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socrateaser, Lawyer
Category: Real Estate Law
Satisfied Customers: 38879
Experience:  Attorney and Real Estate broker -- Retired (mostly)
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We purchased a commercial property in 2008. The property is

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We purchased a commercial property in 2008. The property is owned by a LLC, the members of which are owners of the corporation occupying the property. We are currently refinancing the first and leaving the second (SBA loan) as is. The original loan had guarantees from our two corporations and personal guarantees from the trusts of the LLC members.
The first is $293,000 and the second is $225,00. The bank refinancing the first wants the continuing guarantees ($300,000 from each of the two corporations, $300,000 from each of the two trusts) included in the refinance.
Is it possible to renegotiate the guarantees with the banks? We want to minimize our personal exposure. Is there ever a situation where the corporate guarantees would be sufficient without requiring the personal guarantees? If we have to continue the personal guarantees, do you recommend buying PG Insurance?

I am frequently confronted with questions about whether or not it is possible to negotiate with a lender over the terms and conditions of a personal guarantee. A bank is in the business of making loans, subject to reasonable security from the borrower. Usually, if the equity of a property is sufficient, or a corporation is demonstrated to have substantial retained earnings, then no personal guarantee is required.

However, there is no "rule," here. A bank engaging in a commercial loan is not subject to any federal regulations, in the same manner as would be a bank engaging in a residential loan transaction. Consequently, the bank can do whatever it believes is in its shareholders' interests.

So, the answer here is, "yes," you can get rid of the personal guarantees -- but, whether or not the bank will actually make such a loan is entirely up to the bank's underwriting committee. There is no way for you to know in advance what the bank will decide. You will have to make a credible argument that a personal guarantee is unnecessary.

Concerning insurance, the answer is that it depends on the guarantor's personal risk. If the PG is personally on the verge of insolvency, then there's no reason to be insuring against a default, because the PG can file bankruptcy for less than the cost of insurance. But, if the PG has something to protect which cannot be avoided in bankruptcy, then insurance is a good plan.

Hope this helps.
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