One of the most frequent deal-killers for prospective Tenants is the Personal Guarantee, which is why we discuss it at the beginning, not the end, of the site selection process. While not all Landlords require a personal guaranty, the vast majority do, so it’s something prospective tenants should be prepared for well in advance of submitting an Letter of Intent to Lease (LOI).
Why is guarantee required? When you sign a lease at a property, you are guaranteeing that you will make rent payments over a specified period of time, often five years or more. Based on that promise of performance from you, the Landlord is spending money for leasing commissions, tenant improvements, abated rent, etc. The Landlord frequently finances the up-front costs via a bank loan, so it’s imperative that they have some assurance that you will be able to make the rent payments even in the event of an economic turndown, a non-performing business model, outside industry forces, etc. – all the things that could affect your business performance.
What am I guaranteeing? Since you are guaranteeing your ability to pay rental obligations over the term of a lease, that’s the amount of your guarantee. For example, if you want to lease a space with a rent of $3,000 a month for a period of five years, you are guaranteeing performance on a $180,000 obligation.
Can I support a guarantee? Even though we have this discussion at the beginning of the site selection process, our clients still get tripped up by the guarantee. Why? Because there’s a disconnect between the financial obligation and the client’s net worth.
The client’s net worth needs to provide the Landlord a level of assurance that the Tenant will be able to perform over the entire term of the lease, regardless of business factors that are completely outside of the Landlord’s control.
For example, if my net worth is $30,000 and my guarantee would be for $180,000, I cannot support the guarantee. And from a Landlord’s perspective, they would be much better off accepting an offer (even a lower one) from a prospect that has a net worth of $300,000 over my $30,000.
Real Property vs. Liquid Assets. It’s not only the net worth that matters, it’s the assets making up that net worth, such as real property (a house or real estate investment). That’s because, should a Tenant fail to perform on the lease, the Landlord then has the right in the future to attach a lien to real property to assure that they will get paid for any default. Your cash in the bank may be gone by the time the default occurs, so cash and other liquid assets are not rated as strongly as hard assets.
A personal guarantee should never be taken lightly by either party. It’s a real guarantee, enforceable in court and attachable to your assets.
As a Tenant, no one wants to see you fail. That’s why it’s important to manage your expectations in advance of your site selection journey so you can streamline your search and focus on rental arrangements that both you and the Landlord are comfortable with. Start today by requesting our Net Worth Worksheet today!