well-established legal precedents governing how they work.
Individual investors who complete commercial property purchases alone are normally asked to provide “sole unlimited” personal guarantees. Partnerships will typically commit to “joint and several” guarantees that make each member liable for the outstanding amount of the loan, should that be necessary. Lenders who are particularly confident in the ability of partnerships to satisfy the terms of loans will sometimes accept “joint unlimited” guarantees, instead.
Personal Guarantees are Generally Subject to Negotiation
Many standard commercial loan contracts come with personal guarantee terms already incorporated. In most cases, lenders will be willing to negotiate, as long as the value of the loan is high enough to justify the required effort.
Investors can make things easier on themselves by studying up on how to negotiate commercial loans before that becomes necessary. Being prepared to work with another lender or arrange for a different sort of financing will put a would-be borrower in a position of increased leverage when negotiating.
It will often be desirable to weaken the terms of a personal guarantee to limit the amount of financial damage that could potentially be done. Being able to begin a commercial investment project with the knowledge that it can only possibly have a defined, manageable impact on personal finances will generally be welcome.
Personal Guarantees are Always the Last Resort
Virtually all loans used to buy commercial properties are primarily secured with the title to the associated real estate. Lenders also take into account the likelihood that rental income or other associated sources of revenue will be enough to keep a commercial borrower current.
Only when these sorts of recourse all prove insufficient will an investor become personally liable for the repayment of a loan. Investors who are taking their first steps with commercial properties sometimes overlook this fact and end up being overly intimidated by the possibility of personal liability.
It will always be wise to gauge just how much of an impact a given personal guarantee clause might have if it ends up being activated. At the same time, investors should not shy away from committing to such agreements if everything else about a project seems to be in order. The best way to become comfortable with personal guarantees is to learn as much about them as possible.
Personal guarantee is among the many terms that you’ll come across when you venture into commercial real estate investing. It’s always prudent to do your research so that you’d be clear on your rights and obligations. You may have also heard about sponsors in real estate deals. Learn more about what a sponsor does and how investors rate them by performance, reporting, and such.
Have more questions? Let us know below.