Hard Money Lenders - Negotiating
When borrowing from a bank, guarantees will always be required. Most hard money lenders will require a personal guarantee for a loan if the borrower owns 20% or more of the entity doing the borrowing, or the property. When obtaining a hard loan, however, you have more flexibility in the negotiation than with a bank. Hard money lenders may consider waiving a guarantee, or making hard loans non-recourse, depending on a variety of factors:
Value of the collateral - The lower the LTV, the better, but expect to sign a guarantee if the LTV exceeds 50%.
- Other Collateral - If you don’t have enough equity in one property, you may be able to cross collateralize the loan with another property in return for a guarantee waiver.
- Other non-real estate collateral - Including art, autos, other collections, etc is always a way to replace a personal guarantee.
- Other business dealings - An established relationship, ie. excellent payment history and prior payoffs of hard loans, with other hard money lenders can go a long way to waiving a guarantee requirement.
Hard Money Lenders - Bad Boy Clauses
No matter the type of guarantee, when negotiating your loan and guarantee be aware of the language used in the bad boy clauses. Overly broad bad boy language could unwittingly work to your disadvantage.
For example, consider bad boy clause language like, “….Mr. Smith, or any of his staff members, shall not mislead the lender or its associates….” At first, a clause like this may seem harmless. You may think to yourself, “of course we’re not going to mislead the lender.” But can you really control what your staff members do? And what is considered misleading? You hope your staff will do the right thing all the time, but consider whether or not you want to be personally liable for their bad acts. In most cases borrowers will carry a fidelity insurance policy to guard against employee bad acts, and that policy should satisfy the lender that you are covered for that eventuality. Work with your attorney to incorporate more specific language into your guarantees. For example, instead of “…mislead the lender” use more specific language such as, “…willfully and intentionally mislead the lender by falsifying financial statements.” You may also want to insert language in which the guarantee is not triggered unless you are first alerted to the alleged bad act and have a reasonable opportunity to cure the defect.
The best time to negotiate a waiver of, or the language for a guarantee is during the initial loan evaluation, however you may be able to negotiate a release of the guarantee during the life of the loan based on one or all of the following:
- Increase in collateral value - The combination of an appreciating market and your principal pay down of the loan balance.
- Excellent payment history - Your payment performance and possible previous history of payoffs of hard loans with this lender.
- Better-than-expected company cash flow and profitability - Higher profit margins over an extended period of time along with larger cash assets than originally projected.