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: Keep reading